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Simplified VAT procedure in intra-Community triangular transactions

On 8 December 2022 the Court of Justice of the European Union issued a major judgment on triangular transactions (Luxury Trust Automobil GmbH, C-247/21), in which the court held that the reverse charge mechanism in an intra-Community triangular transaction can operate only when the invoice is properly worded.
Author:
Agnieszka Niedzielska
TAX Compliance Manager

Court of Justice judgment

The Court of Justice held that in such transactions, the final customer is not effectively designated as the person liable to pay VAT if the invoice issued by the intermediary acquirer does not contain the indication “reverse charge.”

Failure to include in the invoice the notation “reverse charge” required under the VAT Directive cannot be corrected at a later date by adding information indicating that the invoice involves an intra-Community triangular transaction and the tax obligation is shifted to the customer.

Important

The restrictive approach applied by the Court of Justice, and earlier adopted in the advocate-general’s opinion of 14 July 2022, may generate lots of problems for entities carrying out transactions of this type.

Particular attention must be devoted to whether all of the conditions for applying the simplification for triangular transactions have been fulfilled, and whether the wording of the document, specifically the invoice, is properly stated, to avoid negative financial consequences later on.

This judgment thus confirms that chain transactions need to treated with special caution, not only with respect to the place of taxation of specific supplies, but also in terms of the formal correctness.

VAT regulations on use of the simplified procedure for intra-Community transactions

Under Polish law, an intra-Community triangular transaction is a transaction in which all of the conditions set forth in Art. 135–138 of the VAT Act are fulfilled, namely:

  • The transaction involves three VAT payers identified for purposes of the intra-Community transaction in three different member states
  • The goods are transported directly from the first VAT payer in the chain of supplies to the last VAT payer in the chain
  • The supply of goods is made between the first and the second taxpayers, and between the second and third taxpayers
  • The subject of the supply is dispatched or transported by or on behalf of the first or second VAT payer
  • Transport of the goods is made from the territory of one member state to the territory of another member state.

This transaction may be settled under the traditional rules, or applying the simplified procedure described in the VAT Act. However, application of the general rules would impose too large a burden on the second entity in the chain of supplies. That entity would have to register in the country to which the goods are transported, recognize an intra-Community acquisition of goods there, and then recognize a local sale.

The simplified method of settling a triangular transaction is designed to relieve the second taxpayer in the chain of these formal obligations. The supply from the second taxpayer in the chain to the last taxpayer in the chain is subject to a self-charge (“reverse charge”) of the tax by the acquirer, who treats it as an intra-Community acquisition of goods. The last entity in the chain thus assumes the obligation to pay VAT from the second entity, which does not have to register for VAT in the country of the final customer or tax the supply and acquisition of the goods there.

Through use of this procedure, it can be deemed that the intra-Community acquisition of goods has been taxed in the country where the shipment of the goods was completed, which relieves the second participant in the transaction from the obligation to tax the intra-Community acquisition of goods in the country that assigned it an EU VAT number (VAT Act Art. 25(2)(2)).

Conditions for applying the procedure

However, application of the simplified procedure in an intra-Community triangular transaction is possible only upon fulfilment of the conditions set forth in VAT Act Art. 135(1)(4):

  • The supply to the last taxpayer in the chain was directly preceded by an intra-Community acquisition of goods on the part of the second taxpayer in the chain
  • The second taxpayer in the chain, making the supply to the last taxpayer in the chain, does not have an establishment in the territory of the member state in which the transport or dispatch is completed
  • The second taxpayer in the chain applies with respect to the first and third taxpayers in the chain the same VAT identification number which was issued to it by a member state other than the member state in which the transport or dispatch begins or ends
  • The last taxpayer in the chain applies the VAT identification number of the member state in which the transport or dispatch ends
  • The last taxpayer in the chain was designated by the second taxpayer as liable for payment of VAT on the supply of goods carried out under the simplified procedure.

Based on the judgment of the Court of Justice of 8 December 2022, an additional condition for applying the simplified procedure is proper documentation of the transaction, i.e., issuance of a correct invoice as well as preparing a VAT SAF-T (JPK_VAT) with the declaration and summary information.

Formal conditions that must be met by each entity participating in a triangular transaction where the simplified procedure is applied

First VAT payer in the chain

The VAT payer first in the chain recognizes a classic transaction of intra-Community supply of goods to the second entity in the chain. Thus the first taxpayer issues an invoice to the second taxpayer, in which it reports an intra-Community supply of goods transaction taxed at the 0% rate, upon fulfilment of the conditions set forth in VAT Act Art. 42. This transaction is reported in the VAT SAF-T (JPK_VAT) filed with the tax authority along with the declaration (field K_21) and in the EU VAT summary information. The first entity in the chain has no obligation to make any additional designations and bears no additional documentary duties.

Second VAT payer in the chain

In the case of the second VAT payer participating in the transaction, the intra-Community acquisition of goods is deemed to be taxed if the second entity issues to the third and final VAT payer an invoice containing, apart from the data referred to in VAT Act Art. 106e, also the following elements (VAT Act Art. 136):

  • Notation “VAT: Simplified Community invoice under VAT Act Art. 135–138” or “VAT: Simplified Community invoice under Art. 141 of Directive 2006/112/EC”
  • Statement that tax on the supply will be settled by the last VAT payer in the chain
  • The EU VAT number applied by it in relation to the first and last taxpayers in the chain
  • The VAT identification number of the last taxpayer in the chain.

In light of the Court of Justice ruling discussed above, the invoice should include the notation “reverse charge” (or the Polish odwrotne obciążenie).

Apart from the data set forth in VAT Act Art. 109(3), the second entity in the chain is required to show in its records the fee established for the supply within the simplified procedure as well as the name and address of the last taxpayer in the chain. This transaction must also be declared in the VAT SAF-T register (JPK_VAT) with the declaration. It will show the basis for taxation for intra-Community acquisition of goods from the first entity in the chain (field K_23), while it should indicate “0” in field K_24 because VAT on the transaction will be settled by the last entity in the chain.

In the recordkeeping portion of the VAT SAF-T (JPK_VAT) it should use the designation “TT_WNT.” It should be borne in mind that this transaction is not shown on the side of input VAT, as would be the case in other transactions subject to the reverse-charge mechanism. To report the supply outside the country to the final entity in the chain, the amount of the transaction should be entered in field K_11, additionally identifying it in the recordkeeping portion with the designation “TT_D.” And in the declaration portion of the VAT SAF-T (JPK_VAT), the taxpayer should also mark field P_66.

This transaction should also be shown in the EU VAT summary information. This entity will report there the intra-Community acquisition of goods from the first VAT payer (section D of the form) and intra-Community supply of goods to the last entity in the chain (section C of the form), marking for both of these transactions the field in column d, “triangular transactions.”

Third VAT payer in the chain

The third and last VAT payer in the chain is required (under VAT Act Art. 138(1)(2)) to:

  • Settle VAT on the intra-Community acquisition of goods on the self-charge basis
  • Include in its records, apart from the data set forth in VAT Act Art. 109(3), also the turnover due to the supply made to it, the amount of tax allocable to this supply (field K_23 and field K_24 of the VAT SAF-T (JPK_VAT) with declaration), and the name and address of the second VAT payer in the chain
  • Prepare summary information on the intra-Community acquisition of goods.

In the case of the third entity, there is no obligation to make any additional designations.

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