Are you involved in supply chain transactions and do you regularly apply the simplified triangular transaction (STT) rule for VAT purposes? The Court of Justice of the European Union (CJEU) issued an important decision on 8 December 2022 on the invoice requirements for applying the rule, strictly applying the requirements. This article looks at the VAT treatment of supply chain transactions (ABC transactions), the application of the STT rule, the CJEU decision and its consequences in practice.
Overview of VAT treatment of chain transactions and the STT rule
A chain transaction involves at least three traders in different EU member states and two successive supplies of the same goods, in which the goods are first sold by A to B and then by B to C and transported directly from the location of the first supplier to the final customer by one of the parties in the chain. Even though there is only one movement of goods, for VAT purposes, each link in the chain constitutes a supply of goods. Only one of the supplies—the supply where the party arranging the transport is involved—qualifies as an intra-community supply and thus can benefit from the VAT exemption for such supplies. The other supplies are domestic supplies subject to local VAT either in the EU member state of dispatch or the EU member state where the transport of the goods ends. However, when B (the intermediary) transports the goods, B is involved in two transactions, i.e., A to B and B to C so a question arises as to which transaction qualifies as an intra-Community transaction.
The rules on EU cross-border chain transactions were revised as from 1 January 2020, specifically with respect to the determination of which supply in a chain should be considered the intra-Community supply. The main rule now is that the intra-Community supply is the supply from A to B if certain requirements are met. However, a derogation from the general rule is possible when the intermediary B gives its supplier the VAT ID number issued by the member state from which the goods are dispatched; in this case, the intra-Community supply is the supply from B to C. All supplies before the intra-Community supply are taxable in the country of departure and all supplies following the intra-Community supply are taxable in the country of arrival. In the absence of the STT, if B is not established and registered for VAT purposes in the member state of departure and arrival of the goods, it would have to register for VAT in either member state to fulfill his VAT obligations. The main purpose of the simplification for triangular transactions is to avoid multiple VAT registrations in different EU member states.
By applying the STT (which is optional), a trader acting as the intermediary in a triangular transaction will be deemed not to be making an intra-Community acquisition in the member state of arrival of the goods and thus eliminates the need for the intermediary to register for VAT purposes in the member state to which the goods are transported. In addition, the chargeability of VAT on the subsequent supply is shifted from the intermediary to the final customer. However, several requirements under the EU VAT directive must be met to apply the STT, including specific language in the invoice that the VAT is reverse charged. By doing so, the final customer, rather than the supplier, will be required to charge VAT and report it on the VAT return.
It is also important to point out the relevance of the rules relating to VAT ID numbers to be included on invoices. If goods are acquired in an intra-Community transaction where a VAT number other than the VAT number of the trader in the country of arrival of the goods is used, an intra-Community acquisition will have to be accounted for in the member state that issued the VAT ID number. In such cases, the VAT will not be deductible, but a refund may be claimed if an acquisition is declared in the member state of the recipient where the transport of the goods ends. When applying the STT, no acquisition has to be declared in the EU member state that issued the VAT ID number that was used in the transaction.
CJEU decision in Luxury Trust Automobile
The CJEU ruled in the Luxury Trust Automobile case that a transaction is taxable as a triangular transaction only if the invoice issued by the intermediary contains the words “reverse charge.” The court upheld the opinion of Advocate General Kokott issued on 14 July 2022.
Facts of the case
The case before the CJEU involved Luxury Trust Automobile GmbH, a company established in Austria and involved as the intermediary in a chain transaction.
Luxury Trust purchased luxury cars from supplier A, based in the UK (at the time still an EU member state) and resold the vehicles to C, a company established in the Czech Republic. The vehicles were shipped directly from the UK to the Czech Republic, with Luxury Trust arranging the transport. Luxury Trust issued three invoices that contained the VAT ID numbers (in the respective states of establishment) of each of the parties and stated that it applied the STT rule by including the reference, “exempt intra-Community triangular transaction.” However, Luxury Trust did not include a reference to the reverse charge mechanism on the invoice.
Luxury Trust subsequently corrected the invoices to add the required language about the transfer of VAT liability to final customer C but there was no evidence that the new invoice was actually supplied to C. To complicate matters, C was considered a “missing trader” by the Czech tax authorities because even though it was registered in the Czech Republic for VAT purposes during the relevant period, the tax authorities were unable to contact C and C did not declare or pay VAT in the Czech Republic on the supply.
The Austrian tax administration took the position that the STT rule could not be applied because Luxury Trust failed to include the reference to the reverse charge on the invoice. Since Luxury Trust used its Austrian VAT number in the transaction, it was considered to have made an intra-Community acquisition in Austria in the absence of evidence that the acquisition was taxed in the Czech Republic. Luxury Trust was not entitled to deduct input VAT in respect of the acquisition. Luxury Trust appealed the decision of the Austrian tax authorities, which was rejected and the case ultimately was referred to the CJEU.
CJEU decision
The CJEU held that for the STT to apply, an invoice from an intermediary in a triangular transaction to the final customer must include a reference that the VAT liability is shifted to the final customer (i.e., that the reverse charge applies), as well as a reference to an exempt intra-Community transaction; a mere reference to the exempt transaction is insufficient. As a result, the issuance of an accurate invoice is a prerequisite for the application of the reverse charge and the STT rule. Since, contrary to the main rule, VAT liability in such cases is transferred from the intermediary to the final customer, it is critical that the end customer is unambiguously clear about its tax obligations.
The court also concluded that the issuance of a new invoice with the required language will not remedy the deficiency and allow the STT rule to apply retroactively; the new invoice will simply be considered the (required) first invoice.
Relevance of the decision in practice
The CJEU’s decision in the Luxury Trust case emphasizes the importance of full compliance with the invoicing requirements when applying the STT rule. In particular, it is important that B state on the invoice that the VAT is reverse charged; if this notation is not included, B will have to register in the member state of destination to declare an intra-Community acquisition and a subsequent domestic supply. In addition, B is required to report an intra-Community acquisition in the EU member state from which it used the VAT ID number in the transaction. Thus, if the scheme is wrongly applied, B runs the risk of an additional tax assessment and penalties.
Under Dutch policy, there is no requirement that an invoice state that the VAT be reverse charged to C when applying the STT; instead, the invoice may simply reference the “intra-Community supply.” We believe that affected VAT payers may rely on Dutch policy at least until the date of the CJEU decision (i.e., 8 December 2022) and, therefore, it will not be possible for an intermediary to receive retroactive assessments. The question is whether the Dutch policy will remain in place. In addition, this policy does not apply in the EU member state of arrival of the goods where VAT is due on the local supply. Taxpayers should consider adjusting their practices as soon as possible and always including two references on the invoice, i.e., one showing that the VAT is transferred to the final customer and the other showing that the transaction is an exempt intra-Community transaction.
In Luxury Trust, the CJEU took a strict approach to interpreting the invoice requirement, in that it focused on the missing VAT reverse charge reference on the invoices. The question, however, can be asked whether the court would have reached the same conclusion had C properly declared VAT because the substantive requirement that VAT be reverse charged to the customer would have been met. This does not alter the fact that entrepreneurs that previously failed to reference the VAT reverse charge on the invoice potentially could be at risk, except in the Netherlands (and potentially other EU Member States with a certain tax policy in place), which does not require such language on invoices.
It is also unclear whether the Luxury Trust decision should be interpreted to mean that the STT rule can be applied only if all invoice requirements are met. After all, for the VAT reverse charge on a local supply to apply, the VAT directive requires an invoice that meets all invoice requirements. On the other hand, the CJEU points out that the reference to the reverse charge must make clear to the final customer that VAT liability must be transferred due to the application of the STT rule, which is optional. We are, therefore, unable to conclude from the CJEU decision whether it considers all invoice requirements as a prerequisite for applying the STT rule. Affected taxpayers should determine whether their invoices meet all invoice requirements when applying the rule and consider including both the reference to an exempt intra-Community supply and the reverse charge on relevant invoices.
More information?
Are you involved in chain transactions and have questions about the potential impact of the CJEU's decision on your situation? Please contact us if you have any questions or would like to discuss the implications of the decision on your business in greater detail.