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Reverse Charge on Construction Services from 1 April 2011
On 16 July 2010 the Finnish Parliament passed legislation to implement a reverse charge procedure in value added taxation in the construction business. The new rules will become effective as of 1 April 2011. Taxand Finland reviews the reverse charges proposal and the expected impact on the construction industry.
The purpose of the legislative amendment is to prevent the avoidance of VAT liability in long sub-contract chains. The new legislation is similar in principal to reverse charge duties in construction services currently in place in Sweden and in Germany.
Under the new rules, the person liable for paying the VAT is the purchaser of the construction service, not the seller. The precondition for this liability is that the purchaser of the service itself sells construction services or rents labour to conduct such services and that these activities are not occasional. To prevent the evasion of the regulation, the rules are also applied if the purchaser is not conducting construction activities and is re-selling the services to another purchaser which otherwise would fulfil the requirements. Since the transactions between subcontractors are invoiced without VAT, the main contractor is liable for paying the VAT of the whole construction work to the tax authorities when it sells the whole construction work/project to the customer. The provisions are applied to both resident and non-resident purchasers and sellers.
The main contractor is required to invoice its client normally with full VAT. In addition, the main contractor is required to report the subcontractors' VAT in its regular VAT return. Invoices issued by the subcontractors do not include VAT. These invoices are required to include a statement that they are related to construction services.
The regulation includes several features that may be problematic in practice. For instance, although the introductory words of the section include several examples of construction services and sales of construction goods, the scope of the legislation is not entirley clear. Furthermore, the subcontractors are expected to face difficulties in terms of evaluating the business activities conducted by their customers. The tax authorities are expected to give clarifications for the most doubtful situations before the regulation becomes effective.
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