VAT Regime

Many organizations need to manage a range of VAT regimes related to their services and transactions: Reverse Charge, the diesel fuel regime, and the pro rata VAT regime.

Reverse Charge - Case study

The reverse charge mechanism applies to certain business-to-business transactions carried out by taxable persons not established in national territory. This entails a reversal of the tax liability or a reversal of the taxable person, whereby the purchaser of the goods and services becomes the taxable person.

For example:

A company headquartered in Braga and with facilities there purchases repair services for its property for €1,000:

1. From a company headquartered in Lisbon;
2. From a company headquartered in Madrid.

VAT Settlement

1. Company headquartered in Lisbon

This is a service provided by a service provider whose business is headquartered in Portugal; therefore, the transaction is taxed in Portuguese territory, with the tax being settled by the supplier. For example:

• Property repair = €1,000
• VAT (21% rate) = €210
• TOTAL = €1,210

2. Company headquartered in Madrid

This is a service provided by a service provider that is not headquartered in Portugal but performs the service at a property located in Portugal.

According to Article 6 of Law No. 6, the provision of such services is subject to taxation in Portugal; however, in this case, since the service provider is not headquartered in Portugal, and if they do not appoint a representative here, the purchaser, rather than the service provider, is responsible for settling the tax (in accordance with Article 2(g) of the VAT Code).

Thus, the reverse charge mechanism is used because there is a shift in the responsibility for settling the tax, which normally falls on the seller or service provider rather than the purchaser. For example:

• Property repairs = €1,000 (to be invoiced by the service provider)
• VAT (21% rate) = €210 (to be paid by the purchaser)

Thus, the purchase of Service 1 would result in the Braga-based company entering the deductible VAT in field 24 of the VAT return. The second purchase, on the other hand, would be entered in fields 3 and 4 of the return for tax settlement purposes, but also in field 24 to exercise the right to deduct.

It should be noted that in the case of a company headquartered in Portugal that, for example, carries out repairs on a property in Spain, the reverse charge mechanism also applies; that is, this involves the provision of services by a service provider headquartered in Portugal but performing the service on a property located outside Portuguese territory.

With regard to Article 6(5), the service in question is not subject to taxation in Portugal because the provisions of paragraph 4, namely taxation at the service provider’s place of business, do not apply to it.

Diesel Fuel Regime

Diesel fuel is subject to special treatment, as only 50% of the VAT is deductible.

Entering a purchase of diesel fuel is identical to any other purchase with deductible VAT; however, it is necessary to calculate a new VAT rate for the category that will be used.

The formula for calculating the new rate to be used in the class is: ((rate/2)/(100+rate/2))*100.

Specifically, for the current standard rate of 21%, we get the following value:

((21 / 2)/(100 + 21/2)) * 100 = 9,5023.

After calculating and configuring the new rate to be applied, the documents should be posted as usual. Only 50% of the VAT amount included in the tax base is posted to the VAT account.

Pro Rata VAT

Taxpayers who, because they carry out both taxable and exempt transactions simultaneously, do not opt for the actual allocation method (accounting allocation of VAT between the two types of transactions) deduct the tax paid based on a percentage of the deduction proportional to the value of the taxable and exempt transactions, and are entitled to a deduction based on the total value of all transactions carried out during the fiscal year.

Since this ratio (pro-rata deduction), which is not definitively known until the end of the fiscal year, the deduction is made in each fiscal year based on the pro-rata amount determined in the previous fiscal year and is adjusted once the definitive pro-rata amount for the current fiscal year is known.

This adjustment, which may be in favor of either the taxpayer or the State, is made on the tax return for the most recent reporting period to which it relates; however, it shall not be made if the difference between the provisional and final pro rata rates is equal to or greater than 5 percentage points.

For example, suppose that in the previous fiscal year, a mixed taxpayer’s sales and services provided were as follows:

• Sales of exempt goods eligible for deduction 15,000 MU;
• Sales of exempt goods not eligible for deduction 32,000 MU;
• Sales of goods subject to VAT 95,000 MU;
• Sales of tangible fixed assets12,000 MU;
• Gains from financial transactions 4,000 MU.

Therefore: Pro rata (provisional) = (15,000 + 95,000)/(15,000 + 95,000 + 32,000) = 0.78

The taxpayer would only be entitled to deduct 78% of the amount, with the remaining 22% to be added to the cost of the corresponding good or service..

To handle pro rata VAT, follow these steps:

1. Determine the pro rata using the calculation shown previously;
2. Determine the rates for the VAT classes subject to the pro rata method. Cegid recommends using the non-deductible % to use the ERP's automatic calculation feature;
3. Go to Finance | Accounting | Resources | Tables | Plans;
4. Select the VAT Plan option;
5. Editing a VAT class assigned to the pro rata method;
6. Adjust the non-deductible % to the amount calculated earlier;
7. Click Save.

The procedures listed previously must be followed for all VAT classes to which the pro rata method applies.

Transfers of fixed assets and real estate financing transactions are excluded from the pro rata calculation. The resulting fraction will be rounded up to the nearest hundredth.