The full version of this article was published in the Ernst & Young (EY) Indirect Tax Briefing, issue 7 (pdf, 7.13 MB).
After years of negotiation, Croatial became the 28th member state of the European Union (EU) on 1 July 2013, subject to the Treaty of Accession being ratified by Croatia and all EU member states. This article looks at the history of VAT in Croatia and recent changes, and examines what’s required for harmonization with EU VAT law.
Recent history of VAT in Croatia
The Croatian system of taxation of the supply of goods and services is based on the Value Added Tax Act, which came into effect on 1 January 1998. When the act was introduced, the standard VAT rate was 22%; over the years this has gradually increased to the current standard rate of 25%.
Since its introduction, the VAT system in Croatia had been amended many times. Early changes mainly concerned the extension of the tax exemptions. Initially the VAT exemption applied to financial services, but further VAT exemptions were gradually introduced and applied to activities such as gambling and the importation of promotional products.
A zero rate has also been introduced for a range of goods and services, including bread, books, certain drugs and public film screenings.
The reduced rate of 10%, which applies to accommodation services, newspapers and magazines, was introduced at the start of 2006. Due to the global economic crisis and the Croatian Government’s subsequent need to increase revenue, the standard VAT rate was increased from 22% to 23% in 2009.
In March 2012, the standard rate was further increased to 25%. At the same time, the 10% reduced rate was extended to other products. Furthermore, the right to deduct input VAT for the purchase and rental of vehicles intended for personal transportation was abolished. The VAT incurred on business entertainment costs also became entirely non-deductible.
As of 1 January 2013, the 10% reduced VAT rate applies to food and nonalcoholic drinks, as well wine and beer in restaurants and pubs.
VAT legislation after 1 July 2013
As one of the final steps toward full compliance with EU VAT legislation, the Ministry of Finance published a draft of the VAT Act on 24 January 2013. Once the Parliament accepts the VAT Act it should come into effect on 1 July 2013.
Accession to the EU means that numerous changes to the current VAT legislation will apply, such as the concept of intra-Community supplies and acquisitions, new place of supply rules for services, distance selling rules, new rules for electronically supplied services and new reporting requirements. Details of some of the changes and their potential impact on Croatian businesses and their customers are outlined below.
Given the relatively high VAT rate in Croatia (25%) compared with that charged in some other EU member states, Croatian final consumers could be tempted, after EU accession, to shop by mail order to buy goods in other EU countries where a lower VAT rate applies.
The distance selling rules apply throughout the EU to prevent cross-border shopping by mail order, which could lead to distortions of competition. Under the rules, EU distance sellers who exceed the limit in another EU member state are required to charge local VAT.
Under the new rules, supplies of goods made from other EU countries to final customers in Croatia will be taxable in Croatia if the value of the supplies exceeds the distance selling threshold. This threshold is set at HRK270,000 (approximately €35,700).
If the threshold is exceeded, the place of supply will be deemed to be in Croatia, and the supplier will be liable to register for VAT purposes in Croatia (and charge and account for Croatian VAT on its sales).
VAT rate on printed newspaper and magazines
Effective 1 July 2013, the VAT rate applicable to the sale of daily newspapers and magazines will change from 10% to 5%. However, the 10% VAT rate will still apply to the sale of periodicals and magazines. This distinction will necessitate accounting and compliance changes for businesses in this sector.
VAT at import
After EU accession, the term “import” will apply only to importations of goods from outside the EU. Goods in free circulation in the EU acquired from other EU member states will no longer be treated as imports; instead, they will be treated as intra-Community acquisitions.
Instead of paying VAT at the time of importation, it will be possible for VAT-registered importers to report and deduct import VAT on their VAT return, subject to receipt of the permission from the tax authorities. This method provides a cash flow advantage compared with the old system, where import VAT may have been payable at the time of the export, but could not be recovered until the next VAT return.
Postponed accounting effectively removes the VAT cash flow difference between imports from outside the EU and intra-Community acquisitions on which the VAT is self-assessed and recovered using the reverse charge mechanism. In addition, imports of goods intended for immediate intra-Community supply by the initial importer will now be exempt from VAT.
The EU triangulation simplification has been introduced for chain transactions involving the buying and selling of goods between three different taxable persons registered for VAT in three different member states (ABC transactions), provided the goods are transported directly from the first seller (A) to the final recipient (C).
If prescribed conditions are met, the simplification will enable the intermediary in the chain (B) to avoid VAT registration in Croatia. However, businesses involved in chain transactions need to be aware that, as drafted, the Croatian rules may be more restrictive than in other countries.
The draft VAT Act prescribes that triangulation simplification may be used in cases where the first acquisition in the chain is made by a taxable person who is neither established nor registered for VAT purposes in Croatia. This rule is stricter than the practice of other EU member states, which require only that the “acquirer” is not established in the destination country.
To get the full story on the VAT implications of Croatia’s accession to the EU, read the full version of this article in the Ernst & Young (EY) Indirect Tax Briefing, issue 7 (pdf, 7.13 MB).
DID YOU LIKE THIS ARTICLE?
Subscribe to the Tax Insights newsletter for the latest thinking in tax.