On 1 January 2020, the VAT rules for EU cross-border supplies of goods changed significantly in all EU countries. The 2020 EU VAT reform, usually referred to as “the 2020 Quick Fixes”, aims at further harmonization of call-off stock rules, EU cross-border chain transactions rules, proving the EU cross-border movement of goods and the checking of VAT ID numbers.
The European Commission came up with proposals on certain improvements to the current VAT system to propose uniform criteria and appropriate legislative improvements which would lead to increased legal certainty and the harmonized application of VAT rules. Four areas were identified:
- Call-off stock arrangements;
- Chain transactions;
- Exemption of intra-Community supplies of goods;
- Proof of transport.
Relevant legal acts
The legal acts which introduced the VAT changes addressed in this article:
- Council Directive (EU) 2018/1910 of 4 December 2018 amending Directive 2006/112/EC as regards the harmonization and simplification of certain rules in the value added tax system for the taxation of trade between Member States (“VD”);
- Council Implementing Regulation (EU) 2018/1912 of 4 December 2018 amending Implementing Regulation (EU) No 282/2011 (“IR”);
- Council Regulation (EU) 2018/1909 of 4 December 2018 amending Regulation (EU) No 904/2010 as regards the exchange of information for the purpose of monitoring the correct application of call-off stock arrangements.
Call-off stock arrangements
The wording “call-off stock arrangements” makes reference to a situation in which a taxable person dispatches or transports goods to a stock in another Member State for an intended acquirer whose identity and VAT identification number are known at the time of the transport or dispatch and who has the right to take goods out of this stock at its own discretion, at which time the property on the goods is transferred.
In the absence of call off stock relief, under the former EU VAT rules, a business (a taxable person) moving its goods from one Member State to a stock located in another Member State was deemed to have made an exempt intra-Community supply in the Member State of departure of the goods. At the same time, this business had to account for VAT on the intra-Community acquisition of goods in the Member State where the goods arrive. In practice, this means that a business, moving goods to another Member State, had also to comply with the VAT obligations in the Member State of arrival (registration for VAT purposes, filing of a VAT return and accounting of the VAT due on the intra-Community acquisition in that return). Some Member States provided call-off stock relief to allow the end customer to simply account for VAT on the acquisition basis as and when the goods are called off, and some Member States did not.
A new Article 17A has been added to the VAT Directive that requires all member states to apply call-off stock relief. This is a welcome simplification. According to the new regulations, taxation is linked to the transfer of a right to dispose of goods as the owner. Also, there are other administrative duties applicable to the keeping of stock records and the reporting of transfers of goods in VAT reports. This requires the complete re-design of the tax treatment of stock arrangements and changes to how these arrangements are recorded.
The simplification does not cover the situation whereby a business transfers goods from one Member State to another without knowing yet the intended acquirer in that latter Member State.
The adopted solution establishes that:
- No intra-Community supply and no intra-Community acquisition take place at the time of dispatch or transport of the goods to the stock located in another Member State;
- An exempt intra-Community supply in the Member State of departure and a taxed intra-Community acquisition in the Member State where the stock is situated only take place at a later stage when the acquirer takes ownership of the goods.
In order to be able to apply this simplification for call-off stock arrangements, certain conditions have to be fulfilled:
- Both the supplier and the intended acquirer are taxable persons;
- The supplier has not established its business nor does it have a fixed establishment in the Member State to which the goods are dispatched or transported;
- The supplier records the dispatch/transport of the goods in a register;
- The goods are transported from one Member State to another with a view to being supplied there at a later stage and after arrival to an intended acquirer;
- The supplier mentions the VAT identification number of the intended acquirer in its recapitulative statement (only that, not the value of the goods) submitted for the period in which the transport of the goods takes place;
- The intended acquirer is identified for VAT purposes in the Member State to which the goods are transferred;
- The intended acquirer’s identity and VAT identification number are known by the supplier at the time when dispatch or transport begins;
- The goods are transported from one Member State to another, thus excluding imports, exports and supplies within a single Member State from the simplification.
Documents, practical procedures and some different scenarios, including a substitution of the customer, return of goods, exceeding of the period of 12 months, goods sent to another Member State, goods exported, destruction or loss of goods, are explained in the Explanatory Notes published by the European Commission.
Chain transactions refer to successive supplies of the same goods (which means that there are two or more consecutive supplies) where the goods supplied are subject to a single intra-Community transport between two Member States.
The Court of Justice of the European Union (CJEU) has consistently ruled that, in these situations, the intra-Community transport of the goods can only be attributed to one of the supplies in the chain, which has the possibility to benefit from the exemption in Article 138 of the EU VAT Directive for intra-Community supplies.
Council Directive (EU) 2018/1910 introduced a new Article 36a in the VAT Directive. This Article addresses the issue of what is the supply to which the intra-Community transport or dispatch of the goods is to be ascribed when a chain transaction takes place, that is to say, what supply is to be considered as the intra-Community supply. In order for Article 36a of the VAT Directive to apply, the following conditions have to be met:
- The goods must be supplied successively. Therefore, it is necessary that at least three persons are involved in the chain transaction.
- The goods must be dispatched or transported from one Member State to another Member State. As a result, chain transactions involving imports and exports, or involving only supplies within the territory of a Member State, are not covered by the provision.
- The goods must be transported or dispatched directly from the first supplier to the last customer in the chain.
If these conditions are met, Article 36a(1) of the VAT Directive lays down the general rule: the dispatch or transport of the goods is ascribed to the supply made to the intermediary operator.
However, Article 36a(2) of the VAT Directive provides for the possibility to derogate from the general rule. That will be the case when the intermediary operator communicates to its supplier its VAT identification number issued by the Member State from which the goods are dispatched or transported. In this case the dispatch or transport of the goods is ascribed to the supply made by the intermediary operator.
Exemption of intra-Community supplies of goods
Regarding Article 138(1) of the VD, the following must be taken into account:
- The content of point (a) in Article 138(1) of the VD corresponds to the content of Article 138(1) in the version applicable until 31 December 2019.
- Point (b) sets a new condition for the application of the exemption which consists of two elements, namely:
- the taxable person or non-taxable legal person for whom the supply is made is identified for VAT purposes in a Member State other than that in which the dispatch or transport begins and
- this taxable person or non-taxable legal person for whom the supply is made has indicated this VAT identification number to the supplier.
As regards the first element, it is to be noted that the VAT identification number of the taxable person or non-taxable legal person to whom the supply is made does not necessarily have to be a VAT identification number issued by the Member State to which the goods are transported; it is sufficient that it is a VAT identification number attributed by a Member State other than that in which the dispatch or the transport begins.
As regards the second element, it is to be noted that the way in which the VAT identification number is shared amongst the contracting parties is not spelled out in the legal text. This should therefore be left to the discretion of the contracting parties and not be subject to any formal requirements (use of a specific document, for instance). Similar to what is stipulated above in the context of Article 36a(2) of the VD, by the fact that the supplier has mentioned the VAT identification number of its customer in the invoice, it can be considered that the customer has indicated its VAT identification number to the supplier.
As far as Article 138(1a) of the VD is concerned, it must be highlighted that a new paragraph 1a is added to Article 138, according to which the exemption provided for in paragraph 1 shall not apply where the supplier has not complied with the obligation provided for in Articles 262 and 263 of the VD to submit a recapitulative statement or the recapitulative statement already submitted by it does not set out the correct information concerning the supply in question as required under Article 264 of the VD, unless the supplier can duly justify its shortcoming to the satisfaction of the competent authorities.
Proof of transport
The EU VAT Implementing Regulation has been updated to specify what evidence will be required to support the application of the zero rate to an intra-Community Supply.
Article 45a of the Implementing Regulation provides that a condition for exempting an intra-Community supply of goods according to Article 138 of the VAT Directive, namely that the goods have been dispatched or transported from a Member State to a destination outside its territory but within the Community, is presumed to be fulfilled in the cases set out in points (a) or (b) of Article 45a(1). This also means that:
- being in one of the cases set out in points (a) or (b) is not on its own sufficient for the supply to be exempt according to Article 138 of the VD. It is presumed that a basic condition is fulfilled but for the exemption to be applicable, also the other conditions set out in Article 138 of the VD will need to be fulfilled;
- applying the presumption in the reversed way is not possible. In other words, the fact that the conditions of the presumption are not met does not mean automatically that the exemption of Article 138 of the VD does not apply. In such case, it will remain up to the supplier to prove, to the satisfaction of the tax authorities, that the conditions for the exemption (transport included) are met. In other words where the presumption does not apply, the situation will stay the same as it was prior to the entry into force of Article 45a of the IR.
Article 45a(2) of the IR stipulates that a tax authority may rebut the presumption that has been put in place under paragraph 1, namely that goods have been dispatched or transported from a Member State to a destination outside its territory but within the Community.
Rebutting the presumption implies therefore that the tax authorities are able to provide the necessary elements demonstrating that the goods have in fact not been dispatched or transported from a Member State to a destination outside its territory but within the Community. This can, for instance, be the case when during a control the tax authorities discover that the goods are still present in the warehouse of the supplier or the tax authorities are aware of an incident during transport that resulted in the goods being destroyed before leaving the territory.
EC’s Explanatory Notes
The Explanatory Notes published by the European Commission in December 2019 are a guidance tool that can be used to clarify the practical application of the new rules concerning call-off stock arrangements, chain transactions, the exemption of the intra-Community supplies of goods and the proof of transport for the purposes of that exemption.
Although the Explanatory Notes run to 85 pages, they are not comprehensive. The Explanatory Notes aim at providing a better understanding of certain parts of the EU VAT legislation, and, they are not legally binding.
Effective from 2020, intra-Community supplies have undergone significant changes to the VAT regime, in particular the mechanism of applying VAT on consignment (call-off) stock arrangements and the principle of assigning transport in a chain of transactions.
The 2020 Quick Fixes are designed to simplify and harmonize the VAT rules for B2B EU cross-border supplies of goods. All businesses involved in the cross-border trade of goods will be impacted by EU VAT reform.
Rostislav Frelich is a tax advisor in the Prague office of PETERKA & PARTNERS advokatni kancelar s.r.o. He leads the Tax Desk Practice Group at PETERKA & PARTNERS. Mr. Frelich can be contacted at [email protected].