New circular of the German tax authorities regarding retroactive invoice corrections
On 18 September 2020 the Ministry of Finance published the long-expected circular concerning retroactive invoice corrections and provided practical guidelines to determine when input VAT can be deducted.
In the circular, the German tax authorities consider several judgements of the European Court of Justice (ECJ), as well as the German Federal Finance Court (BFH). In this article we summarize the most important principles set out in the circular.
Provided that the material conditions for input VAT deduction are given, the question is when is a taxable person allowed to exercise the right to an input VAT deduction.
As a ground rule, the taxable person must be in the possession of a proper German VAT invoice showing the legally-due VAT. The point in time when input VAT can be deducted would be the VAT period in which the material conditions are satisfied and the taxable person is in possession of a proper VAT invoice.
If a taxable person does not receive a proper German VAT invoice but the German tax authorities possess information that shows the material conditions for input VAT are met, the taxable person can deduct the input VAT in the VAT period he or she received a German VAT invoice showing German VAT.
Where a proper German VAT invoice is not given and the German tax authorities are not in the possession of additional information regarding the transaction, a retroactive invoice correction is generally possible. In this case, the original invoice must contain five minimum criteria of a proper VAT invoice and the invoice must be rectified. The five minimum criteria are the following:
- Details regarding the issuer of the invoice (the taxable person carrying out the supply),
- Details regarding the recipient of the supply,
- Details regarding the description of the supply carried out,
- Details regarding the remuneration, and
- The VAT due.
If these invoice details are given, a retroactive invoice correction is possible and the taxable person can deduct input VAT in the VAT period the supply and the original invoice were received. However, if the VAT amount shown on the original invoice was too low, the taxable person can only deduct additional VAT in the VAT period when they are in the possession of the amending document.
In the circular, the German tax authorities also note that, based on a recent judgement of the BFH, retroactive invoice corrections are not always in the favour of a taxable person; an invoice correction could result in a disadvantage to the taxpayer.
The principles of the circular are applicable to all open cases. Nevertheless, the German tax authorities have provided transitional relief so that until 31 December 2020 a taxable person can apply for the VAT deduction at the time the supply is carried out and the proper German VAT invoice is received. However, this transitional relief only applies in cases where the taxable person has not yet claimed the input VAT deduction.
When it comes to determining when to claim an input VAT deduction, we suggest taxable persons consider the following questions:
- Was a proper (German) VAT invoice received?
- In which VAT period must the input VAT deduction be exercised?
- Should I ask my supplier for an invoice correction?
Based on the answers to these questions, taxable persons should be positioned to take the appropriate measures in time to ensure their right for input VAT deduction in the applicable VAT period.
 The rectification, for example, could involve the issuance of an additional document that clearly refers to the original invoice (for example, it would refer to the invoice date and invoice number) and that includes the missing information or amends the incorrectly stated information. Alternatively, rectification could be done by crediting the initial invoice and issuing a new one.