Following a decision by the Court of Justice of the EU in a Polish case (C-696/20), tax experts have urged businesses to reassess their eastern European supply chains for VAT compliance in chain transactions.
The National Revenue Administration's (KAS) decision to impose a double taxation rate of 46% on chain transactions was overturned by the court, ITR reported at the time. It was determined that this went against the neutrality and proportionality principles of the EU VAT regulation.
Dorota Pokrop, a partner at EY Poland who advised on the case, believes that the seven-year legal battle's conclusion should serve as both a relief and a caution to businesses doing business in Poland and other eastern European nations.
By assuming that tax authorities will treat chain transactions in the same way as they do in their home countries or other EU jurisdictions, she claims that some businesses have underestimated the significance and sensitivity of these transactions.
"There is a tendency for companies to say, regardless of what they do, it is impossible to impose VAT if the goods leave the country [Poland]," according to Pokrop.
But she emphasizes that the lack of harmonisation of laws governing chain transactions in the EU is detrimental to businesses.
According to Pokrop, "different countries still have different rules [on chain transactions] and it often makes people too relaxed when it comes to the analysis of chain transactions, as they feel the rules are quite liberal and countries [in the chain] will not have the right to impose VAT."
According to her, in order to prevent problems down the road, businesses should generally perform thorough and upfront analyses of their chain transactions.
Although the CJEU decision eliminated the possibility of double taxation, it left open the possibility of tough anti-VAT fraud legislation as long as it did not go against EU VAT neutrality and proportionality principles.
This includes the Polish VAT law's Article 25(2) (Law of March 11, 2004 on Value Added Tax), which KAS used to overcharge businesses. However, as the court determined, the Polish law broke the VAT rules of the EU bloc.
The CJEU decision, according to Robert Jaszczuk, partner for VAT advisory and compliance at SSW Pragmatic Solutions, a legal and business services firm in Warsaw, allows for the implementation of strict national legislation under the pretense of preventing VAT payment avoidance.
“It also shows how the proper classification of movable transactions within the chain is absolutely necessary, as business facts and parameters impacted the final judgment [by the court],” says Jaszczuk.
Pokrop cautions that taking the lead on VAT from the countries where businesses are headquartered could prove problematic for businesses, especially in eastern European nations, due to the lack of harmonised legislation for chain transactions between member states.
"Poland, Romania and Bulgaria have a specific view of transport allocation and the tax authorities are always analysing it, so these should be checked upfront to avoid very long and extensive discussions with tax authorities," the expert advises.
Despite EU efforts to harmonise VAT rules on chain transactions, businesses frequently violate regulations.
It is significant to note that this ruling applies to situations that occurred before the EU implemented VAT regulations for cross-border supplies of goods through Directive 2018/1910 in January 2020.
These regulations, also known as "quick fixes," were created to impose mandatory VAT identification number (ID) checks for intra-Community supplies and to harmonize cross-border chain transactions and the movement of goods within the EU.
An intermediary taking part in a chain transaction has the right to allocate the transport and charge a zero rate of VAT on subsequent transactions under Article 36(a) of the EU VAT Directive.
According to Gorka Echevarria, global VAT leader at Geneva-based Lexmark, a manufacturer of laser printers, as of January 2020, an intermediary will be able to provide a VAT ID in the nation where the goods are being shipped, causing the initial supply to be categorized as domestic.
As a result, the supply of goods to subsequent parties in the chain qualified for a VAT zero rating.
According to some tax authorities, the CJEU decision may also apply to chain transactions.
According to Echevarria, he expects it to be used when a different link in the supply chain completes the transport of the goods.
He continues, "my recommendation is [for businesses] to start reassessing the parameters of VAT zero rating of intra-Community chain transactions in large multinationals with complex supply chains."
Following a protracted legal battle between KAS and an unnamed company with operations in Poland but a Dutch headquarters, the CJEU recently handed down its ruling.
Businesses should not be subject to double taxation in the EU, according to Alex Baulf, senior director of global indirect tax at Avalara, a tax technology company based in the UK. He also believes that authorities should enforce tax compliance laws in a fair and impartial manner.
Baulf claims that the case "shows the complexity of taxing chain transactions of goods even 36 months after the quick fixes were introduced to provide clarity and uniformity across the EU by harmonising the cross-border chain transactions rules."
Some internal experts agree with this viewpoint, including Dennis Appelhoff, tax manager at Metro Markets, an online marketplace with headquarters in Düsseldorf, who claims that the decision gives businesses security in chain transactions.
According to Appelhoff, "a possible double taxation in case of a wrong interpretation on the side of both parties is thereby no longer an issue for companies."
The best way for businesses to avoid becoming embroiled in protracted legal disputes, according to Micha Goj, partner in tax controversy at EY in Warsaw, is to keep abreast of local VAT regulations.
According to Goj, if businesses can successfully steer the CJEU toward the right question, the EU's proportionality and neutrality principles can ultimately shield businesses from the unfavorable effects of government regulations.
Businesses should make sure that their VAT compliance teams are up to date on any changes to their markets and their product supply chains in the interim, continues Pokrop.
According to Goj, businesses should generally make sure to properly engage with tax authorities at the review stage before matters reach the courts, even if they believe they have accurately determined their VAT liability at the transaction level.
"Ultimately, some disputes begin with tax authorities coming to wrong assumptions about a matter, and once that assumption takes root, it is very difficult to overturn."
Goj advises businesses to consult with their tax departments or advisors early on and throughout the audit process to help shorten the overall duration and expense of any legal process.
Early intervention could ultimately spare businesses the time and costs associated with protracted litigation. It might make sure that businesses and tax authorities can agree on issues before they develop into stubborn points of contention.
By fLEXI tEAM