For some years ago the European Commission has been working on a new value-added tax (VAT) system based on the principle of taxation at the place of consumption. The VAT Action Plan is being drafted on such basis, with the aim of reviewing and improving the current system, and fighting VAT fraud in the EU. However, due to the different criteria and views of member states, only a few measures have been adopted.
One of these measures is the VAT “quick fixes,” which will impact the treatment of intra-Community trading of goods, particularly in monitoring and controlling the fulfillment of the requirements for the correct VAT treatment of transactions.
The new VAT treatment for certain cases involving intra-Community transactions has been implemented with the aim of simplifying the administrative burden of companies operating cross-border, as well as harmonizing the treatment by all EU member states. However, it is possible that, rather than simplifying, the new requirements will lead to further controls for taxpayers, with subsequent risks deriving from failure to comply.
Whether or not this is the case, the “quick fixes” will come into force by January 2020, and companies must be ready to face the implications of the new requirements set out in Council Directive (EU) 2018/1910, of December 4, 2018, (the amending Directive) amending Directive 2006/112/EC (the VAT Directive) as regards the harmonization and simplification of certain rules in the VAT system for the taxation of trade between member states. Together with this amending Directive, the “quick fixes” have also been regulated in the Council Implementing Regulation (EU) 2018/1912, of December 4, 2018, amending Implementing Regulation (EU) 282/2011 as regards certain exemptions for intra-Community transactions.
The measures implemented by the “quick fixes” concern the four areas below:
- call-off stock arrangements;
- chain supply transactions;
- VAT ID number provision for intra-Community transactions;
- documentary evidence for transport in intra-Community transactions.
This article will provide further explanation of the four measures, together with the requirements and VAT treatment involved.
Call-off Stock Arrangements
The call-off stock scenario arises when goods are transported from one member state to another but title of the goods is not transferred to the future acquirer when the goods arrive at the destination. On the contrary, the goods are stored in the country of the acquirer but remain the property of the supplier, normally in the premises of the client or a third-party logistic service provider. When the client withdraws the goods from the premises on the basis of its needs, the title is deemed to be transferred.
This operation has different treatments for VAT purposes in EU member states. Even though the aim of the amending Directive is to simplify VAT liabilities for taxpayers, this is not always the case. For instance, the usual treatment is that a transfer of own goods takes place by the supplier at the moment the goods are transported to the member state of destination, giving rise to a deemed intra-Community supply in member state of dispatch and a deemed intra-Community acquisition in member state of arrival, and when the goods are withdrawn from the local warehouse by the recipient, a local supply of goods takes place. On this basis, the member state of destination may opt for requesting the local registration of the supplier in order to report the deemed intra-EU acquisition of goods or not.
Another treatment is that, under certain requirements and circumstances, the transfer of title of the goods must be considered to happen at the moment of the transport; this based in the actual economic transfer of the goods principle rather than in the legal principle. On this basis, the VAT treatment would lead to a direct intra-Community supply of goods in the country of dispatch and an intra-Community acquisition of goods in the country of destination, but the latter performed by the acquirer, so the subsequent local supply would not be deemed to exist.
In view of the different criteria followed by the member states, the amending Directive 2018/1910 has set out a new Article 17 bis to regulate the call-off stock arrangements and to harmonize the VAT treatment. The Article firstly defines the call-off stock scenario as where goods are dispatched or transported from one member state to another by a taxable person with the aim of supplying these goods, in a future moment and after arrival, to another taxable person, who must be entitled to be in possession of the goods on the basis of an agreement between them.
Following this definition, as far as the supplier is not established for VAT in the country of destination, the recipient is duly registered for VAT in the member state of arrival and its identity and VAT ID number are fully known by the supplier at the moment of dispatching the goods, so it can be reported by the supplier in the corresponding ledger and EC Sales and Purchase Listing; member states must treat the full transaction like an intra-Community supply of goods by the seller in the member state of dispatch and an intra-Community acquisition of goods by the purchaser in the member state of arrival, thus a local VAT registration in the member state of arrival is not required at all by the supplier.
However, there is a temporary requirement in order to apply this treatment, which is a 12-month period from arrival of the goods. Therefore, if after 12 months the goods have not been supplied to the recipient (withdrawn from the warehouse) or have not been returned to the member state of dispatch, a transfer of goods shall be deemed to have happened on the day following the end of the 12-month period.
Moreover, a transfer of own goods shall be deemed to have taken place when the goods are supplied to a person other than the initial person, or the goods are transported to another member state or are destroyed, lost or stolen.
According to these requirements, apart from the simplification for the supplier of avoiding registration in the member state of arrival, there is a clear problem as regards the monitoring or control of the conditions—for instance, in the case of goods that are not easy to be accounted or monitored, to know at what moment these leave the call-off arrangement, or in the case of destroyed goods, which leads to the treatment of a transfer of goods but could be reported late if the supplier is not informed in time. It should be noted that a lack of compliance could lead to late reporting of the VAT in the member state of destination, with the corresponding penalties or surcharges.
Other cases not clearly defined might be the intervention of an intermediary or a sales agent, who could be considered by the local tax authorities to be acting in his own name and therefore be the acquirer of the goods instead of the final client. It could also be the case that call-off stock is arranged for multiple recipients through the same distribution channel, so it is uncertain whether the requirement related to the identification of the recipient could be deemed as fulfilled if the goods can be withdrawn by any of them.
In any event, this is a new regulation that will come into force by January 2020 and its application is apparently mandatory if the requirements are met: thus, operators in this scenario must pay special attention in order to be ready to deal with the potential changes in VAT reporting, IT, logistics and monitoring protocols.
Chain transactions are those where more than two parties are involved in subsequent supplies of goods but only one transport of the goods takes place. For instance, supplier “A” supplies goods to recipient “B”, who then supplies the goods to recipient “C,” with the goods being transported directly from country “A” to the final recipient in country “C.” Of course, more participants could exist in the chain supply.
The problem regarding these transactions where only one intra-Community transport of goods exists is which party performs the intra-Community operation exempt from VAT and which are deemed local supplies of goods.
In the frame of chain transactions, the Court of Justice of the European Union (CJEU) has definitively established the criterion of only considering as an exempt intra-Community transaction that one to which the transport is linked.
However, the question is always the same: which is the supply to link the transport? This answer may sometimes be clear; for instance, if the first supplier makes the supply under the Delivered Duty Paid Incoterm, supplier “A” arranges for the transport of the goods until final destination. However, when the terms are not clear, and considering the legislation or criteria of the member states, the decision could be different.
With the aim of simplifying and harmonizing such criteria, Article 36 bis of the VAT Directive considers that the transport shall be linked to the supply made to the intermediary, except when the latter provides its supplier with a VAT ID number granted by the member state from which the goods are dispatched. Should this be the case, the transport would be linked to the supply made by the intermediary. Further, the Directive defines the intermediary as the taxable person within the chain other than the first supplier, who transport the goods himself or through a third party acting in his name.
In principle, despite this apparently clear rule, there are always potential scenarios that could lead to doubt. For instance, it is usual, for reasons of confidentiality, that all the parties are not aware that other parties are also involved in the chain supply. This means that the final recipient could be unaware of the existence of first supplier, so treating the acquisition as an intra-EU acquisition of goods, while it should be a local purchase of goods. Therefore, there is a risk that all parties do not consider the same treatment as applicable.
VAT ID Number as Material Requirement
The third of the changes introduced by the amending Directive (by amending Article 138 of the VAT Directive) is the consideration of the provision of the VAT ID number by the acquirer as a material requirement in order for the seller to apply the exemption of the intra-Community supply of goods.
Up to now, it was understood that in order to exempt from VAT an intra-Community supply of goods, apart from the transport of the goods with destination to another member state, the identification of the acquirer as a taxable person was required. This identification was obviously linked to the provision of the VAT ID number granted by a member state other than the one from where the goods are dispatched, but it could easily happen that such number was not correctly given to the seller, due to error or simply because the purchaser was not registered for VAT in time. In such case, the question was whether the transaction could be considered as exempt from VAT, as the seller was not in a position to demonstrate that the acquirer was actually a taxable person acting under such conditions.
Contrary to the regulations of many member states, the CJEU considered that the provision of the VAT number is just a formal requirement which cannot limit the right to deduct VAT or the VAT treatment of the intra-Community supplies as exempt transactions, as far as there is sufficient evidence to prove that the goods have effectively left the member state of dispatch and arrived at the recipient (taxable person) in the member state of destination.
However, with the new provision, this is clearly a material or substantial requirement. On this basis, only if the acquirer provides a valid VAT number at the moment of supply, and the supplier correctly reports the transaction in the corresponding EC Sales and Purchase Listing, will the supply be exempt from VAT.
In principle, this is a clear requirement to decide whether the exemption applies or not, but it could be the case that the provision of the VAT number is late, after the dispatch of the goods, or that the seller intends to regularize the situation later. Will it be considered that if a valid VAT number was not provided at the moment of the supply, it cannot be exempt from VAT?
Furthermore, there is another critical requirement to apply the VAT exemption, which is the correct reporting in the recapitulative statement or EC Sales and Purchase Listings, not only in terms of the information reported but also in terms of deadline. An error in the reporting could lead to the loss of the VAT exemption, with a corresponding VAT demand by the competent tax authorities. Mistakes such as wrong reporting period, wrong amount (discounts, returned goods, etc) or wrong identification, which apparently should not have a serious impact on the transaction cost, could mean outstanding VAT and heavy penalties or surcharges.
A full, previous and correct identification of the recipient through its VAT ID number therefore becomes critical in order to avoid the risks of outstanding VAT.
Documentary Evidence in the Intra-Community Transport of Goods
The last of the changes implemented by the “quick fixes” measures is regulated through the amending of Implementing Regulation (EU) 282/2011 and, in particular, Article 45 bis, which provides for the documentary evidence that would prove the effective transportation of the goods to another member state in an intra-Community supply of goods. This proof is required to support the VAT exemption.
In this regard, it should be noted that this is a presumption of evidence, so would not limit the right of the taxpayer to use other means of proof in order to justify the transport of the goods. Besides, at least in the Spanish VAT Law and Regulation, the documents listed in this Article were already admitted as valid for such purposes, so this is basically a reinforcement of the criteria for harmonization.
The documentary evidence could vary depending on whether the transport is arranged by the seller or by the purchaser:
- if arranged by the seller, at least two non-contradictory documents of transportation, listed in section (a) of point 3 of Article 54 (for instance, signed CMR document, air freight invoice or one invoice from transporters), and issued by two different third parties that must be independent of both the supplier and the recipient. Another alternative is to be in possession of one of the documents mentioned above plus one of the documents listed in section (b) of point 3 of the Article (for instance, insurance policy for the transport of the goods, official document issued by a public body supporting the arrival of the goods, or receipt issued by the depositary of the goods in country of destination);
- if arranged by the purchaser, the seller must be in possession, apart from the above-mentioned documents, of a written statement from the purchaser certifying that the goods have been dispatched or transported by him, mentioning the member state of arrival.
As mentioned above, this is not a significant change in respect of the documents already demanded by the tax authorities as proof of transportation, but is valid to harmonize the documentation required in all member states.
However, the main issue arising from this wording is the definition of “independent” concerning the status of the parties that provide the services related to the transportation. In this regard, it is very usual for these services to be provided by companies belonging to the corporate group (for instance manufacturer-logistics-distributor) of either the seller or the purchaser. Will this mean that in such a case the documents would not be valid as proof? Not definitively but, probably, the seller would need to reinforce the proof with additional documentation.
The “quick fixes” as described above will definitely impact the VAT treatment and control measures implemented by companies involved in intra-Community trading of goods, so businesses need to pay particular attention to these areas in order to comply with all requirements and procedures in good time.
Javier Galván Falcón is a Partner with Diligens Tax Consulting, Spain.
The author may be contacted at: email@example.com
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