Part 3: Chain Transactions
This is the third in a series of four blogs providing explanatory detail to the EU’s “2020 Quick Fixes” that aim to standardise certain VAT rules throughout the EU. Part one of this series focussed on VAT Identification of the Customer, whilst part two provided guidance on the Exemptions of Intra-Community Supplies of Goods. Here, we will discuss the updated guidance around the handling of Chain Transactions which take effect from 1 January 2020.
What are chain transactions?
Chain transactions occur where there are several successive deliveries of goods between businesses but only one Intra-Community shipment. Only one of the transactions in the chain can be treated as a VAT-free Intra-Community delivery; the others will be treated as domestic transactions in either the Member State of dispatch or destination, with the relevant local rate of VAT charged. Since local rules in each Member State can vary, this has often resulted in inquiries and disputes with and between tax authorities in both Member States as to whether the VAT treatment at each step was correctly applied. This in turn leads to commercial uncertainty for businesses and can result in financial penalties for incorrectly applying VAT (as well as potentially the loss of input VAT incurred, especially during a dispute and additional evidential paperwork.
Going forward, the new rule defines the link in the chain that is the VAT-free Intra-Community transaction. The following conditions must be met for the new rules to apply:
- The goods must be supplied successively (the EU defines this to be at least three parties in the chain)
- The goods must be dispatched from one Member State to another (i.e. the transaction doesn’t involve an in-country movement, or imports or exports between an EU Member State and a non-EU country)
- The goods must be dispatched directly from the first supplier to the last customer in the chain
- Delivery by a supplier to an intermediary undertaking the cross-border shipment may be zero-rated if that intermediary either organises the shipment or is recognised as legally responsible for it. However, if an intermediary arranging the transport has given the supplier their VAT registration number, the intermediary is regarded as carrying out the Intra-Community movement. The first delivery is instead then treated as a domestic movement subject to VAT at the rate of the dispatch country. In circumstances where they are seeking to be the party zero-rating their transaction, the intermediary must keep documentary evidence to prove they (or a third party acting on their behalf) have dispatched the goods. In effect, two separate proofs are necessary – evidence of the arrangement of the dispatch, and of the dispatch itself taking place.
For clarity, the Chain Transactions “Quick Fix” does not impact or interact with the “Triangulation” simplification.
Some EU countries have already unilaterally introduced some or all the “2020 Quick Fixes” in their local VAT legislations. However, the EU formalises these measures across the board from 1 January 2020. Businesses are encouraged to analyse the new framework to see how they can in turn make improvements and efficiencies in their Intra-Community goods movement processes.