Quick fix on VAT treatment of chain transactions

There are standard rules to determine the link that constitutes an intra-Community transaction in chain supplies.

10 September, 2019

The EU will harmonize VAT rules on four key areas of international trade. Most businesses involved in intra-Community trade should review and take action from these changes. This article is part of a series of Marosa articles about the changes announced.

On January 2020, four changes will be introduced at EU level to simplify and provide legal certainty over VAT rules on international trade.

  • EU wide simplification on consignment stock. An harmonized simplified regime will apply.
  • More importance of customer´s EU VAT number. It will become a material requirement for zero-rated intra-Community supplies.
  • Simpler proofs on intra-Community supplies. Less and more flexible record keeping.
  • Uniform rules on chain transactions. Additional guidance on where to allocate the intra-Community transaction in chain transactions

This article covers the new criteria to determine the VAT treatment on chain transactions as from 2020. At the end of the article you can find links to each of the three remaining quick fixes.

Definition and VAT implications

This quick fix refers to chain transactions as those successive sales where multiple transfer of ownership happens over the same goods but only one transport or physical movement of the goods takes place. The traders within the chain are located in different countries and the goods are moved from one country to another when the transport takes place.

For VAT purposes, since only one transport takes place, only one link of the supply-chain can be considered as intra-Community transaction. All other links are treated as domestic supplies in one of the trader´s country. The challenge here is to determine which link must be treated as the intra-Community transaction. It is paramount to get this right because businesses would face high penalties for incorrect VAT treatment of this activity. For example, they treat as zero-rated intra-Community supply a sale that should be treated as domestic supply.

New rules on chain transactions as from 2020

Under the new rules, we need to distinguish the first and last party in the supply chain from the intermediaries. Indeed, the first and last party only make one supply, whereas intermediaries are involved in two transactions each. The new rules to allocate the intra-Community supply apply when the intermediaries arrange the transport.

As from 2020, the EU aims to introduce a standard rule as per which the intra-Community supply applies in the link in which the goods are supplied to the intermediary that arranges the transport.

There may be an exception from this logic where the business arranging the transport provides a local VAT number to the supplier of the country where the transport starts. In this case, the client who arranges the transport is considered to perform the intra-Community supply itself (instead of his supplier). The transport would then be allocated to the business arranging the transport and its customer.

If you want to know more about this simplification, you can read the VAT expert Group´s opinion on Chain transactions and the section 3.2 of VAT committee minutes on their meeting on 3 June 2019. You can also read the VAT Committee working paper about this matter.

The other 3 quick fixes

You can find more information about the remaining EU changes as from 2020 in our dedicated articles about each change:

Contact Marosa for any question or remark on how to adapt your business to the 2020 changes introduced by the Four Quick fixes.

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