In November, we published a two-part blog post on new EU VAT rules for online commerce. Those rules were developed in accordance with a VAT Action Plan adopted by the EU in 2016 and intended to make the EU's indirect tax system simpler, more fraud-resistant and more business-friendly.
The so-called "quick fixes" are an important part of the system of VAT changes coming into force in all EU member states on 1 January 2020.
The quick fixes focus on various cross-border transactions of goods. They apply to all businesses — both EU- and non-EU-based — that trade in the EU. If your business has cross-border activity, you should review the rules summarized here and ensure your accounting and VAT compliance software, and your audit-trail systems, are ready for the new requirements.
Overview of the EU's VAT quick fixes
There are four EU VAT quick fixes. Here they are, with their respective aims:
- Quick Fix 1: Clarify the conditions to apply the EU's cross-border VAT exemption, including the use of a mandatory VAT ID number
- Quick Fix 2: Harmonise the proof of goods transport between two EU member states
- Quick Fix 3: Harmonise the treatment of call-off stock arrangements
- Quick Fix 4: Harmonise the treatment of chain transactions
The four fixes fall into three categories of VAT cross-border supplies in the EU. Here are those categories, with the related fixes and how they apply in each situation.
1. Simple EU cross-border supply: Quick Fixes 1 and 2 apply
This situation involves simple business-to-business (B2B) EU cross-border transactions of goods (also called intra-Community supply). A supplier engaging in this kind of transaction can apply a zero VAT rate to its supply in the dispatch member state. The customer must charge and account for VAT due in the destination member state.
We can use as an example a shipment of goods from Germany to France. Under certain conditions, the German supplier will not need to charge German VAT on its supply. Instead, it can apply a zero VAT rate and transfer the VAT liability to the French business (i.e. the customer). The customer must self-account for the French VAT due on the acquisition of goods from the German supplier. The customer can offset the VAT due with a corresponding amount of VAT claimed as a cost.
How Quick Fix 1 applies and what to consider. At present — that is, before the implementation of the quick fixes on 1 January 2020 — a supplier should obtain a valid EU-issued VAT number from its business customer in order to benefit from the application of the zero VAT rate. However, based on EU case law, a supplier may still apply the zero VAT rate even if it has failed to include the customer's VAT number on the invoice. Following the implementation of Quick Fix 1, unless the supplier shows the valid VAT number of its customer on the sales invoice, the supplier will no longer be able to apply the zero rate. In addition, the supplier must include its intra-Community supplies in the EU sales lists (i.e. recapitulative statements) in order to benefit from the zero-rate provisions.
How Quick Fix 2 applies and what to consider. In order to apply the zero VAT rate, the supplier must obtain and retain evidence of the physical movement of goods from one EU member state to another. Currently, there are various country-specific requirements regarding the type of documents that may serve as a proof.
Quick Fix 2 introduces a new, harmonised approach across the EU that will require at least two separate pieces of documentary evidence that are non-contradictory and issued by two different, independent parties. The new rules list a number of acceptable documents, such as a CMR note, bill of lading, airfreight invoice of the goods carrier, and proof of payment for dispatch or transport.
2. Call-off stock and EU cross-border supply: Quick Fix 3 applies
The call-off stock VAT regime essentially refers to the transfer of goods from one EU member state to another in order to make subsequent supplies in the country of destination where the customer is known in advance. On arrival, the goods are placed in a warehouse or other premises to be drawn down (or "called off") when the customer requires them. Currently, EU VAT rules require that the supplier registers in the member state of destination, unless the particular member state has adopted a simplification regime. It should be emphasized that the conditions and procedures that now apply vary from one member state to another.
How Quick Fix 3 applies and what to consider. With the implementation of Quick Fix 3 in January 2020, the supplier will no longer need to register for VAT in the destination member state, if they meet certain conditions. Under those conditions, the supplier can treat the transaction as a direct intra-Community supply from the moment the customer removes the goods from the warehouse. These conditions include: a time limit for removal of up to a year; documentary proof consisting of a register with specific details; and reporting requirements (such as including the goods in the EU sales lists). If these conditions are not met, the quick fix will not apply and the supplier will still need to register in the destination member state.
3. Chain transactions and EU cross-border supply: Quick Fix 4 applies
This change affects EU cross-border supplies of goods within chain transactions. A chain transaction involves multiple transfers of ownership over goods, accompanied by a single cross-border movement of those goods. In such cases, the EU cross-border movement must be ascribed to one of the supplies in the chain. Only this supply can benefit from the zero-rated regime of the intra-Community supply.
How Quick Fix 4 applies and what to consider. Quick Fix 4 provides clarity around how to ascribe the cross-border movement of goods to one of the supplies in a chain transaction. In such cases, the movement of goods should be ascribed to the supply made to the party that arranges for the actual transport of the goods. This is typically the first transaction in a chain — for example, the A-B supply in an A-B-C-D chain transaction. There are, however, exceptions.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.