Tax & Legal 17 November, 2017

Changes in zero rate for VAT for ocean-going vessels

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Changes in zero rate for VAT for ocean-going vessels

The 2018 Tax Plan includes a number of tax measures, one of which relates to a restriction on the application of the zero VAT rate to sea-going vessels. Namely, the application of the zero VAT rate to the supply and provisioning of, as well as services to, commercial seagoing vessels will be adjusted.

Current situation

Under the VAT Directive, the supply of vessels used on the high seas for passenger transport for reward, cargo transport, fishing and the like is exempted from VAT. The exemption also applies to the provisioning of those vessels and items permanently connected to the vessels or the items used for their operation. Examples of costs on which this applies are costs for the of the conversion, repair or maintenance of the ships. In the Netherlands, the exemptions are shaped by a zero VAT rate. The European Commission has pointed out to the Netherlands that the provision in which this is laid down is defined too broadly. In the Netherlands, the exemption is linked to so-called seagoing vessels, without requiring that those seagoing vessels are actually used for navigation on the high seas.

Tightening VAT zero rate

The possiblilities for the application of the zero rate in the Netherlands will therefore be narrowed down. The target implementation date of the new exemption is 1 January 2018.

The consequence of narrowing of the scope of the exemption is that the zero rate will no longer apply to the supply and provisioning of ships and services to ships that operate less than 90% outside the ‘twelve-mile zone’. In such a situation, according to the new regulation, a seagoing vessel is no longer a seagoing vessel. This applies to inter alia ferry services, tugs or commercially operated yachts. In those cases, the general VAT rate of 21% applies to local supplies and services within the Netherlands. Should an incorrect VAT rate be charged, the Tax Authorities can impose a fine of up to €5,278.-.

What does this mean for your organisation?

Typically, if operations are taxed, the VAT related thereto will be deductible. However, this change results in a cash-flow disadvantage compared to the current situation. It is also necessary to check whether the relevant services are correctly accounted for in the accounts.

For example, when performing repairs or maintenance, the customer will have to be asked whether VAT should be charged on the invoice. This increases the administrative burden for both the shipowner (who has to prove that a ship is deployed on the high seas) and the supplier. There is also the risk of VAT retrospective taxation (if high seas deployment cannot be demonstrated afterwards) and the risk of greater pre-financing for the customer due to a 21% VAT levy.

The new VAT legislation for sea-going vessels has not yet been finalized, as there have been parliamentary questions on definitions and enforceability. The starting point is to consult with the industry on amending the VAT legislation.

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