EU cross-border chain transactions - legislative changes ahead
Indirect Tax Matters December 2019
2020 EU VAT reform
The European Commission has proposed a number of key short-term reforms, aimed at improving, modernising and ultimately simplifying the current VAT system, pending an overhaul of the current regime with the aim of introducing a new definitive VAT regime in the future.
As part of this reform, there will be ‘4 quick fixes’ to improve day to day functioning of cross border transactions. These are designed to:
- Harmonise call off stock rules across the EU;
- Harmonise EU cross-border chain transactions rules;
- Harmonise the rules for documenting EU cross-border movements of goods;
- Introduce a mandatory VAT ID number check for Intra-Community supplies;
This article will take a closer look at the new EU legislation relating to ‘EU cross-border chain transactions’ which is to take effect from 1 Jan 2020. This common rule is being established to avoid different approaches amongst EU Member States, which can lead to double taxation or non-taxation and to enhance legal certainty for operators.
Chain Transaction
A chain transaction is a successive supply of goods involving a minimum of 3 persons in the chain.
The goods must be transported or dispatched directly from the first supplier to the last customer in the chain, e.g. directly from A to C, in the diagram below.
General Rule
The general rule under the new legislation is that, where this type of chain exists, the transport will be ascribed to the supply made to the ‘intermediary operator’.
The ‘intermediary operator’ is a supplier in the chain (other than the first supplier) who dispatches or transports the goods himself or through a third party acting on his behalf.
All other supplies will be domestic supplies either in the Member State of departure or the Member State of arrival.
Example 1: General Rule
Assume in the diagram above, that B arranges the transport of the goods from Ireland to Germany.
VAT implications
- B, as the person who arranges the transport/dispatch is the ‘intermediary operator’.
- The transport is therefore ascribed to the supply made from A to B.
- A makes an intra EU supply of goods from Ireland, (0% rated assuming all conditions for an intra EU supply are met.)
- B makes an intra EU acquisition of the goods in Germany.
- The supply from B to C is a domestic supply, in Germany, liable to German VAT.
Derogation from the general rule
Where the intermediary operator communicates to his supplier the VAT number issued to him/her by the Member State from which the goods are dispatched or transported, i.e. Ireland in the diagram, then the transport/dispatch will be ascribed only to the supply made by the ‘intermediary operator’.
Written communication is required to prove that the VAT number has been communicated.
In this scenario also, all other supplies will be treated as domestic supplies either in the Member State of departure or the Member State of arrival.
Example 2: Derogation
Assume in the diagram above that B, arranges the transport/dispatch of the goods from Ireland to Germany and in addition, B also has an Irish VAT number which it communicates to Supplier A.
VAT implications
- B, as the person who arranges the transport/dispatch is the ‘intermediary operator’.
- B communicates its Irish VAT number to Supplier A.
- Under the derogation, the transport is therefore ascribed to the supply made by B to C.
- The supply from A to B is a domestic supply in Ireland, liable to Irish VAT.
- B makes an intra EU supply of goods from Ireland, to Germany (0% rated assuming all conditions for an intra EU supply are met.)
- C makes an intra EU acquisition of the goods in Germany.
‘Intermediary’ operator – this can never be the first or last person in the chain
In order to ascribe the transport/dispatch of the goods to one supply it is necessary to identify the intermediary operator.
The first and last persons in the chain are precluded by the legislation from being an ‘intermediary’ in a chain as they each only participate in one transaction, i.e. supply from the first person in the chain or the supply to the last person in the chain. They are never in essence an ‘intermediary’.
Where the first or last person in the chain organises/arranges the transport then the transport can only be ascribed to the supply to which these persons are party.
Transport – areas to consider?
In accordance with guidance on this matter, the intermediary operator, is the supplier who organises the transport either themselves on their own behalf, or contracts the transport with a third party, bearing the risk of that transport in case of loss or damage of goods.
Confusion can occur where the ‘third party’ is actually another supplier within the chain. In this scenario it is important to check the terms of the agreement for transport on a case by case basis to determine who is bearing the risk associated with the transport.
Where the transport is split between a number of different transport providers, i.e. by truck, by boat and then by truck again etc. then there must be continuity in the transport, so that the whole itinerary can be considered to be a single transport, this should be organised by a single intermediary in the chain.
Where there is a clear break in the transport, or where different legs of the transport are organised by different persons in the chain (at their own risk), then these new rules cannot be applied as there is more than one transport involved.
It is important to determine where the goods are located when the transport begins and what supplies have already taken place in the chain when the transport is carried out.
Proof of status as an intermediary operator
The intermediary operator needs to keep evidence that the goods have been dispatched or transported by them or by a third party acting on their behalf, in addition to the normal proof of transport evidencing the movement of goods from one Member State to another.
What do I need to do?
Map out current supply chain transactions that you are involved in and review the VAT treatment being applied at present.
Is the VAT treatment that is being applied in line with the new VAT rules? If not, what changes need to be put on place for 1 Jan 2020, e.g. sales, procurement, IT, tax, legal etc.?
Will these new rules impact on your current VAT registrations and reporting obligations within the EU?
Could you make changes to your current supply chain to avoid unnecessary VAT obligations for you and your customers on 1 Jan 2020?
If you have any questions or wish to discuss please do not hesitate to contact us, or any member of the VAT team.
