Trading within the EU? Here's the VAT facts
In fact, given the absence of any catchy summer hits this year (or actually, the absence of summer itself), the echo of VAT changes resonates even more loudly. At times, all of these factors make one yearn for the warmer climes of non-EU countries, such as Egypt or Australia. My administrative assistant has even booked herself a one-way ticket to the antipodal capital of Sydney to escape all this VAT confusion and rainclouds.
Although it's been almost two months since the fall of most of Poland's customs borders, the new rules for trading within the enlarged EU still seem to cause confusion among taxpayers. Given the glaring absence of a VAT for Dummies book from the ever popular series (Wiley Publishing editors, please take note), this week's Tax Eye goes through the mechanics of intra-community trade in goods.
The first thing to get accustomed to is new terminology. Within the EU, import and export of goods are replaced by 'intra-community acquisition' (ICA), and 'intra-community supplies' (ICS), respectively. Thus 'import/export' as we used to know it only takes place where trading transactions are carried out with countries outside the EU. So the industrious entrepreneurs selling Russian caviar and Ukrainian cooking pots at Stadion Dziesię-ciolecia are still in the 'import/export business.' Those dealing in Czech crystal and German clock radios are now in the 'ICA/ICS business' (just try saying it a few times, and you'll find that it has a nice ring to it).
Intra-community acquisitions
Generally, these transactions are VAT-neutral, as illustrated by the following example. A Polish company purchasing gadgets from a German supplier assesses input VAT on the goods purchased, but will simultaneously deduct corresponding output VAT in the same monthly tax return. Thus, the net tax effect for the Polish company is zero.
However, in order for the above transaction to qualify as ICA, a number of conditions need to be met, including the Polish company acquiring the right to dispose of the purchased gadgets as their owner. Moreover, the German vendor may not be eligible for special tax exemptions, otherwise the transaction does not qualify as ICA. For its part, the Polish company has to purchase the gadgets for the purposes of its undertaking.
If the German company has a warehouse in Poland, the transportation of goods from Germany to that warehouse will also constitute ICA. However, if the German company temporarily brings into Poland equipment for repair, this will not be recognized as an ICA, but rather as supply of repair services subject to Polish VAT.
Intra-community supplies
Although the Sixth EU Directive on VAT does not separately define ICS, the Polish legislators prefer to make that distinction. Hence, according to the Polish VAT Law, ICS takes place when goods are sold by a Polish vendor to a non-Polish registered EU VAT payer or a non-taxable legal entity located within the EU. When a Polish VAT payer moves his goods from Poland to a warehouse located in another EU member state, this can qualify as an ICS if the goods are then used for the purposes of his/her own undertaking in that state.
Intra-community supplies are zero-rated. In other words, the vendor would charge VAT at zero percent on the invoice issued to the buyer. One of the conditions for applying the zero percent rate is for the vendor to be in possession of the buyer's valid EU VAT number. For example, a Polish company selling tractor tires is required to indicate the EU VAT number of the Czech buyer on the invoice raised.
Another prerequisite for recognition of an ICS is that the vendor maintain all necessary documentation (e.g. invoices, transportation documents, specification of goods dispatched, etc.) to evidence the dispatch of goods from Poland and their delivery to the buyer located in another EU member state. Such documentation must be in place prior to filing the monthly VAT-7 return.
When is VAT due?
The general rule in intra-community trading of goods is that the VAT liability arises on the 15th day of the month following the month in which the supply of goods took place. However, if the supplier has issued the invoice before the 15th, VAT becomes due on the invoice date. In practice, suppliers would most often recognize the VAT payable in the month of issuing the invoice.
When a buyer pays an advance in lieu of a transaction and receives an invoice for a future supply of goods, the VAT liability arises at the time of issue of the invoice. If, however, the buyer receives the goods much earlier than the invoice (provided it was issued by the supplier on the 15th day of the month following the month in which the supply took place), prior month VAT reporting adjustments may be necessary.
The need for making adjustments also arises when the amount of goods supplied differs from the amount reported on the invoice. For instance, if the number of goods delivered is greater than expected, then both the buyer and the vendor are required to account for an intra-community acquisition and an intra-community supply, respectively, based on the invoice. As regards the excess, it has to be recognized by the buyer in accordance with the general rules, i.e. on the 15th day of the following month. The supplier, on the other hand, has to reconcile the difference at the time of issuing a correction invoice or prior to the 15th day of the month following the supply.
If this is too much for you to take in all at once, you have two possibilities. One is to relocate to Australia, where there is no VAT but rather GST (General Sales Tax) and 300 days of sunshine a year. The other is to save a clipping of this article and keep it by your bedside.
Although it's been almost two months since the fall of most of Poland's customs borders, the new rules for trading within the enlarged EU still seem to cause confusion among taxpayers. Given the glaring absence of a VAT for Dummies book from the ever popular series (Wiley Publishing editors, please take note), this week's Tax Eye goes through the mechanics of intra-community trade in goods.
The first thing to get accustomed to is new terminology. Within the EU, import and export of goods are replaced by 'intra-community acquisition' (ICA), and 'intra-community supplies' (ICS), respectively. Thus 'import/export' as we used to know it only takes place where trading transactions are carried out with countries outside the EU. So the industrious entrepreneurs selling Russian caviar and Ukrainian cooking pots at Stadion Dziesię-ciolecia are still in the 'import/export business.' Those dealing in Czech crystal and German clock radios are now in the 'ICA/ICS business' (just try saying it a few times, and you'll find that it has a nice ring to it).
Intra-community acquisitions
Generally, these transactions are VAT-neutral, as illustrated by the following example. A Polish company purchasing gadgets from a German supplier assesses input VAT on the goods purchased, but will simultaneously deduct corresponding output VAT in the same monthly tax return. Thus, the net tax effect for the Polish company is zero.
However, in order for the above transaction to qualify as ICA, a number of conditions need to be met, including the Polish company acquiring the right to dispose of the purchased gadgets as their owner. Moreover, the German vendor may not be eligible for special tax exemptions, otherwise the transaction does not qualify as ICA. For its part, the Polish company has to purchase the gadgets for the purposes of its undertaking.
If the German company has a warehouse in Poland, the transportation of goods from Germany to that warehouse will also constitute ICA. However, if the German company temporarily brings into Poland equipment for repair, this will not be recognized as an ICA, but rather as supply of repair services subject to Polish VAT.
Intra-community supplies
Although the Sixth EU Directive on VAT does not separately define ICS, the Polish legislators prefer to make that distinction. Hence, according to the Polish VAT Law, ICS takes place when goods are sold by a Polish vendor to a non-Polish registered EU VAT payer or a non-taxable legal entity located within the EU. When a Polish VAT payer moves his goods from Poland to a warehouse located in another EU member state, this can qualify as an ICS if the goods are then used for the purposes of his/her own undertaking in that state.
Intra-community supplies are zero-rated. In other words, the vendor would charge VAT at zero percent on the invoice issued to the buyer. One of the conditions for applying the zero percent rate is for the vendor to be in possession of the buyer's valid EU VAT number. For example, a Polish company selling tractor tires is required to indicate the EU VAT number of the Czech buyer on the invoice raised.
Another prerequisite for recognition of an ICS is that the vendor maintain all necessary documentation (e.g. invoices, transportation documents, specification of goods dispatched, etc.) to evidence the dispatch of goods from Poland and their delivery to the buyer located in another EU member state. Such documentation must be in place prior to filing the monthly VAT-7 return.
When is VAT due?
The general rule in intra-community trading of goods is that the VAT liability arises on the 15th day of the month following the month in which the supply of goods took place. However, if the supplier has issued the invoice before the 15th, VAT becomes due on the invoice date. In practice, suppliers would most often recognize the VAT payable in the month of issuing the invoice.
When a buyer pays an advance in lieu of a transaction and receives an invoice for a future supply of goods, the VAT liability arises at the time of issue of the invoice. If, however, the buyer receives the goods much earlier than the invoice (provided it was issued by the supplier on the 15th day of the month following the month in which the supply took place), prior month VAT reporting adjustments may be necessary.
The need for making adjustments also arises when the amount of goods supplied differs from the amount reported on the invoice. For instance, if the number of goods delivered is greater than expected, then both the buyer and the vendor are required to account for an intra-community acquisition and an intra-community supply, respectively, based on the invoice. As regards the excess, it has to be recognized by the buyer in accordance with the general rules, i.e. on the 15th day of the following month. The supplier, on the other hand, has to reconcile the difference at the time of issuing a correction invoice or prior to the 15th day of the month following the supply.
If this is too much for you to take in all at once, you have two possibilities. One is to relocate to Australia, where there is no VAT but rather GST (General Sales Tax) and 300 days of sunshine a year. The other is to save a clipping of this article and keep it by your bedside.
