The biggest change to EU’s VAT in nearly 25 years
As of January 1, 2020, businesses that trade across borders in the EU will need to comply with what are known as four Quick Fixes, each setting new rules for the way VAT is applied for cross-border movement of goods.
The changes are part of an EU-wide approach to addressing the so-called VAT Gap, which remains a challenge for Member States. For years, the gap, which is the difference between the expected VAT revenue and the amount actually collected, has remained stubbornly high, at about 11% across the EU.
An estimated €50 billion is lost annually to deliberate VAT avoidance or fraud.
However, many Individual Member States have a much higher gap in recovery, with countries losing substantial revenues due to fraud, tax evasion and maladministration.
The total gap in 2018 was estimated at about €130 billion — eroding the ability of Member States to use tax revenue for public purposes. About half that gap, or an estimated €50 billion annually, is believed to be deliberate VAT avoidance or fraud.
To stem the losses, the EU has proposed moving towards one Single EU VAT Area by July 2022: an enormous and complex proposition that might not proceed. While this remains under discussion, some immediate changes have been agreed, and will begin from January 1, 2020.
“Some time ago, the EU Commission proposed several reforms of the VAT system that are aimed at improving and modernizing the levy of VAT,” says Jayant Rakhan, VAT Partner for the Baker Tilly Netherlands office.
“The central element of the proposal consists of a new system for the levy of VAT on cross-border intra-Community supplies of goods.
“Businesses who rely on cross-border transport of goods between EU Member States will be affected by these new rules and will need to implement changes to their business systems as soon as possible to ensure they are ready for the measures to come into force on 1 January, 2020.”
A Quick Fix or a long-term challenge?
Discussions within the EU on the need to update the VAT system have extended for several years, driven by the change in the way commerce takes place (including the rise of e-commerce) as well as increased cross-border activity.
It is now far more common for businesses within the EU to move goods around different Member States, which can potentially raise challenges about where the VAT on the transaction is applied.
That leads to a cost to business — with businesses engaged in cross-border transactions within the EU incurring compliance costs an average 11% higher than those trading within only one EU country.
The EU argues the Quick Fixes will help address this complexity and reduce the cost of compliance by clarifying the requirements for VAT in cross-border transportation of goods and simplifying the process for business.
“The driving factors for these extra costs are the different applications of VAT rules among EU member states and the additional compliance obligations for businesses engaged in cross-border trade,” Mr Rakhan says.
Changes ‘will affect every business selling goods’
As of January 1, 2020, all four Quick Fixes will come into force, representing a significant change in the way VAT is applied for cross-border transportation of goods between EU Member States.
Baker Tilly Netherlands Manager VAT & Customs Marisa Hut says the scope of the change is enormous.
“It will affect every business selling goods within the EU to another business — every B2B transaction will be affected from 2020,” she says.
“For many companies this will be a simplification. Currently there are companies that could have to have a VAT registration obligation in every country. While there are some simplifications now, they are not consistent and you can have very different rules between countries.
“Good advice becomes critical and we are going to see a larger number of deals falling over in situations where that advice is not being sought or heeded.”
– Marisa Hut
“So for some companies who are struggling now with their obligations, this might make things much simpler.
“But at the same time, there are other companies who have not worried about registration or who might not be complying 100% right now, who will be caught out under these changes if they do not have their systems and procedures in place.”
“This is where good advice becomes critical and we are going to see a larger number of deals falling over in situations where that advice is not being sought or heeded.”
Baker Tilly country experts say there are many businesses who appear either unaware or unprepared for these changes to the VAT regime.
Although the changes are presented as simplifications, for many companies the required administrative fixes to comply will be complex.
Companies will likely have to verify their current supply chains, adjust ERP systems, update invoices, improve VAT reporting, undertake more extensive reviews and possibly renew current contracts with suppliers and customers.
Compliance challenge not limited to European firms
As Marion Fetzer, a VAT Partner with Baker Tilly Germany explains, the changes will be much broader than just EU.
“These changes will affect every supplier supplying goods into the EU, not just suppliers established in the Union,” she says.
“These are really huge changes that all suppliers operating in the EU should prepare carefully for, to ensure that they are prepared for the changes for 1 January.”
That includes adding to the compliance burden already being felt by US multinationals operating in the EU.
“Given US trade into the EU represented $318 billion in 2018, this is a significant concern for a number of companies.”
– Lynette Stolaryzk
Lynette Stolaryzk, specialist tax leader at Baker Tilly US, explains that many US companies are still struggling to digest changes made in 2017 to the US tax regime, as well the major Wayfair tax ruling on state sales tax that could allow states to start taxing remote retailers.
With these two domestic tax issues dominating US multinational attention, the vagaries of EU VAT changes are unlikely to have been properly understood, Ms Stolaryzk says.
“These changes for US multinationals will just add one more layer of complexity around goods being traded in the EU,” she says.
“Given US trade into the EU represented $318 billion in 2018, this is a significant concern for a number of companies.
“Each company will have to individually assess how the changes to the VAT directly impact their supply chains.”
Mr Rakhan is concerned that the awareness of these VAT changes across companies is limited and has urged businesses to get ahead of the change, urgently, by seeking proper advice.
“It’s important for companies to be getting advice now on these issues. If they are not prepared, and potentially don’t realise the new requirements under the changes such as the need for customer identification numbers, the impact could be huge,” he says.
“VAT rates are around 20 per cent, so not receiving the VAT exemption through a simple administrative oversight could be very costly to business.”
Baker Tilly can help ensure your systems are compliant so you can apply the VAT exemption with certainty and make use of the rules for stock on demand.
VAT Quick Fixes Q&A
There is a lot of news about so-called Quick Fixes to VAT for cross-border trade in the EU. What is the headline change?
VAT is complex, particularly when you send goods from one EU Member State to another, with specific conditions that have to be met. If you are also holding goods in another Member State before they are transferred to your buyer (known as call-off stock) or are involved in triangular transactions, the VAT position becomes even more complex.
Different application of VAT rules among Member States creates a range of compliance obligations for businesses engaged in cross-border trade, which can add costs and time to each transaction. At the same time, VAT avoidance and fraud is a big problem — estimated to worth about €50 billion annually.
To fix this, the EU aims to introduce one Single EU VAT Area by July 2022, which should reduce the compliance burden but will also require businesses to make some big changes in the way they work.
Before this happens, four measures known as the Quick Fixes will start in January 2020 to improve the current approach taken to collect VAT from cross-border sales.
What kinds of VAT complexity do the Quick Fixes address?
There are a lot of different scenarios that arise when a business or a supplier moves goods between Member States to an eventual customer.
The first Quick Fix relates to call-off stock.
Imagine a bicycle manufacturer who is selling bicycles to a sports store in another country. In order for the bikes to be sold whenever a customer walks in the door of the sports store, the manufacturer (the supplier) might agree to hold stock within the store warehouse until such time the store (the buyer) comes to collect it. Only when the bikes are taken from the warehouse does the title or ownership of the bike transfer from the supplier to the buyer.
If the warehouse is in the same country as the supplier’s business, this wouldn’t raise any issues and the VAT would be paid as per that country’s rules. But if the warehouse is in a different EU country to the supplier, complexities arise over the VAT levy on cross-border intra-Community supplies of goods.
What happens currently?
Staying with our bicycle manufacturer, if the bikes are transferred from one EU Member State to another EU Member State, the supplier may have a VAT registration and reporting obligation in the Member State where the stock is transported.
The process of sending the goods from one State to another (even when they remain the property of the supplier) is deemed an intra-Community supply (in the home country where the goods are dispatched) and an intra-Community acquisition (in the country where the goods are received). This means that the supplier would need to report both transactions in its local VAT return in the EU country of dispatch and in the EU country of arrival of the goods.
Once a customer collects their goods from the warehouse, another action takes place: a domestic supply of goods in the Member State where the goods are located. Each of these actions carries potential tax implications and also paperwork.
Complex, but what’s the problem?
The issue comes down to the idea that a business supplies itself goods when it moves them across a border in preparation to sell to a customer. This has meant many businesses needing to register for VAT in the receiving country (with some exceptions for countries that have put special simplification rules in place).
In contrast, the same business selling directly to the customer (but not storing the goods on the way through) would usually not have had to register to apply the final country’s VAT and the sale would be covered by normal intra-Community rules on the supply of goods.
There are also differences between countries. For example, if a bicycle business in France transported bikes to a customer warehouse in the Netherlands, there would be no need to register for VAT in the Netherlands, as a simplification arrangement are already in place. That isn’t the case if it transported bikes to a customer warehouse in Bulgaria which does not have existing simplification rules.
What will happen under the Quick Fixes?
Under Quick Fix 1, a business transferring itself goods (call-off stock) from one Member State to another will no longer be regarded as carrying out a deemed intra-Community transaction (provided it meets some key criteria).
Once the customer, our sports store, takes the goods from the stock, the supplier will be deemed to have carried out an intra-Community supply of goods from the originating Member State. The customer will then report an intra-Community acquisition in the receiving Member State.
What are the conditions for the simplification to take effect?
There are specific conditions for the Quick Fix to be allowable. A few examples of these conditions include:
- Firstly, the goods have to be dispatched by the supplier with the intention that they will be supplied to the customer at a later stage — and must be supplied within 12 months.
- The customer will need to be a taxable person with a VAT identification number in the Member State of Arrival and the customer needs to be entitled to take ownership of the goods based on an existing contract.
- The supplier must not be established as a business in the Member State of arrival and must not have a fixed establishment there. It must also have the information on the identity of the customer plus the customer’s VAT identification number prior to sending the goods.
- Both the supplier and the customer must keep a special register of the goods, including specific information on the transfer and parties.
So you can’t use this process in the situation that you haven’t identified your potential customer yet?
No. A supplier cannot use the Quick Fix if they are just sending goods to a warehouse in another Member State in the hope of then selling them to an unidentified customer somewhere in the future.
What if goods are sold multiple times and send directly from the first supplier to the end customer?
This is another fairly common scenario with businesses selling goods in a chain before they reach an end customer. It is sometimes called triangular transactions.
For the bicycle manufacturer, this might be selling bicycles to a distributor company that allocates stock to a network of sports stores. In that case, it can be easier logistically for the manufacturer to send the bike directly to the store as the final customer.
But only one step in this chain can qualify for the VAT exemption (zero-rate) for intra-Community supply of goods.
Which step qualifies for the exemption? The lack of consistent rules currently mean that businesses face considerable uncertainty on this point and Quick Fix 2 is designed to provide clarity.
How does Quick Fix 2 work?
This Quick Fix provides a simple rule in the situation that the transport is arranged by or on behalf of the ‘middleman’. Consider a chain transaction where business A is selling goods to business B who is selling goods to business C, with the goods moving from A to C directly.
If ‘middleman’ business B arranges the transport of goods (or has it arranged on its behalf by a logistics service), then the intra-Community supply is deemed to be between A and B, with the supply of B to C considered a domestic supply in the Member State of arrival.
If, however, business B gives Business A the VAT identification for the Member State of dispatch, the second supply in the chain (from business B to Business C) is deemed the intra-Community supply. The supply from A to B is now the domestic supply in the Member State of dispatch. This should lead to greater legal certainty and reduce the compliance burden for many businesses if the ‘middleman’ arranges the transport.
Will these rules make it easier to claim the VAT exemption when transferring goods?
One of the current challenges for intra-Commission supply of goods is how a business proves that the bicycles, ovens, car parts any other item was actually transported between Member States. The burden of proof can be quite different as the EU Member States have different rules regarding the required proof.
Quick Fix 3 will now try to address this by simplifying the documents needed to prove transfer.
Businesses will need at least two documents, known as Category A and Category B. Category A documents show transport, like a fully signed CMR transport document, a bill of loading, an airfreight invoice or an invoice from a carrier of the goods. Category B documents show other aspects of the transaction — they can include an insurance policy in relation to the transport of the goods, bank documents proving payment for the transport of the goods, or official documents issued by a public authority like a notary confirming the arrival of the goods in the Member State of arrival.
If the business is supplying the goods and arranging transport themselves, it will be presumed sufficient proof of cross-border transport if they can produce two non-conflicting Category A documents or non-conflicting documents from both Category A and Category B, with all documents issued independently by parties not related to each other or the vendor.
If it is the customer arranging transport, things are a little more complicated and the supplier also needs documentary proof from the customer that the goods have been transported.
It is important to recognize that it is not required for business to apply this Quick Fix. If, however, businesses want to use the presumption of this Quick Fix, the administration of items of proof should meet the requirement.
How important is it that businesses have systems in place that can manage the new requirements?
It’s vital — and Quick Fix 4 is a good example of why this may become a challenge for firms or businesses that haven’t got good cross-border trading systems in place.
One big loophole in the current rules — which is about to be closed — relates to the VAT Identification Number of the customer.
Right now, a supplier who makes an intra-Community supply of goods is required to report the VAT identification number of their customer in the so-called EC Sales List (VIES listing/recapitulative statement), as well as on invoices.
Based on European Court of Justice case law, if the supplier does not have the customer’s valid VAT identification number (they got the number wrong, for example, or deliberately misstated it), that alone has been an insufficient reason to refuse an application for VAT exemption (zero-rate) for intra-Community supplies of goods..
That changes as of January 1.
Now, obtaining a valid VAT identification number of the customer in case of intra-Community supplies will become a material requirement for the application of the VAT exemption (zero-rate). Additionally, reporting the intra-Community supply of goods in the EC Sales List will also become a material requirement, unless the supplier is acting in good faith and can justify any shortcoming in this respect.
Does that mean that a supplier could be left paying VAT because they didn’t have the correct VAT Identification?
Businesses should be certain that valid VAT identification numbers of their customers are documented for each and every intra-Community transaction. The ERP master data should be fully up to date they should regularly validate VAT identification numbers on the website of the European Commission.
Businesses should also make sure that the valid VAT identification number of the customer is mentioned on invoices issued for intra-Community supplies of goods.
There are a lot of changes: who will this affect?
Absolutely every business that is involved in B2B intra-EU trade and transports goods within the European Community — including businesses outside the EC but which move goods around between Member States — will need to be aware of the implications.
It is part of the biggest change to VAT in about 25 years.
These changes are also happening very soon, from January 1, 2020.Because the Quick Fix changes follow from EU law, they apply right across the European Community, but as always, Member States may implement or interpret the new rules differently, potentially still leading to confusion.
Our recommendation is that businesses move immediately to consider how they Quick Fixes might affect the way they do business, and if they have any questions, contact Marisa Hut or Jayant Rakhan from the Baker Tilly Netherlands VAT & Customs Advisory team, who can help you directly or put you in touch with a local Baker Tilly expert in your country.