VAT quick fixes (part 3): chain transactions

Przemysław POWIERZA
Tax Partner at RSM Poland

We are presenting the next article from the “VAT quick fixes” series. Last time, we analysed changes introduced in the call-off stock procedure. This time, we are going to focus on the amendment of chain transactions.

Pursuant to a general principle defined in Article 32 of Directive 2006/112/EC (hereinafter: the Directive) and Article 22 par. 1 item 1 of the Value Added Tax Act, the place of supply shall be deemed to be the place where the goods are located at the time when the dispatch or transport of the goods to the customer begins. This means that if goods are dispatched from Poland to Germany, Poland is the place of supply for VAT purposes. The place (= country) of supply is thus crucial for determining in which country a given transaction shall be taxed.

CHAIN TRANSACTIONS, MEANING WHAT?

In chain transactions, several entities perform the supply of the same goods where the first one moves the goods directly to the last purchaser in the chain, and its dispatch or transport may be assigned to a single supply called ‘goods transport’. This results from the fact that since goods are moved once (from one country to another), this means that there is only one intra-Community supply or one export from the supplier and one intra-Community purchase or import for the purchaser, respectively. If goods are dispatched or transported by the purchaser who is also performing the supply (intermediary), it is assumed that the dispatch or transport is allocated to the supply made to this purchaser (intermediary), unless the supply terms and conditions provide otherwise, i.e. that the dispatch or transport of goods shall be allocated to the supply (i.e. to the transaction performed not ‘for’ but ‘by’ the intermediary). Thus, in the case of intra-Community chain transactions, the place of supply (goods transport) determines both the place (country) of taxation and the entity that has the right to apply an exemption (0% rate) to the ICS or export. All traders involved in the transaction chain, both before and after this entity, must recognise domestic sale in the place (country) in which the dispatch of goods begins or the supply is finished, respectively.

An appropriate identification and later settlement of a chain transaction is quite a challenge if the transaction involves more countries and entities. It is difficult to properly assign a regulation to a chain of transactions, often long and complex, as different links (traders) usually do not have an extensive overview of the entire process and the parties involved. In any case, it is not surprising: if traders were fully aware of all the stages in the supply of the goods in question, the first supplier and the final purchaser would most likely have eliminated intermediaries.

GOODS TRANSPORT EASIER TO IDENTIFY

The amendment is supposed to make it all easier and, most importantly, uniform in the entire European Union. The German Ministry of Finance has just published a draft amendment of the regulations. We are still waiting for the draft amendment of the Polish VAT Act. In line with the new rules, the only intra-Community supply (‘goods transport’) will be the supply from the supplier to the first intermediary. As there are exceptions to every rule, it is no different this time. If the intermediary gives the supplier its VAT number issued by the Member State, from which goods are dispatched or transported, the ‘goods transport’ will be the supply carried out by this entity. Unless the next purchaser uses its valid identification number of the country of dispatch: in such case, the ‘goods transport’ will again move one link up in the chain. We will eventually have a situation in which the supplier uses its identification number from the country of dispatch, and the purchaser uses the identification number of the country to which the goods are supposed to be eventually delivered. This regulation seems to be straightforward. The simplified identification of ‘goods transport’ will prevent cases in which some goods are not taxed at all or not taxed correctly. Traders, on the other hand, will gain certainty concerning the place of taxation and interpretation of the regulations, from now on uniform in the entire Community.

For the avoidance of any doubts, the definition of an “intermediary” has been introduced into the Directive. It is a supplier other than the first entity in the supply chain, who either dispatches or transports goods on its own or through a third party acting on its behalf. Thus, it means that this is an entity that arranges the transport of given goods.

In the next and at the same time the last part of this series, you will read about the remaining changes in the Directive. We are going to discuss the requirements for intra-Community transactions documentation and the role of the VAT identification number for the application of a 0% rate to an intra-Community supply. We encourage you to read it carefully!