Briefing Document: VAT and Intra-Community Acquisitions
Subject: Analysis of VAT regulations concerning intra-Community acquisitions, focusing on the Court of Justice’s rulings in Joined Cases C-536/08 and C-539/08 and relevant articles of the Sixth VAT Directive (77/388/EEC).
Executive Summary:
This briefing examines the complexities of Value Added Tax (VAT) treatment of intra-Community acquisitions, particularly the conditions under which a taxable person can deduct input VAT. The Court of Justice’s (CJEU) judgment in Joined Cases C-536/08 and C-539/08 (concerning X and Facet-Facet Trading, respectively) clarifies that a taxable person is not entitled to an immediate deduction of input VAT in the Member State that issued their VAT identification number if the goods in question never physically entered that Member State and the acquirer cannot prove taxation in the destination Member State. This ruling balances the fundamental principle of immediate VAT deduction with the need to prevent tax evasion and ensure that VAT revenue is allocated to the Member State of final consumption. The Sixth VAT Directive articles 17, 28a, 28b, 28c, and 22 are particularly relevant to this analysis.
Key Themes and Ideas:
Intra-Community Acquisition Definition (Article 28a(3) of the Sixth VAT Directive):
- Defined as “acquisition of the right to dispose as owner of movable tangible property dispatched or transported to the person acquiring the goods by or on behalf of the vendor or the person acquiring the goods to a Member State other than that from which the goods are dispatched or transported.”
- This definition highlights the cross-border nature of the transaction within the EU.
Place of Taxation: General Rule vs. Exception (Article 28b(A) of the Sixth VAT Directive):
- General Rule (Article 28b(A)(1)): The place of acquisition is where the goods are located when transport to the acquirer ends (i.e., the destination Member State). This is the preferred outcome, aligning taxation with consumption.
- Exception (Article 28b(A)(2)): “Without prejudice to paragraph 1…[the place] shall…be deemed to be within the territory of the Member State which issued the value added tax identification number under which the person acquiring the goods made the acquisition, unless the person acquiring the goods establishes that that acquisition has been subject to tax in accordance with paragraph 1.”
- The exception applies if the acquirer cannot prove taxation in the destination Member State. In this case, the place of acquisition defaults to the Member State that issued the VAT number.
The Corrective Mechanism (Article 28b(A)(2)):
- Aims to prevent double taxation. If VAT is charged in the Member State of VAT registration (due to the exception) and the destination Member State, “the taxable amount shall be reduced accordingly in the Member State which issued the value added tax identification number.”
- However, the acquirer bears the burden of proving taxation in the destination state to trigger this mechanism.
Conditions for VAT Exemption (Article 28c(E)(3)):
- This article outlines specific conditions under which a Member State must ensure VAT is not charged on intra-Community acquisitions within its territory.
- These conditions are:
- Acquisition by a taxable person not established in that country but VAT-registered in another Member State.
- Acquisition for a subsequent supply of goods in that country.
- Goods are directly dispatched from a Member State other than where the acquirer is VAT-registered.
- Customer for the subsequent supply is VAT-registered within that country.
- Customer is designated as liable for the VAT on the subsequent supply.
- These conditions aim to simplify transactions where the goods are immediately re-supplied in the destination Member State.
The Court’s Reasoning in Joined Cases C-536/08 and C-539/08:
- The central question was whether a taxable person could immediately deduct VAT in the Member State of VAT registration when the goods didn’t enter that state and the exception in Article 28b(A)(2) applied.
- The Court ruled against immediate deduction, reasoning that:
- Because the goods never entered the Member State that issued the VAT identification number, the transactions cannot be regarded as giving rise to a “right to deduct” within the meaning of Article 17 of the Sixth Directive.
- Allowing deduction would undermine the corrective mechanism by removing the incentive to prove taxation in the destination Member State.
- Immediate deduction in such cases would risk allowing deduction in a Member State with no actual economic activity related to the goods, potentially leading to lost tax revenue for the correct Member State.
- The Court emphasized that the transitional arrangements for VAT are designed to transfer the tax revenue to the Member State in which final consumption of the goods supplied takes place.
Significance of VAT Identification Numbers:
- Essential for determining the place of taxation.
- Create obligations for taxable persons to prove taxation in the destination state to avoid “default” taxation in the Member State of VAT registration.
- Enable tax authorities to track intra-Community transactions and ensure proper VAT collection.
Facts of Cases C-536/08 (X) and C-539/08 (Facet-Facet Trading):
- These cases involved Dutch companies purchasing goods from other Member States and selling them to customers in different Member States. The goods were often shipped directly to the customer’s Member State, bypassing the Netherlands. The Dutch tax authorities assessed additional VAT because the companies were using their Dutch VAT numbers for the acquisitions but were not always able to prove taxation in the destination Member State.
Balancing Immediate Deduction with Tax Evasion Prevention:
- The Court acknowledged the importance of immediate VAT deduction as a fundamental principle of the VAT system, noting that “the right to deduct VAT, as an integral part of the VAT scheme, is a fundamental principle underlying the common system of VAT and in principle may not be limited.”
- However, the Court prioritized the prevention of tax evasion and ensuring the proper allocation of tax revenue. In the specific context of Article 28b(A)(2), it found that immediate deduction was not automatic. This prevents abuse and incentivizes compliance with the rule that VAT is due where the goods are consumed.
Quotes from Original Sources:
- “Articles 17(2) and (3) and 28b(A)(2) of Sixth Council Directive 77/388/EEC…must be interpreted as meaning that a taxable person coming within the situation referred to in the first subparagraph of Article 28b(A)(2) does not have the right immediately to deduct the input value added tax charged on an intra-Community acquisition.” (Judgment Conclusion)
- “The purpose of those transitional arrangements is to transfer the tax revenue to the Member State in which final consumption of the goods supplied takes place.” (Paragraph 30)
- “The right to deduct shall arise at the time when the deductible tax becomes chargeable.” (Article 17(1))
- “Intra-Community acquisition of goods shall mean acquisition of the right to dispose as owner of movable tangible property dispatched or transported…to a Member State other than that from which the goods are dispatched or transported.” (Article 28a(3))
Implications for Businesses:
- Businesses engaged in intra-Community trade must meticulously document the destination of goods and ensure compliance with VAT regulations in both the Member State of VAT registration and the destination Member State.
- It is crucial to obtain evidence that VAT has been properly accounted for in the destination Member State to avoid being taxed in the Member State of VAT registration and potentially losing the right to immediate deduction.
- Businesses should carefully review their invoicing practices and ensure that VAT identification numbers are correctly used and reported.
Recommendations:
- Conduct a comprehensive review of current VAT practices in relation to intra-Community acquisitions.
- Implement robust documentation procedures to track the movement of goods and ensure compliance with VAT regulations in all relevant Member States.
- Seek professional advice to ensure compliance with VAT regulations and minimize the risk of penalties.
This briefing provides a detailed overview of the VAT regulations concerning intra-Community acquisitions and the implications of the Court of Justice’s judgment in Joined Cases C-536/08 and C-539/08. It is essential for businesses engaged in intra-Community trade to understand these regulations and take steps to ensure compliance.
See also
- Joined cases C-536/08 (X) and C-539/08 (fiscale eenheid Facet-Facet Trading) – No deduction on Intra-EU acquisitions taxed at the MS of identification of the purchaser, instead of the destination – VATupdate
- Roadtrip through ECJ Cases – Focus on Place of Supply of Intra-Community Acquisitions – ”Triangulation” (Art. 42) – VATupdate
- See also
- Join the Linkedin Group on Global E-Invoicing/E-Reporting/SAF-T Developments, click HERE
- Join the LinkedIn Group on ”VAT in the Digital Age” (VIDA), click HERE
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