Complicated Supply Chain Scenarios Where VAT is Charged

The EU Council’s list of cross-border VAT rulings presents complex supply chain scenarios with questions around the place of supply and where VAT liability lies. Each case states the EU council’s answers to these questions and makes for interesting reading for any business that may have a complicated supply chain where VAT legislation can get confusing. 

To read the EU Council’s Cross-Border Rulings List list you can download it here.  

There are some supply chain examples given where VAT must be charged. In these circumstances, a company can request a cross-border VAT refund or can register for VAT in the foreign country. In these situations, VAT IT is able to assist and therefore will highlight those examples. 

2013 / 1. PLACE OF SUPPLY OF GOODS AND SERVICES AND CORRECT ACCOUNTING PROCESS FOLLOWING BUSINESS RESTRUCTURE (August – December 2013) (Page 3 of the document)

Member States involved: United Kingdom, Netherlands

Facts: 

UK and Dutch (BV) companies are indirect subsidiaries of a US Corporation. UK and BV are both registered for VAT in the UK. BV is registered as a non-established taxable person (“NETPU”) because it has no fixed establishment in the UK. BV is also registered for VAT in the Netherlands. Prior to the restructure, UK purchased raw materials and manufactured products, which it then supplied to relevant business customers. BV was a dormant entity with no employees and no functions. Under the new process, the UK will act as the agent of BV when purchasing raw materials. BV will have beneficial ownership of the raw materials and assume the risks involved in the manufacturing process. On import UK will immediately onward supply the goods to BV with the addition of an agency fee of 5% subsumed within the recharge for the goods. UK will then use the materials to manufacture goods on behalf of BV (toll processing) and will charge a separate service fee for that work. Work on goods is subject to the business to business (B2B) general rule When manufacturing is complete the bare legal title is transferred to BV. BV will supply the finished goods to their relevant business customers.

Questions: 

How should UK invoice BV for the purchase of the raw materials? 

What is the place of service of the manufacturing services? 

What is the place of supply of the finished goods? 

Legislation: 

Legislation: Articles 94 and 196 of Directive 2006/112 

VAT ACT 1994 Sections 47(2A) and 7(2)

Cross-Border Ruling:

UK has to raise an invoice to BV for the purchase of the raw materials (as agent and nominee) showing BV’s UK VAT number and showing UK VAT. The place of supply of the manufacturing service is where the recipient (BV) belongs for the purpose of receiving the supply. As BV has no establishment in the UK, place of supply is therefore the Netherlands (B2B). UK has to raise an invoice for the manufacturing services to BV, showing BV’s Dutch VAT number. VAT has to be accounted for by BV in the Netherlands under their Dutch VAT registration. The supplies of the finished good by BV is subject to UK VAT as the goods will be located in the UK at the time of supply. BV has a right to treat as input tax, VAT they incur which relates to the making of taxable supplies. 

2014 / 6. SEPARATE SALES OF MACHINERY AND TYRES ASSEMBLED TO THE MACHINERY (May 2014) (Page 8 of the document)

Member States involved: Estonia, Finland 

Facts:

Company A in MS 1 buys machinery from company B in MS 2. The machinery is shipped from MS 2 to MS 1. It is not disputed that this is an intra-community trade of goods. Company A also buys a set of tyres from company C in MS 2. C directly transfers the property of the tyres to A (and C invoices A accordingly). However, the tyres are transported from C’s premises in MS 2 to B’s premises in MS 2. In some cases, B assembles the tyres to the machinery. Once this assembly is done, the machinery is shipped from MS 2 to MS 1. In other cases, tyres are not assembled but they are also shipped to MS 1, together with the machines. 

Question:

What is the VAT treatment of the sales of the tyres?

Cross-Border Ruling: 

The sales of tyres by C to A, assembled or to be assembled, can be considered as intra-community sales of goods, but C needs documents certifying the transport of the machinery (or the tyres if not assembled) and a contract with A or B where this use of tyres is clearly stipulated. If C does not have such documents, the sales by C are subject to VAT in MS 2, and A can ask for a refund of that VAT. 

2014 / 11. TRANSFORMATION OF CRUDE OIL (October – November 2014) (Page 14 of the document)

Member States involved: Netherlands, Belgium 

Facts:

A Belgian company (B) performs work for a Dutch company (A). The work consists in the transformation of crude oil into refined products via the use of refining units located in Belgium. Both companies are related. 

Questions:

What is the place of supply of this service? 

Is it possible to consider the Belgian facilities of B as a fixed establishment of A? 

Legislation: 

Article 44 of Directive 2006/112, 

Article 11, paragraph 1, of Implementing Regulation 282/2011, 

EUCJ case C-605/12, Welmory sp. Z o.o. of 16 October 2014. 

Cross-Border Ruling:

Considering that B would not own the crude oil nor the refined products at any time (they would be and remain the property of A, the work performed by B for A qualifies as the supply of services. In case A has no infrastructure in Belgium which could constitute a fixed establishment within the meaning of article 44 of Directive 2006/112, the place of the supply of services rendered by B to A would be the place where A has established his business, i.e. the Netherlands. In this respect, considering that A and B are two independent entities from a legal and a contractual point of view and that A would not employ any staff in Belgium nor own any fixed assets or machines in Belgium, the facilities of B (i.e. the Belgian refinery) would not constitute a fixed establishment of A in Belgium within the meaning of article 44 of Directive 2006/112. 

Based on the additional information provided, the crude oil would enter into Belgium coming from inside and outside the EU (imports in Belgium would be done by A). Moreover, the refined product would be sold from Belgium by A within and outside the EU. Although this is outside the scope of the CBR request, the above-mentioned scenario could lead to some VAT obligations in Belgium for A (i.e. Belgian VAT registration). 

2015 / 14. PLACE OF SUPPLY OF AN INTRA-COMMUNITY SALE FOLLOWED BY A LOCAL SUPPLY CARRIED OUT BY A NON-ESTABLISHED TAXABLE PERSON. (January 2015) (Page 18 of the document)

Member States involved: France, United Kingdom. 

Facts: 

Company A, established in France, sends goods to the UK. In the UK, these goods are assembled by A before they are sold to a company B established in the UK. 

Questions: 

Which are the VAT rules applicable to the supplies following the assembly? 

Legislation: 

Articles 17, 20, 40 et 138 of Directive 112/2006/EC. 

Cross-Border Ruling

Company A carries out an assimilated intra-Community supply of goods on the basis of paragraph 1 of article 17 of the VAT Directive. The transfer of goods from France to the UK is VAT exempted in France on the basis of Article 138. The same company carries out a deemed intra-Community acquisition, which is taxable in the UK (according to articles 20 et 40 of VAT Directive). The subsequent supplies to company B constitute internal supplies in the UK, subject to VAT in the UK. As a consequence, company A must be registered for VAT purposes in the UK. 

2015 / 15. PLACE OF SUPPLY OF AN INTRA-COMMUNITY SALE FOLLOWED BY A LOCAL SUPPLY OF GOODS CARRIED OUT BY A TAXABLE PERSON NON-ESTABLISHED WITHIN THE MEMBER STATE OF DISPATCH, BUT IT HAS A FIXED ESTABLISHMENT IN THE MEMBER STATE OF DELIVERY OF GOODS. (January – June 2015) (Page 19 of the document)

Member States involved: France, Belgium. 

Facts: 

Company (B) established in Germany, with a fixed establishment in France, sells goods, purchased before from company (A) established in Belgium, to a taxable person (C) established in France. Different scenarios could be applied: 

– In the first case, the goods are either transported directly from the establishment of the Belgian supplier A to the French company C or sent to France after having been stored in a warehouse owned by company B in Belgium. 

– In the second case, the goods are first sent from Belgium to France, then introduced into a warehouse under a «call-off» regime. Under this scheme, company B introduces the goods in a warehouse located at the premises of its client C in France, but remains the owner of the goods, until they are extracted by the French client C. 

Question:

Which are the VAT rules applicable to the different supplies? 

Legislation:

Articles 20, 31, 32, 40 and 138 of VAT Directive 2006/112/CE. 

Cross-border Ruling

– In the first case, the supply of goods by company B to its client C established in France has to be considered as a supply with transport, whose place of taxation is not France, according to Article 32(1) of VAT Directive. 

The French client C has to declare an intra-Community acquisition, subject to VAT in France, in accordance with Articles 20 and 40 of the VAT Directive. 

– In the second case, company B is considered to carry out a transfer of goods, assimilated to a supply of goods according to Article 17(1) of the VAT Directive. The transfer of goods to France is VAT exempt in Belgium, in accordance with Article 138 of the VAT Directive. Company B also makes an operation assimilated to an intra-Community acquisition, subject to French VAT (Articles 20 et 40 of the VAT Directive). 

The supplies by company B to its French client C, which take place at the moment of the property transfer, are taxable as internal supplies in France. As company B disposes of a fixed establishment in France, B is liable for the VAT on these supplies to C. 

2019 / 23. VAT TREATMENT OF PERISHABLE GOODS CBR ADOPTED 15.04.2019 (Page 28-29 of the document)

Member States involved: Ireland, Estonia 

Facts:

Private individuals (Ordering Customer) purchase gifts of perishable goods sold online or over the phone by retailers. The Ordering Customer wants these perishable goods to be delivered to another private individual (Recipient Customer) in another Member State. The Ordering Customer pays the retailer the amount of the gift and an additional amount as a separate for the International Delivery Charge.

Because the goods supplied are perishable, the retailer does not want to ship its own goods cross-border to the Recipient Customer. Instead, the retailer (Sending Member), through a network organisation of retailers of similar perishable goods, asks that the goods be delivered from another retailer (Executing Member) to the Recipient Customer. The Executing Member picks out from its own stock the perishable goods and delivers them to the location of the Recipient Customer. The Executing Member does not take any payment from the Recipient Customer. 

The network is constituted by several Member Organisations dealing with the orders of perishable goods and the flow of cash, from the Ordering Customer to the Executing Member. The Clearing House, part of the network, makes sure that all the Members are paid, i.e. that the Executing Member receives the payment of the perishable goods ordered and that the other Members receive their commission. 

Questions: 

1. Which entity makes a B2C supply of goods for VAT purposes and who is the recipient of that supply for VAT purposes? 

2. What is the taxable amount for that B2C supply of goods for VAT purposes? 

3. What is the place of supply of the service for VAT purposes supplied by the Sending Member in return for the International Delivery Charge that is paid by the Ordering Customer to the Sending Member? 

4. What is the overall VAT analysis of the supplies between the various entities? 

Legislation:

Articles 14, 30, 44, 45, 46, 58, 73 of Council Directive 2006/112/EC. 

1. The supply of the perishable goods is performed by the Executing Member for having ownership over the goods. The Ordering Customer is the recipient of the supply of goods, regardless that the goods are in fact delivered to the Receiving Customer. 

2. The taxable amount for the supply of the goods is the total consideration payable by the Ordering Customer for the perishable goods, exclusively. 

3. The International delivery Service is considered as a separate supply of service. The taxable amount for the supply of this service is the total consideration payable by the Ordering Customer. The place of supply of the international delivery service / delivery service (for both orders made over the phone and online) to private individual customers should be the place where the supplier (Executing Member) has established his business, under Article 45 of the VAT Directive 2006/112/EC. 

4. The supplies between the various entities involved in the supply chain is complex. Ireland are of the view that there is not a supply of goods between the Sending Member, the Member Organisation 1 and the Executing Member, the Member Organisation 2 or the Clearing House. No goods have been supplied between these entities. The clearing house matches entities to facilitate the supply of the flowers and is not involved in the supply of goods. The Commission payments relate to supplies of services and not goods and are taxable under the rules provided for under general rules set out in Article 44 of the VAT Directive 2006/112/EC. 

Conclusion

Understanding the complexities of VAT liability, reclaim and compliance within international supply chains, can be onerous on your vat department. Your business can outsource all VAT compliance and recovery to experts who have been doing this for over 20 years. If you have a complicated VAT question about an international Supply Chain scenario, please get in touch.