Estonian VAT rate increases to 20% as of 1 July 2009

On 18 June the Estonian Parliament accepted and on 22 June the President announced an amendment to the Estonian VAT Act, whereby the standard rate of VAT increases from 18% to 20% as of 1 July 2009. There were no other changes introduced to the VAT Act.

Taking into account the above we would recommend companies to pay close attention to the time of supply as stipulated in Article 11 of the VAT Act, as this has direct impact on the applicable VAT rate. For instance, if a prepayment was received from a client or goods or services were delivered to a client in June, the supply has taken place in June and the applicable VAT rate is 18%, regardless of when the invoice will be issued. Due to the fact that there is no transitional provisions offered by the legislator, there may arise situations where one transaction is taxable with two different VAT rates. This may happen, for example, if 50% prepayment was received in June, but goods or services will be delivered in July. According to the VAT Act, 50% supply has taken place when the prepayment was received and would be subject to 18% VAT, while to the remaining part of the transaction 20% VAT rate would apply

Without doubt there will be confusion and disputes between taxpayers due to the short notice and lack of transitional provisions, especially in case the transaction values have been agreed in gross amounts based on 18% VAT rate. Should such issues arise we recommend to review thoroughly the terms and conditions set forth in the contract and contact appropriate advisers if necessary.

Please do not hesitate to contact us for additional information  jzernask@kpmg.com