By 1 January 2020 member states must implement a set of measures aiming for a uniform VAT treatment of certain cross-border transactions – it is time to act for businesses. Authors: Andrea Sohst, Christoph Drexl
On 7 April 2016 the European Commission adopted an “Action Plan on VAT – Towards a single EU VAT area”. Thereafter, the European Commission made a series of proposals to work towards its proclaimed goal of making EU VAT simpler for businesses to use, while combatting the significant VAT fraud.
The so-called “Quick Fixes” form part of this Action Plan and come as an amendment to Directive 2006/112/EC (“EU VAT Directive”).
These amendments are to be transposed into national law with effect as of 1 January 2020. Hence, Swiss businesses trading in goods across Europe must start getting ready for the new rules now.
Quick Fix 1: Intra-EU Call-off stock arrangements
Call-off stock (or consignment stock) refers to the situation where, at the time of the transport to another member state, the supplier already knows the identity of the person acquiring the goods, to whom these goods will be supplied at a later stage and after they have arrived in the member state of destination.
Current VAT consequences
For the supplier, such call-off stock arrangements give rise to:
- a deemed intra-Community supply (in the member state of dispatch),
- a deemed intra-Community acquisition (in the member state of arrival), followed by
- a domestic supply in the member state of arrival, and
- requires the supplier to VAT register in the member state of arrival.
A number of member states have set up simplification regimes allowing for call-off stock arrangements without requiring the supplier to VAT register in the country of arrival of the goods. These simplifications are not based on the EU VAT Directive and, therefore, in no way harmonized. Hence, while some member states do not foresee call-off stock simplifications at all, others do but with conditions deviating from one member state to another (e.g. concerning allowed duration of storage abroad or allowed place of storage abroad).
Call-off stock arrangements under the revised VAT Directive
This Quick Fix aims at harmonizing legislation across the EU by adding a specific reference to call-of stock arrangements in new art. 17a EU VAT Directive.
Accordingly, as of 1 January 2020 the supplier will be deemed to perform a VAT exempt intra-EU supply in the member state of Departure and the acquirer to perform an intra-EU acquisition in the member state of arrival only at the time the goods are withdrawn from the call-off stock.
This simplification shall be subject to the following conditions:
- Goods are dispatched or transported to another member state by a taxable person (supplier), or by a third party on his behalf.
- Dispatch or transport of the goods takes place with a view to those goods being supplied at a later stage and after arrival to another taxable person (customer) in that member state.
- Customer is entitled to take ownership of those goods in accordance with an existing agreement between supplier and customer.
- Goods are withdrawn from the call-off stock or returned to the supplier within 12 months after arrival in the member state.
- Supplier is not established in the member state of arrival.
- Customer is identified for VAT purposes in the member state of arrival and both his identity and VAT ID assigned to him by that member state are known to the supplier at the time when dispatch or transport begins.
- Supplier records the transfer of the goods in a special register and includes the identity of the customer and the VAT identification number assigned to him by the member state to which the goods are dispatched or transported in a revised version of the EC Sales List.
What actions should affected businesses take?
Amongst others, before 1 January 2020, businesses trading across the EU should:
- Review their current position on call-off stocks in the EU: Are there call-off stock arrangements? Should call-off stock arrangements be newly considered in light of a uniform set of rules throughout Europe?
- Review current call-off stock arrangements and align them with the future rules where needed.
- Review if certain EU VAT registrations can be made redundant by implementing call-off stock arrangements.
Quick Fix 2: Customer VAT ID as substantive requirement for the exemption of intra-EU supplies
VAT ID and intra-EU supplies – current state
Based on the current provisions, a supplier can treat an intra-EU supply of goods as exempt from VAT in the member state of dispatch provided he proves that:
- the supplier acts as a taxable person,
- the goods are supplied for another business acting as such and
- the goods are dispatched or transported to another member state.
The customer’s VAT identification number is an element to prove the above – but is not a substantive requirement.
VAT identification number becomes material condition for VAT exemption
The revised VAT Directive uplifts the need to document and verify the customer’s VAT ID and makes it a substantive condition for the VAT exemption of intra-EU supplies.
In the future, the lack of a valid VAT ID of the customer at the time of the intra-EU supply will therefore result in the refusal of the VAT exemption.
What actions should affected businesses take now?
Businesses trading within the EU must constantly update their ERP master data. This should include (automated) processes to validate periodically their customers’ VAT IDs against e.g. the VAT Information Exchange System (VIES).
Quick Fix 3: Intra-EU Chain transactions
Intra-EU chain transactions refer to a situation where:
- the same goods are supplied successively and
- those goods are dispatched or transported from one member state to another member state directly from the first supplier to the last customer in the chain.
Current VAT consequences
In absence of any written guidance in the EU VAT Directive, the specific VAT treatment of intra-EU chain transactions is based on case law established by the ECJ.
Based on this case law, the cross border movement of the goods should be assigned to only one supply in the chain. This supply may then be treated as VAT exempt intra-EU supply, while the other supplies in the chain must be treated as domestic supplies, subject to VAT either in the member state of dispatch or arrival.
Where a middle party in the chain arranges for transportation, there are still today uncertainty and a lack of harmonization as to which supply the movement of the goods should be allocated to.
Chain transactions under the revised VAT Directive
The revised VAT Directive will include a specific regulation for chain transactions. Notably, the Quick Fix will only deal with the scenario of a middle party in the chain arranging for the transportation (referred to as “intermediary operator”):
- As a rule, the dispatch or transport shall be ascribed only to the supply made to the intermediary operator.
- By way of derogation from the above, the dispatch or transport shall be ascribed only to the supply of goods by the intermediary operator where he has communicated to his supplier the VAT identification number issued to him by the member state from which the goods are dispatched or transported.
What actions should affected businesses take?
Before 1 January 2020, businesses trading across the EU should:
- Review their involvement in EU chain transactions and the respective VAT treatment applied.
- Review current arrangements involving chain transactions and whether they are in line with the future rules or require revision.
- Review if certain EU VAT registrations can be made redundant by implementing the revised rules for chain transactions.
Quick Fix 4: Documentary proof for intra-EU supply of good exemption
There is currently no common set of rules regarding the documentary proof to provide for treating intra-EU supplies as exempt from VAT.
This lack of a clear set of rules is a constant source to discussions with the tax authorities in particular when it comes to proving that the goods have in fact left one member state and arrived in a member state different from the member state of departure.
Documentary proof under the revised VAT Directive
The revision herewith lays out harmonized rules for the documentation proving that the goods have left the ship-from and arrived in the ship-to country’s territory. The actual provision is very detailed and rather complex. In short and in no way exhaustive, the supplier will have to furnish the following documentary proof:
- Either at least two non-contradictory documents relating to the actual transport of the goods, such as a signed CMR document or note, a bill of lading, an airfreight invoice or an invoice from the carrier of the goods.
- Or a non-contradictory document listed above and any of the following documents: an insurance policy with regard to the dispatch/transport of the goods or bank document proving payment for the dispatch/transport, official documents issued by a public authority confirming the arrival of the goods in the ship-to country (e.g. document issued by public notary), or a receipt issued by a warehouse keeper in ship-to country confirming the storage of the goods in this member state.
What actions should affected businesses take now?
The adoption of this harmonizing set of rules requires businesses carrying out transactions across the EU to:
- Review their current processes around collecting and archiving documentary proof for intra-EU supplies and amend where necessary.
- Review their current arrangements with both vendors and buyers and align with the revised requirements where necessary.
Conclusion
Swiss businesses must familiarize themselves with the new rules in order to ensure they comply with the future requirements for exempting intra-Community supplies (Quick Fixes 2 and 4). On the other hand, the Quick Fixes should also be seen as a good opportunity to review an extension of call-off stock arrangements (Quick Fix 1), offering their customers greater flexibility without having to obtain additional VAT registrations. Lastly, the harmonization of the rules on chain transactions might be seen as an opportunity for the middle parties (a role often taken by the Swiss business) to gain certainty on the related VAT consequences.
