VAT risk for supplier in chain transactions in case of pick up by second customer
On 21 February 2018, the Court of Justice of the European Union (hereafter: “CJEU”) delivered its judgment in the Kreuzmayr case (C‑628/16) on the application of the zero rate in a cross-border supply chain. Again, after the Toridas case of 26 July 2017, the CJEU had to decide on the assignment of the transport of goods in a chain transaction. The CJEU judgment gives more insight in the application of the exemption (with the right to deduct input VAT) for intra-Community supplies in a cross-border supply chain. Besides, the CJEU answers the question whether the principle of the protection of legitimate expectations extends so far as to justify the right of deduction in case parties assigned the transport to the wrong link in the supply chain.
26 February 2018
BP Marketing GmbH (BP), a German-based company sold petroleum products to BIDI Ltd (BIDI), a company VAT registered in Austria. BIDI agreed to carry out the transport of the petroleum products from Germany to Austria. After BIDI paid in advance, BP provided the collection numbers and collection permits of the petroleum products which were stored at refineries in Germany.
In fact, BIDI resold the petroleum products to Kreuzmayr, a company based and VAT registered in Austria, before the goods left Germany. BIDI gave Kreuzmayr the collection numbers and collection permits received from BP. It was agreed that Kreuzmayr would arrange for or carry out the transport of the petroleum products from Germany to Austria. Subsequently, the goods were collected either by employees of Kreuzmayr or by hired haulage contractors.
BP, who was not informed by BIDI of the resale of the goods, treated its supplies to BIDI as exempt intra-Community supplies. BIDI charged Austrian VAT on its invoices to Kreuzmayr, who deducted this VAT.
In a dispute between BIDI and BP, BP learned that BIDI had entrusted Kreuzmayr with the transport of the goods. BP informed the German tax authorities of this fact. The tax authorities subsequently requested payment of German VAT on the supplies by BP.
Initially the deduction of the input VAT was allowed by the Austrian tax authorities. However, it turned out that BIDI had neither declared nor paid the invoiced amounts of VAT to the tax authorities, without having informed Kreuzmayr of that fact. BIDI justified its course of action by claiming that the supplies to Kreuzmayr were exempt intra-Community supplies taxable in Germany, and that they were consequently not taxable in Austria. Following an audit, BIDI sent corrected invoices to Kreuzmayr without VAT. However, BIDI did not repay the VAT amounts wrongly received to Kreuzmayr (according to BIDI simply by mistake). Kreuzmayr never recovered the amounts of VAT which it had paid, because BIDI had become insolvent.
In respect of Kreuzmayr’s VAT position the Austrian tax authorities took the view that based on the corrected invoices the supplies to Kreuzmayr were exempt intra-Community supplies and not domestic supplies. Kreuzmayr had therefore no right to deduct the Austrian input VAT charged to it by BIDI on the original invoices and as a result cancelled Kreuzmayr’s input VAT deduction.
Transport attributable to second supply
The CJEU has ruled that, in the circumstances at hand, the exempt intra-Community supply was made by BIDI.
In reference to its settled case-law, the CJEU states that in any cross-border supply chain with two successive supplies of the same goods, there can only be one supply that is treated as an exempt intra-Community supply. If the right to dispose of the goods as owner is transferred to the second acquirer before the intra-Community transport occurs, the intra-Community transport cannot be assigned to the first supply.
The CJEU rules that as Kreuzmayr became the owner of the goods before the intra-Community transport took place in the country of departure of the goods (Germany), the supply by BIDI to Kreuzmayer was the intra-Community. supply In this case, BIDI and Kreuzmayr were both aware of the fact that the right to dispose of the goods as owner had been transferred to Kreuzmayr in Germany before the intra-Community transport. The fact that BP had qualified the first supply as the intra-Community supply, based on its knowledge at the time, does not mean that BIDI and Kreuzmayr could rely on that qualification and accordingly treat the second supply as a domestic supply.
Additionally, the CJEU ruled that, Kreuzmayer cannot rely on the principle of the protection of legitimate expectations against his supplier in order to claim a right to deduct input VAT. Kreuzmayr cannot deduct the amount of input VAT wrongly paid for supplies on the sole basis of the incorrect invoice provided by BIDI, indicating that the supply is a domestic supply. Kreuzmayr can however reclaim the VAT unduly paid in accordance with national law. In earlier case law the CJEU ruled that it falls to the Member States to determine the conditions in which improperly invoiced VAT may be adjusted.
Impact on the first supply
The CJEU does not answer the third question of the referring judge in the Kreuzmayr case. In this question the referring judge asks about the consequences for the first supply that has been treated as an intra-Community supply by BP, which turned out to be incorrect later on. In particular it requests whether the VAT consequences of the transaction need to be changed with retrospective force. It appears that the question has not been answered because the question was incorrectly formulated.
Because there can be only one intra-Community supply in the supply chain we think that the first supplier must change the classification of its supply to a local supply in the Member State of departure once he has become aware of the fact that the right to dispose of the goods as owner has been transferred to the second acquirer in the Member State of departure. We believe this is in line with the CJEU judgment in the Euro Tyre Holding case, which seems to be the reasoning behind the German tax authorities’ request to BP to pay German VAT on its supply.
We feel that the supplier can only be held reliable for the payment of local VAT from the moment he has obtained the information that leads to his supply being a local supply after all, which can for example be the result of a tax audit. As a result no interest or penalties should be applied. Tax authorities might however take the position that the first supplier is required to adjust its classification of the transaction with retrospective force.
As the Kreuzmayr case again shows it is important for parties involved in chain transactions to obtain all relevant information as to when the right to dispose of the goods as owner has been transferred to another party before the supply takes places. They should however also be aware that the information obtained can turn out to be incorrect later on and this can affect their VAT obligations, i.e. create an obligation to pay local VAT. If and where possible parties should make sure they include proper protection in their contracts.