The EU Commission's VAT action plan: 4 Quick Fixes

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EU countries lost €137 billion in Value-Added Tax (VAT) revenues in 2017 according to a study released by the European Commission in September 2019. The loss in VAT revenue has prompted some critical actions by the European Commission and initiated some changes to the EU VAT rules and accounting processes.  The major changes, under EU VAT legislation, do not take effect until 2022 or later, but there are some immediate steps that the EU implemented that took effect on Jan. 1, 2020.
These are referred to collectively as the Quick Fixes, and will impact businesses engaged in cross border trade involving the movement of goods.

There are four Quick Fixes that have taken effect and as of Jan. 1, 2020 businesses should have been taking action accordingly, so that they remain in compliance.

1. Harmonise Call-Off Stock Rules across the EU

This applies where inventory is held in another member state for subsequent supply to a named customer in that other member state. The supplier moves goods to the other member state and retains title until the goods are drawn down by the customer.

Position up to 31st December 2019:
The movement of the goods was treated as an intra-community supply at the time they are moved. This typically required the supplier to register for VAT in the member state where the goods were stored so that intra-community VAT accounting could be completed, and the subsequent supply of the goods could be charged to local VAT at the time title transferred. By way of simplification, some member states allowed the owner to avoid registration in the destination member state (subject to restrictions in local EU jurisdictions), but this simplification was not consistently applied.

As of Jan. 1, 2020:
The movement of the goods is treated as an intra-community supply at the time they are drawn down by the customer. The intra-community supply will only take place when the goods are formally called off (or after 12 months, if earlier). Suppliers and customers must keep a ‘call off’ register of goods. The goods will not be regarded as transferred if they are returned to the member state of origin after the 12-month period.

2. Harmonise EU cross-border Chain Transaction Rules

Where there are two (or more) transactions but a single movement of goods.

Position up to 31st December 2019:
There was confusion and inconsistency as to which was the (potentially zero-rated) transaction where goods were supplied by way of a chain transaction – e.g. legal title in goods transferred from A to B to C but a single movement of the goods, from A to C, took place. This led to uncertainty in treatment for all three parties and most often additional VAT reporting and compliance issues for the intermediate owner, B.

As of Jan. 1, 2020:
If B arranges the transport of the goods as intermediary the sale from A to B is the zero-rated intra-community transaction but if B is registered in the member state of departure and provides its VAT registration number in that member state, then the B to C sale is the zero-rated transaction.

3. Harmonise the Rules for Documenting EU cross-border Movements of Goods

Position up to 31st December 2019:
There was no common set of guidelines or policy governing the level of evidence required to demonstrate that goods had left the member state of origin to support zero-rating.

As of Jan. 1, 2020:
The seller must have access to two non-contradictory pieces of evidence from a pre-determined list of documents issued by two parties involved in the transaction such as shippers, banks, etc. (e.g. bill of lading or airfreight invoice). These two parties must be independent of the seller, the customer and each other.

4. Requirement for valid VAT number to be obtained and quoted

Position up to 31st December 2019:
In principle a supply of goods could be zero-rated as an intra-community transaction without a VAT number, provided it could be determined that the customer was a taxable entity. The case law in question had uphold that the EU VAT number of the customer was not mandatory, provided other substantive evidence demonstrated the conditions for zero-rating the transaction have been met.

As of Jan. 1, 2020:
Two new pre-conditions will exist to qualify for zero-rating.
a.    the customer’s VAT registration number must be collected by the seller and shown on the sales invoice.
b.    the transaction must be included on the seller’s EC Sales List (Intrastat), a periodic report that should be filed in respect of intra-EU sales.

The overall aim of these Quick Fixes is to make the rules across the EU consistent and to tighten up processes to make it more difficult to avoid accounting for VAT.

This in turn shall create challenges for businesses as – among others - businesses may charge and remit local VAT if no correct customer VAT ID is obtained and incur further administrative burdens of obtaining and checking Tax IDs of their customers. Prompt action on behalf of affected businesses may be essential, given that organizing the administrative and order processes as well as the ERP systems will require time and resources.