New rules apply to the direct attribution method for VAT deduction
The framework and requirements for “mixed VAT taxable persons” in Belgium to use the “direct attribution method” for the deduction of input VAT changed on 1 January 2023. Among the changes are that mixed VAT taxable persons no longer need prior approval of the Belgian VAT authorities to apply the direct attribution method, but they are required to notify the authorities of any intended use of the method and will have to provide specific information to the authorities on an annual basis. Taxpayers in the financial, insurance, real estate, not-for-profit and public sectors are particularly affected by the new rules.
Mixed VAT taxable persons are those carrying out both VAT-taxable activities, which give rise to a right to deduct input VAT, as well as exempt activities, which do not give rise to such a right. Mixed VAT taxable persons by default deduct input VAT using the “general pro rata method,” a percentage calculated as the ratio of VAT-taxed turnover to total turnover. Alternatively, such taxpayers can request to deduct input VAT based on the “actual use” of the goods and services purchased. This alternative deduction method, commonly referred to as the direct attribution method, is widely used in the financial and insurance, real estate, not-for-profit and public sectors.
New formalities and increased scrutiny
The main changes can be summarised as follows:
- (New) mixed VAT taxable persons can apply the direct attribution method without obtaining prior approval from the VAT authorities (previously required). An electronic notification, which will likely include the disclosure of the parameters (to be) used, will be sufficient.
- Mixed VAT taxable persons that applied the direct attribution method before 31 December 2022 must notify the VAT authorities by 30 June 2023 that they intend to continue using this method (and the parameters). New reporting obligations will be introduced starting from 2024, under which mixed VAT taxable persons will have to communicate to the VAT authorities details on all input VAT incurred in the previous calendar year with a breakdown of full, partial (and parameters used) and non-deducted VAT.
The Belgian VAT authorities have the right to examine a taxpayer’s reasons for using the direct attribution method, as well as the parameters used, at any time within the next two years and may either challenge the use of the method or reject it entirely. Note that, in principle, a rejection will have retroactive effect, starting from the first day of the tax return period in which the VAT payer notified the VAT authorities.
Mixed VAT taxable persons that are using the direct attribution method or considering using it for future tax periods will need to ensure their deduction method is aligned with the new tighter framework and that the parameters (to be) used are defensible. Regardless of any historic track records or rulings, mixed VAT taxable persons, active in diverse sectors, should be aware that the VAT authorities will have access to upfront and annually updated information to identify any distortions of input VAT deductions, raise questions, commence audits and, in a worst case scenario, impose retroactive adjustments of the VAT deducted.