The EU Court has deemed that the rules on third party trading are applicable when a middle man in a chain transaction is registered for VAT in the country from which the goods are transported. However, the Court concludes that a tax authority in a member state can deny a company the right to apply these rules if the company in question does not fulfill the formal obligations.
The circumstances in the case are, briefly stated, the following.
A company was established and registered for VAT in Germany and also registered for VAT in Austria. The company purchased goods from suppliers in Germany and sold them to customers in the Czech Republic. As the goods were sent directly from the suppliers in Germany to the customers in the Czech Republic, the company applied the rules on third party trade. This implies that the VAT on the transactions should be reported by the customers in the Czech Republic.
Initially the company had presented incorrect EC sales lists and, consequently, had initiated corrections to these which were provided to the Austrian tax authorities. Since the company had not presented correct information within the prescribed time period, the tax authorities determined that the company was to report Austrian VAT on the purchases made by the company from the German suppliers.
The case became subject to a legal process and the Supreme Administrative Court in Austria asked the EU Court how to interpret some of the applicable regulation. The EU Court determined, amongst other things, that the fact that the middle man was established and registered for VAT in the same country as the first party is not an obstacle for the use of the rules on third party trade. The EU Court also stated that the tax authorities in a member state cannot in principle tax an intra-EU acquisition only on the basis that the acquirer has failed to present EC sales lists within the prescribed time period. However, if the acquirer has obviously contributed to tax avoidance or if such a delay implies that the acquirer cannot prove that a subsequent delivery which is to be taxed in the country of destination has taken place, then, such neglect of formal requirements can imply that the rules on third party trade cannot be applied.
According to our understanding, the decision is important as it clarifies the circumstances in which the third party trade rules can be applied. To date, it has been difficult for companies to feel secure in applying the rules as the various member states have interpreted them differently.
Based on our experience, Swedish implementation and the Swedish Tax Agency’s view has not resulted in companies being denied application of the rules on third party trade to any greater degree, as long as the middle man has not contributed to tax avoidance. However, we have experience of this outside Sweden. Consequently, we believe that the decision can imply that a larger number of companies will venture to apply/will be able to apply the third party trade rules.
As we have previously reported in Tax matters, the EU Commission has proposed an extensive VAT reform which, amongst other things, implies that reverse tax liability will no longer apply https://blogg.pwc.se/taxmatters/eu-kommissionen-foreslar-omfattande-momsreform. Instead, the supplier is to calculate and charge VAT on the basis of the purchasing country’s VAT rate. The supplier subsequently pays the VAT to its tax authority and the authority transfers the amount to the purchasing country’s tax authority.
There is an exception to the above proposed reform. A purchaser registered as a Certified Taxable Person (CTP) can avoid paying VAT to the supplier and instead apply reverse tax liability (“reverse charge”) to the acquisition. The Commission also proposes four ”quick fixes” to facilitate companies’ VAT treatment in the current VAT system until the new VAT system has been fully implemented. One of these “quick fixes” involves the simplification of VAT reporting on chain transactions.
It is with great interest that we wait to see if the EU Commission’s proposal for a VAT reform will be adopted. For companies undertaking EU trade, such an adoption will imply major adjustments to reporting systems.