A recent preliminary ruling request to the European Court of Justice, Case C-664/21, NEC PLUS ULTRA COSMETICS, has re-emphasised the importance of collecting documentation when carrying out a zero-rated supply in the EU. The 2017 NEC PLUS ULTRA COSMETICS case involved a company established in Switzerland selling cosmetics products under the Ex Works clause from their warehouse in Slovenia to business customers established in Romania and Croatia. Ex Works (EXW) is an Incoterms rule, a set of definitions outlining the responsibilities of buyers and sellers in international transactions. With Ex Works the transport obligations, costs and risks are the buyer’s responsibility.

The tax administration of the Republic of Slovenia inspected NEC PLUS ULTRA COSMETICS and requested evidence and supporting documentation relating to these supplies to verify that goods had been transported to another EU Member State.

NEC PLUS ULTRA COSMETICS provided copies of the invoices and of the ‘Convention relative au contrat de transport international de marchansises par route’ (CMR) consignment notes. The company failed to provide the evidence requested by tax officers to prove the right to tax exempt the supplies to their customers (delivery notes and other documents mentioned in the CMRs).

The company clarified that the reason for the late submission was that the Hamburg office responsible for supplies to Croatia ceased its activities in August 2018, making it more difficult to find the documents asked for by the tax officers.

Consequently, the Slovenian tax authorities provided the company with an additional VAT assessment notice and ordered it to pay the relevant amount.

What documents do you need to keep for supplies carried out after 2020?

In the implementation of the Quick Fix related to the proof of transport in 2020, the European Commission has clarified that where the supplier arranges transportation of the goods, it must be in possession of either:

List A

List B

If the acquirer is responsible for transport of goods (i.e. under the Ex Works clause), they must provide the vendor with a written statement by the 10th of the month following the date of supply that the goods have been transported by the acquirer or on the acquirer’s behalf. The written statement must include the following:

How to ensure VAT compliance

In the case of the Ex Works clause:

If you don’t feel reassured by your customer, change the agreement and Incoterms clause before the supply takes place.

Need help with VAT compliance?

Still have questions about VAT exempt supplies and the Incoterms Ex Works clause? Speak to our tax experts.

It seems such a short time since HMRC sent a reminder letter in March 2022 recalling the upcoming changes to the UK’s customs systems and explaining what to do to prepare for these changes.

With the deadline rapidly approaching, here’s a brief recap.

The Customs Handling of Import and Export Freight (CHIEF) system, which is now nearly 30 years old (it was introduced in 1994), will close in two phases:

The Customs Declaration Service will serve as the UK’s single customs platform, with all businesses needing to declare all imported and exported goods through the Customs Declaration Service (CDS) after 31 March 2023.

CDS benefits and key changes

As mentioned on the HMRC website, the Customs Declaration Service toolkit gives traders access to the many benefits of the upcoming changes. In summary:

Benefits

CDS changes

What does this mean in practice?

To be able to use CDS and import goods into the UK from 1 October 2022 and to export from 1 April 2023, businesses are required to have the following:

Businesses should also consider:

Take Action

Want to know more about how changes to the UK’s customs systems will impact your business and its compliance? Contact us to find out more.

In Italy, the discipline of transfer pricing states that in intra-group transactions between entities from different countries, where one is resident in Italy, transactions must take place on an arm’s length basis. In other words, transactions are based on freely competitive prices and under comparable circumstances.

Companies carefully treat the transfer pricing adjustments from a corporate income tax perspective. However, less attention is paid from a VAT perspective.

It’s worth mentioning that in most cases, the transfer price adjustments are profitability adjustments (rather than price) of the transactions carried out between associated companies.

However, treating the transfer pricing adjustments as outside the scope of VAT might cause problems in case of a tax authority audit and re-qualification of the transactions.

Italian tax authority clarifications

The issue of transfer pricing adjustments for VAT purposes is not expressly regulated by the Italian legislator, other EU Member State legislators or from an EU VAT legislative point of view. In the absence of an ad hoc provision, reference is made to EU and local legislation, and private and public rulings on a case-by-case analysis.

Regarding public rulings, Italian tax authorities published several responses in 2021.

With the last response to ruling no. 884 of 30 December 2021, inspired by EU Commission Working Paper n. 923 and VAT Expert Group document n. 071, Italian tax authorities clarified that to establish whether transfer pricing adjustments represent the consideration for a transaction relevant for VAT:

How will this affect my business?

In the 30 December 2021 ruling (no. 884), Italian tax authorities confirmed the adjustments in question were outside the scope of VAT following the transfer pricing adjustments. It stated for subsidiaries “the recognition of an extra cost aimed at lowering their operating margin“, wasn’t “directly related to the original supplies of finished products“.

The same outcome didn’t apply to ruling no. 529 of August 6, 2021.

In this case, at the time of the sale of the goods, the seller applied a provisional price.

That provisional price was then subject to adjustment on a quarterly basis, through the so-called “Profit True Up“. The result could consist either of a claim by the transferor against the transferee or, conversely, transferor’s debt.

In this specific case, Italian tax authorities found a “direct link between the sums determined in the final balance and the supplies” and concluded by determining the relevance of the transfer price adjustments made by the taxpayer for VAT purposes.

Final comments considering other tax authority approaches

Whether or not your business is operating in Italy, the above shows how important the potential VAT implications of transfer pricing adjustments are and the confusion for businesses on how to proceed in different scenarios.

At Sovos we’ve seen more local tax authority audits focused on clarifying if the treatment is valid from a corporate income tax and a VAT perspective.

After a review of the contracts and agreements between the companies and subsidiaries involved, it’s essential to understand whether the transfer pricing adjustments are:

Take Action

Speak to our team if you have questions about the latest approach from a VAT perspective on transfer pricing adjustments in Italy, the EU and the UK and the potential solutions to mitigate any risk of audit and penalties.

The Italian Customs Authorities recently updated their national import system by applying the new European Union Customs Data Model (EUCDM). These new changes came into effect on 9 June 2022.

According to the new procedure, the old model of paper import declarations has been abolished. The import declarations are now transmitted to the Italian Customs Authorities’ information system with a digital signature.

What does this mean in practice?

The acceptance of a customs declaration is notified to the economic operator (that can be the importer, the Customs Agent, etc.) through a Master Reference Number (MRN), an alphanumeric string of 18 characters.

The old IM message (telematic track to be submitted at the time of the import to the Italian Customs Authorities through the Customs Telematic Service (i.e. Servizio telematico doganale (STD)) has been replaced by the following paths as defined by EU legislation:

How can I know how much import VAT is due on goods imported from outside the EU into Italy?

At the time of the release of the goods, Italian Customs Authorities make available the "summary statement for accounting purposes of the customs declaration" (prospetto di riepilogo ai fini contabili della dichiarazione doganale). The summary includes all data necessary to detect customs duties, import VAT and any other charges due.

The summary mentioned above is made available to the importer and the declarant/representative in the reserved area of the single portal of Italian Customs Authorities through the "Document management – customs declarations" service.

We recommend that importers contact their Customs Agent to receive a copy of this summary for their accounting purposes.

How and when can I recover my Italian import VAT?

As per Italian VAT Law, possessing a Single Administrative Document (SAD) is needed to exercise the right to recover import VAT in Italy. As the SAD is now unavailable, Italian Customs Authorities, in agreement with the Italian Revenue Agency, agreed that the new accounting summary is sufficient to allow the importer to exercise the right to recover the import VAT.

Therefore, the new accounting summary is needed to exercise your right to recover the import VAT paid to the Italian tax authorities.

Moreover, the right to recover import VAT is exercised only once the summary is reported in the Purchase VAT Ledger as per art. 25 of Italian VAT Law.

Finally, the import document must be included in your quarterly VAT return and your annual VAT return which must mirror your Italian VAT Ledgers.

To ensure your import VAT is not lost, we recommend considering that the last day to recover the import VAT, related to an import of goods carried out in 2022, is 30 April 2023.

Further documents introduced from June 2022

In addition to the Summary Prospetto di riepilogo ai fini contabili della dichiarazione doganale, discussed above, economic operators will be able to receive:

Italian Customs Authorities advise customs operators to provide the Prospetto di svincolo to transporters as proof of the fulfilment of customs formalities in the case of checks.

Take Action

Speak to our team if you have any questions about the latest Italian importing requirements and their impact on your business’s compliance.