All businesses with operations and transactions across the European Union (EU) are required to comply with EU VAT rules and regulations. Businesses that, directly or through subsidiary operations, are involved in the movement of goods across EU borders will be impacted by these upcoming changes. Failure to comply can lead to penalty exposure and further scrutiny by the tax authority.
The significant loss in VAT revenue has prompted some critical actions by the European Commission and initiated some changes to the EU VAT rules and accounting processes. The major changes, under the definitive VAT regime, do not take effect until 2022 or later, but there are some immediate steps that the EU is implementing that take effect on January 1, 2020.
These are referred to collectively as the Quick Fixes and will impact businesses engaged in cross border trade involving the movement of goods.
There are four Quick Fixes that will take effect on January 1, 2020 and businesses should take action accordingly so that they remain in compliance.
1. CALL OFF STOCK SIMPLIFICATION
This applies where inventory is held in another member state for subsequent supply to a named customer in that other member state. The supplier moves goods to the other member state and retains title until the goods are drawn down by the customer.
The movement of the goods is treated as an intra-community supply at the time they are moved.
This typically requires the supplier to register for VAT in the member state where the goods are stored so that intra-community VAT accounting can be completed, and the subsequent supply of the goods can be charged to local VAT at the time title transfers. By way of simplification, some member states allow the owner to avoid registration in the destination member state (subject to local restrictions), but this simplification is not consistently applied.
Position from January 1, 2020
The movement of the goods is treated as an intra-community supply at the time they are drawn down by the customer.
The intra-community supply will only take place when the goods are formally called off (or after 12 months, if earlier). Suppliers and customers must keep a ‘call off’ register of goods.
2. CHAIN TRANSACTIONS SIMPLIFICATION
Where there are two (or more) transactions but a single movement of goods involving the movement of the goods from the original supplier to the final person in the chain and that person is in another EU member state. For example, supplier in country A ships goods to recipient in country D but invoices to an entity in country B, who in turn invoices to its customer in country C, who invoices country D.
Only one party in the chain can be responsible for the intra-community movement and take advantage of the VAT exemption for intra-community supplies. However, this rule is currently inconsistently applied and leads to confusion such that it is not clear which party is responsible.
Position from January 1, 2020
A new general rule takes effect, which sets out that the intra-community supply as being the one between the first supplier and the intermediary reseller.
This is subject to a derogation that allows the intermediary reseller to make the intra-community supply if it is registered for VAT in the country where the shipment of the goods begins.
Complex, multiparty chains, require more careful consideration.
3. PROOF OF TRANSPORT
There is no common set of guidelines or policy governing the level of evidence required to demonstrate that goods have left the member state of origin to support the VAT exemption for intra-community supplies.
Position from January 1, 2020
The seller must have access to two non-contradictory pieces of evidence from a pre-determined list of documents issued by two parties involved in the transaction such as shippers, banks, etc. (e.g. bill of lading or airfreight invoice). These two parties must be independent of the seller, the customer and each other.
4. REQUIREMENT FOR VALID VAT NUMBER TO BE OBTAINED AND QUOTED
Currently European case law has found that in principle a supply of goods can be zero-rated as an intra-community transaction without a VAT number, provided it can be determined that the customer is a taxable person. The case law in question has confirmed that the EU VAT number of the customer is not a necessity provided other substantive evidence demonstrates the conditions for exempting the transaction of VAT have been met.
Position from Jan. 1, 2020
Two new pre-conditions will exist to qualify for VAT exemption. First, the customer’s VAT registration number must be collected by the seller and shown on the sales invoice. Second, the transaction must be included on the seller’s EC Sales List, a periodic report that should be filed in respect of intra-EU sales.
The overall aim of these Quick Fixes is to make the rules across the EU consistent and to tighten up processes to make it more difficult to avoid accounting for VAT.
The above is a summarization of the changes all businesses with operations and transactions in the EU should be aware of. The underlying concepts are technically complex as evidenced by the fact that the European Commission VAT Expert Group has issued a 70-page draft explanatory guide to accompany the implementing regulations.
There are a number of important logistical, commercial and accounting implications arising from the commission’s Quick Fixes. These include:
- Understanding the operational and recordkeeping requirements,
- The impact on the supply chain, and
- Ensuring financial systems are properly configured to deal with the changes.
These changes will also be impacted by the outcome of Brexit, and at the time of the publish of this content this is not certain it should be factored into planning.
In preparation, businesses should take steps to make sure their intra-EU supply arrangements will not be adversely impacted by the Quick Fixes. For practical guidance, and a more detailed discussion about your specific scenario, please reach out to your normal RSM contact.
If you would like to receive additional information on this matter or VAT assistance, the tax team of RSM Belgium is at your disposal.