VAT in three-party transactions: procedural simplifications and common mistakes
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Effective management of intra-Community trade requires businesses not only to be logistically efficient, but also to have a thorough understanding of the regulations governing value added tax.
One solution that can bring tangible benefits to VAT taxpayers in this regard is the so-called simplified procedure for triangular transactions. It allows businesses to avoid the need to register an intermediary for VAT purposes in the country of destination of the goods, which helps to optimise VAT settlement and can provide a significant competitive advantage for companies operating in the EU market.
The essence of an intra-Community three-party transaction under the VAT system
An intra-Community three-party transaction is a specific type of chain supply involving three VAT taxpayers registered for intra-Community transactions in three different Member States of the European Union. This transaction is based on the following model: the first supplier sells the goods to an intermediary, who in turn resells them to the final customer, with the goods being physically transported directly from the first party to the last.
In the standard model of chain supplies, the intermediary might be required to register as a VAT payer in the purchaser’s country in order to account for VAT there on the intra-Community acquisition of goods (ICA) and the local supply, which would entail burdensome formal obligations. The simplified procedure removes this requirement by shifting the burden of accounting for VAT on the intra-Community acquisition of goods in the country of destination to the final participant in the chain.
Conditions for applying the simplified procedure
The option to use the simplified procedure is not automatic and depends on a number of conditions being met.
In particular, the supply to the final VAT taxpayer must be preceded by an intra-Community supply to an intermediary. The intermediary, in turn, must use the same VAT identification number for intra-Community transactions (EU VAT) in dealings with both the supplier and the recipient (and this number must not be issued by the Member State in which the transport begins or ends).
The intermediary must also not have a place of business within the territory of the Member State where the transport ends. Furthermore, the final VAT taxpayer in the chain must use the EU VAT number of the Member State where the transport ends.
It is also necessary to include a relevant note on the invoice issued by the intermediary stating that the tax on the supply made by the intermediary will be accounted for by the last entity in the chain.
Documentation and accounting obligations of Polish VAT taxpayers participating in the simplified procedure
A Polish VAT taxpayer acting as the first supplier in the chain recognises an intra-Community supply of goods (ICS), generally at a 0% rate, by issuing an invoice to the intermediary. This ICS is reported in the JPK VAT and the recapitulative statement.
In turn, the intermediary, who is a Polish VAT taxpayer, issues an invoice to the final purchaser containing, in particular, the annotation ‘VAT: Simplified EC invoice pursuant to Articles 135–138 of the VAT Act’ or “VAT: Simplified EC invoice pursuant to Article 141 of Directive 2006/112/EC”, as well as a statement that the tax on the supply will be accounted for by the final VAT taxpayer in the chain.
In the JPK VAT return and summary information submitted, the aforementioned intermediary is required to disclose, on the one hand, specific details regarding the intra-Community acquisition of goods (though excluding tax, which is characteristic of the simplified procedure), and on the other hand, details of the supply of goods made by them outside the country (in connection with the resale of goods).
In turn, the final entity in the chain, being a Polish VAT taxpayer, discloses detailed data on the intra-Community acquisition in the JPK VAT and the summary report.
The most common errors and their consequences
The practice of tax authorities and case law, including judgments of the Court of Justice of the European Union (CJEU), indicate that even seemingly minor formal errors may deprive a trader of the right to use the simplified procedure.
One such shortcoming is the absence of an appropriate annotation on the invoice issued by the intermediary. If the invoice does not clearly indicate that the purchaser is obliged to account for VAT under a triangular transaction, the intermediary may be forced to register retrospectively for VAT purposes in the country where the transport ends and to pay the tax, together with certain additional penalties.
Another fairly common mistake is the intermediary using an EU VAT number assigned in the country where the transport begins or ends. The lack of appropriate documentation needed to demonstrate the physical movement of goods between individual countries can also be a problem.
Recommendations for businesses
To minimise the tax risks associated with the chain transactions in question, companies should carefully assess whether the conditions for applying the simplified procedure are met in each specific case.
It is also recommended to implement a systematic verification of counterparties’ status in the VIES database (the EU VAT number search engine) prior to each supply. Care should also be taken to ensure that internal accounting systems correctly generate the required annotations on invoices and correctly flag transactions in JPK files / summary reports.
In the event of any doubts regarding the nature of a transaction or the status of its parties, it is advisable to consult a tax adviser on the course of action to be taken. The correct implementation of the simplified procedure not only saves time but, above all, ensures the financial security of the business in international trade.