The European Council formally approved proposals for four “quick fixes” concerning value added tax (VAT) to simplify international trade. The “VAT quick fixes” will be effective beginning 1 January 2020, and will be expected to have considerable implications for businesses trading in international goods.
The VAT quick fixes concern the following four changes:
These changes will affect different facets within a business (such as changes to the ERP systems and the tax control framework), and could require businesses to update their administrative processes, VAT compliance procedures, billing processes, and other matters such as contracts and order processes with customers and suppliers.
To shorten delivery times, it is becoming increasingly common for suppliers to transfer stock to a warehouse or other location (for example, a store or showroom) of a regular customer in another EU Member State. The goods remain the property of the supplier until they are picked up by the customer (this process is also referred to as “call-off stock”). Under the current VAT rules, when a supplier transfers the goods to the call-off stock, it performs a deemed intra-Community supply in its own EU Member State and a deemed intra-Community acquisition in the EU Member State of arrival. As soon as the customer takes the goods out of the call-off stock, the supplier performs a domestic supply. Generally, the supplier will have to register for VAT purposes in the EU Member State where the warehouse is located. At present, most EU Member States have VAT simplification arrangements for call-off stock, but these differ per country.
Under the new harmonized rules, the transfer of goods to a warehouse in another EU Member State will no longer qualify as a deemed intra-Community supply and a deemed acquisition (for a maximum period of one year). As soon as the customer takes the goods out of the stock, the supplier performs a direct intra-Community supply to the customer. The supplier will not be required to register for VAT purposes in the EU Member State of arrival of the goods. The supplier and customer that use this simplification, however, must keep a register that complies with specific conditions. In addition, the supplier must report on the EC sales list that it transported goods to foreign stock. If a supplier does not comply with all the conditions for call-off stock, it must in principle still register for VAT purposes.
In the case of a chain transaction with consecutive supplies of goods among three or more taxable persons in different EU Member States, the intra-Community goods transport can only be attributed to one link in the chain. This means that the zero VAT rate for intra-Community supplies only applies to one supply. The other supplies are local (domestic) supplies of goods. In practice, there is often discussion about which link must be attributed to the intra-Community goods transport.
Under the new rules, the starting point is that the intra-Community supply takes place in the link in which the goods are supplied to the taxable person that arranges the intra-Community transport or has this arranged. This is usually the first supply in the “link A-B.” Exceptions to this fiction are possible, for example, if intermediary B, which arranges the transport or has this arranged, provides the supplier with a VAT identification number of the EU Member State of dispatch of the goods. In that case, the intra-Community goods transport is attributed to the link between the taxable person arranging the transport or that has this arranged and its customer (in this example the “link B-C”).
A customer’s valid VAT identification number is currently a formal requirement for applying the zero VAT rate to intra-Community supplies of goods. However, it has been settled by the Court of Justice of the European Union (CJEU) that, in principle, a taxable person only has to comply with the material conditions in order to apply the zero VAT rate. Therefore, the zero VAT rate cannot formally be refused due to the mere fact that a taxable person did not receive a valid VAT identification number from its customer.
Under the new rules, the use of a valid VAT identification number that the customer communicated to the supplier will be regarded as a material requirement for applying the zero VAT rate. If a supplier fails to state the customer’s valid VAT identification number on the invoice, it will no longer be possible to apply the zero VAT rate as of 1 January 2020. Furthermore, as a condition for applying the zero VAT rate, the taxable person must file an EC sales list.
The fourth quick fix provides for the harmonization and simplification of the rules on proof of transport for the purposes of applying the zero VAT rate to intra-Community supplies. To be eligible for the zero VAT rate, taxable persons must, for example, prove that the goods were dispatched from one EU Member State to another EU Member State. EU Member States currently maintain different rules to prove this transport, and this leads to uncertainty and significant administrative expense for businesses with cross-border trade.
According to the new rules, there is a rebuttable presumption of transport to another EU Member State if the supplier can provide at least two non-contradictory evidential documents that were prepared independently from one another. This may include signed CMR documents, together with a copy of payment for transport issued by the bank. Logistics service providers are expected to play an even more important role under the new rules in respect of the provision of proof for the purposes of applying the zero VAT rate.
Businesses involved with cross-border goods transport need to consider how the new VAT rules could affect their transactions in 2020. Prompt action may be essential, given that organizing the administrative and order processes as well as the ERP systems will require time and resources—and not forgetting the fact that tax authorities worldwide are tending more toward digitalization. The requirements for the collection, analysis, and actual retention of data are rapidly increasing. This means that tax authorities expect taxpayers to implement changes to regulations promptly and correctly within their business.
Read a February 2019 report prepared by the KPMG member firm in the Netherlands
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