Quick fix: Requirements for and proof of intracommunity supply
On 4 October 2017, the European Commission published some details of its plan for reform of the EU VAT system in respect of cross border trade.
2 November 2017
- Material requirements for intracommunity supplies
- Proof of the exemption/zero rate
- Additional material requirements for intracommunity supplies
- Some critical notes
- Related articles
In anticipation of the new VAT system that should, according to the proposals enter into force in 2022 the Commission proposes four quick fixes to provide some simplifications in the current system. This article deals with two of those quick fixes: the proof for the exemption for an intracommunity supply and the additional material requirements for application of the exemption proposed at the request of Member States.
Material requirements for intracommunity supplies
When a supplier supplies goods and those goods are transported in relation to the supply to another Member State this supply is exempted/zero rated if the customer must report an intracommunity acquisition. In order to apply the exemption/zero rate the supplier must prove:
- That the right to dispose of the goods has been transferred to the customer
- That the goods have been transported from one Member State to another in relation to the supply
- That the customer needs to report an intracommunity supply in the Member State of destination.
These are the so-called material requirements for applying the exemption or zero rate for intracommunity supplies. To correctly report an intra-Community supply, the supplier must have a valid VAT identification number of his customer outside of the Member State of departure and include that VAT identification number with the transaction value in his European Sales Listing.
The CJEU has ruled that if formal requirements have not been met the VAT exemption/zero rate can still be applied as long as the material requirements are fulfilled. According to CJEU case law a valid VAT identification number of the customer is such a formal requirement.
Proof of the exemption/zero rate
In the current intra-EU trade regime, the task of collecting and providing the proof that the material requirements for the exemption/zero rate for intracommunity supplies have been met, sits with the supplying business. As there is currently a lack of uniform rules or conclusive guidance within the EU on the level of proof required, businesses are faced with uncertainty.
The European Commission has now proposed a simplification for the rules on the proof of exemption/zero rate. Under the proposed quick fix, Certified Taxable Persons (CTPs) can rely on specific pieces of evidence listed in the VAT Implementing Regulation. In short, CTPs are taxable persons that have been granted the status of reliable taxable person by the tax authorities. I refer to my article on CTP for a more extensive description of the CTP.
In case the supplier of the goods is a CTP and the goods have been transported or dispatched by him or by a third party on his behalf, the supplier can prove his entitlement to the exemption or zero rate by possessing two items of non-contradictory evidence.
The following documents are accepted as pieces of evidence:
- A document signed by the customer or by a person authorised on his behalf acknowledging the receipt of the goods.
- Documents relating to the transport or dispatch of the goods, such as a signed CMR document or note, a bill of lading, an airfreight invoice, an invoice from the carrier of the goods, an insurance policy with regard to the transport or dispatch of the goods or bank documents proving payment of the transport or dispatch of the goods.
- Official documents issued by a public authority, such as a notary, confirming the arrival of the goods in the Member State of destination.
- A receipt issued in the Member State of destination confirming the storage of goods in that Member State.
- A certificate issued in the Member State of destination by a professional body in that Member State such as by a chamber of commerce or industry confirming the destination of the goods.
- A contract between the supplier and customer or a purchase order indicating the destination of the goods.
- Correspondence between the parties involved in the transaction indicating the destination of the goods.
- The VAT return of the customer declaring the intracommunity acquisition of the goods.
If the transport is taken care of by the customer who is a CTP, the supplier can apply the exemption/zero rate when he is
- in the possession of a written statement of the customer stating that the goods have been transported or dispatched by the customer or a third party on the customer’s behalf and that statement refers to the Member State of destination and;
- when he has two items of non-contradictory evidence confirming the transport or dispatch. The customer must provide the written statement to the supplier no later than the tenth day of the month following the supply.
A tax authority may still deny the supplier the right to the exemption/zero rate when there are indications of misuse or abuse by the supplier or customer.
What is unclear is whether all combinations of these pieces of evidence are allowed. For example, is it sufficient if the supplier possesses a contract or purchase order mentioning the destination of the goods and some e-mail correspondence with its customer where the customer indicates to which Member State the goods will be transported? It seems that in such a situation the evidence is based completely on the customer’s declaration. Another thing that catches the eye is that the list of pieces of evidence is closed, meaning that no other pieces of evidence than those mentioned in the list can be used if one wants to use the simplification and limit the evidence burden to two pieces.
Additional material requirements for intracommunity supplies
At the request of Member States, the European Commission also proposes as a quick fix to implement some additional material requirements that have to be met before the exemption/zero rate for intracommunity supplies can be applied. These new material requirements are:
- A valid VAT identification number of the customer in a Member State other than that in which the dispatch or transport of the goods begins.
- Reference to the customer in the Intracommunity Sales Listing (ISL).
These are both requirements that have been indicated as being merely formal requirements by the CJEU. Currently, if e.g. a valid VAT identification number is missing, the supplier cannot be refused its right to the exemption/zero rate when he can prove that all material requirements for an intracommunity supply, mentioned above, are met.
Some critical notes
The proposal for the proof of the exemption/zero rate for intracommunity supplies allows businesses to organise their information systems in a way that it captures and maintains the two most relevant pieces of evidence in their business model and make them critical pieces for transaction clearing. However the simplification only partially relieves the administrative burden for businesses. Research carried out in 2014 (see VEG No 027, taxud.c.1(2014)57825) shows that the following two situations are most problematic:
- When the supplier, or the customer, transports the goods using his own means of transport
- When goods are sold “ex works”
In case it is the supplier that transports the goods or assigns a third party to do this for him, he will have matters more or less in his own hands under the proposed rules. If he can obtain the CTP status he can collect two pieces of non-contradictory evidence to prove his entitlement to the exemption/zero rate. If goods are however are sold “ex works” or under other conditions were the customer takes care of the transport or assigns a third party to do this for him, the supplier will depend on whether or not his customer has the CTP status and whether the customer will provide the written statement. What’s more if the supplier or customer cannot obtain the CTP status, e.g. because it is not established in the EU, the simplification cannot be applied at all.
The proposed new material requirements for the application of the exemption/zero rate for intracommunity supplies will in my opinion only to some extent help in the combat of VAT fraud, while it exposes bona fide businesses to increased financial risk. Fraudsters will most likely adapt and have their VAT identification number in the VIES system, but they will still disappear later on. The ISL is a means of matching transactions, but matching alone cannot prevent VAT fraud. When it is clear that an intracommunity acquisition has not been reported, the fraudster has probably disappeared already. In cases where the VAT number is absent or when the supplier has accidently not mentioned a supply in its ISL he (still) pays a hard price, even if no fraud has occurred. Particularly if this is established during an audit and the supplier is unable to charge its customer with the VAT that it needs to pay.