VAT is not about logic
Donka Darpatova is a tax manager in the Warsaw office of Ernst & Young.
Tax and territoriality are closely linked concepts. Taxes are levied in every territorial unit imaginable, from country to state or zone. So there is no way to avoid tax on our planet, unless the respective unit that is entitled to impose it voluntarily gives up this innate right. Amazing, isn't it?
From a cosmic perspective, the above conclusion sounds rather absurd. We tax advisers have been nurtured in the belief that even the obvious must be questioned. Hence, true to my inbred professional scepticism, I contemplated this on the plane to Warsaw last week. On landing I had already formulated a few bold and brilliant thoughts, on which I will not elaborate for the fear of being bombarded with accusations of attempting to ruin fiscal budgets. I can only say that my non-traditional view of territoriality was inspired by the possibilities that cyber space and international waters have to offer.
Some days later, I had the occasion to take a fresh look at my innovative ideas with the benefit of advice from a colleague - Piotr Litwin, a VAT expert, whose kind offer of help in writing this week's column dedicated to VAT in EU trade I readily accepted.
It is comforting to know that not only I, but most EU member states, have been struggling with territoriality issues. Even though the first attempts to tackle these dates back to the 1950's, EU borders were not abolished until 1993.
Borders define a specific territory and, in the context of trade, give rise to import/ export transactions, which, thanks to the French who invented it in the 1960's, normally also implies a VAT charge. One of the dilemmas faced by Member States, and the European Commission, was ensuring that competition is not distorted by differences in the local VAT rates and the prices of goods/services moving freely within EU territory. Some form of compromise had to be found.
Finally, in 1993 a set of new provisions, known as the transitional system of taxation, was introduced. It outlined the framework of trade in goods within the EU (if the trade involved third countries, regulations concerning export and import were still applicable) and was intended to last only for four years. However, the transitional arrangements are still in place to this day. What is more, there are no signs of a workable and permanent solution being implemented in the foreseeable future. Rumour has it that the current system is here to stay.
So what are these rules and how will they apply to Poland after EU accession? The first change will involve a change of names. If goods are sent to other EU states, an intra-Community supply will take place - instead of export. But it will still be subject to the 0 percent VAT rate. Upon receipt of goods from other EU states, the respective local VAT rate (eg. 22 percent for Poland) will continue to apply in the same manner, but the import transaction will be referred to as an intra-Community acquisition.
The similarities with the existing regulations go further. An example is the transfer of goods between warehouses in different member states - viewed from the importer's perspective. Currently, if a business dispatches some of its own goods to Poland from a warehouse in Germany, import VAT has to be paid when the goods enter Polish territory. The fact that there is no change of ownership (there is no contract with another party, no supply) is irrelevant. Since there is no supply, and consequently no acquisition, logically there should also be no intra-Community supply (and consequently no intra-Community acquisition) in post-accession Poland. Unfortunately, VAT is not about logic. The transfer of goods between warehouses is deemed as an intra-Community supply and acquisition and taxed accordingly.
Much ado about changing practically nothing? Maybe, but some changes in taxation rules are worth mentioning. Probably the most significant is the new method by which VAT is accounted for and settled. Import VAT is collected by customs authorities at the borders -- if you do not pay it you cannot release the goods for free circulation. VAT on intra-Community acquisitions is calculated (self assessed) and accounted for by the taxpayers themselves. But, contrary to import VAT, it may never be paid. It is a result of the fact that VAT on intra-Community acquisitions is deductible - again just like VAT on importation. Therefore, taxpayers include it as output to be paid and input to be deducted in the same VAT declaration. Since the outcome of this simple exercise is nil, no payment to the tax authorities is due. Do not ask: why bother making the calculations at all, if the economic result is neutral - remember, VAT is not about common logic.
Unquestionably, there is a cash flow benefit in it somewhere. But not that clear a benefit. In the current system, the correctness of the calculation of import VAT is checked immediately at the border. Thus, generally the taxpayers do not have to worry anymore. In the new system, "the burden of mistake" is entirely on the taxpayers. It may take years before a tax inspector discovers it and, with undisguised satisfaction, assesses an outstanding tax liability plus interest for late payment.
So, in the end, despite the notion of the free movement of goods, it all boils down to VAT levied on territories, collected at borders, imposed or self-assessed with reference to a specific geographical location. For the time being, while the temporary system is still permanent enough, we have to learn to come to terms with its inherent shortcomings.
