Lately, we have been seeing more and more cases of incorrectly assessed transactions and unfortunately, in connection to that, cases of additional value added tax including large penalties in the area of international trade of goods.  

The general public still believes that VAT is basically “a kind of flow” and that if you pay it through prices of some inputs, it will then be returned by the Financial Administration, and vice versa; or, that you can never go wrong with the “reverse-charge” tactic. However, the cooperation of tax administrations of individual EU member states and the increasing awareness of the staff about some stereotypically faulty situations show that if you set up relations concerning VAT wrongly, it can have more negative effects than just ordinary additional income tax payments. This article aims to bring attention to some of the frequent cases of such errors. In this first part, let us look at delivery of goods to a different member state, acquisition of goods and export. Concerning the next part, you can look forward to chain and tripartite transactions. 

Delivery of goods to another member state 

First, let us quickly look at a quite ordinary delivery of goods by a Czech taxpayer residing in the Czech Republic to a person registered for tax in another member state. In order to argue the right to exemption from VAT, it is no longer enough to issue an invoice with the VAT registration number assigned to the customer by the other member state. In order to defend the claim for exemption it is necessary to gather all possible evidence. Maybe some of you know the following situation from practice: your office receives a phone call, the caller asks, with a foreign accent, if there is a possibility to buy your goods and collect them directly from the platform saying that the goods will be immediately transported to e.g. Poland, Slovakia etc. Probably no salesman will resist closing a lucrative deal, especially if the customer promises to pay in full with cash on delivery. However, conditions stated thus basically mean, that the supplier gives up all control over the goods in their own warehouse, and that the customer can sell the goods at their own will anywhere in the Czech Republic. There is no need to ponder on whether it would be easy to find a suitable buyer, or not. If the supplier allows all this and does not do everything possible to make sure and prove that the goods will be / have been transported to another member state, he would put himself at a great risk of not being able to receive an exemption from taxation and getting an additional VAT including sanctions. Czech VAT legislation says that delivery of goods to another member state can be proved by e.g. a written statement of the customer or a an authorised third person that the goods have been delivered to another member state, or other evidence. However, our own experience teaches us that the statement alone does not always satisfy the tax administration and that they might ask for further proof. This could be e.g. a confirmation issued by the carrier that the goods have been handed over to the customer in another member state, confirmation of taking delivery by a warehouse in another member state; further evidence may be provided by a tax return of the customer in another member state proving that the acquisition was taxed in said member state. The supplier should also make sure that the customer is trustworthy, that their VAT registration number is valid; the supplier should also find as much information about the customer as possible, and the same goes for the carrier company. In relation to the ruling of the Court of Justice of the European Union in the case of C-409/04 Teleos, there has been an addition to Section 108 (k) of 235/2004 Sb., Act on Value Added Tax which states that: the person liable to pay the tax is also a person registered to tax in another member state that has acquired goods with place of payment in the state of the payer if the goods have not been transported or sent to the different member state by this person and the payer has taken all the steps to prove the legibility to tax exemption upon delivery of goods to another member state. However, the provision states quite clearly that the supplier is obliged to provide evidence that he has taken all the steps reasonably possible. 

We would just like to add that another obvious condition for exemption from VAT upon delivery to another member state is the fact, that these goods must be subject to VAT for the customer. But even with such a transaction the supplier should be advised to obtain from the customer a confirmation that after the transport is finished, the customer becomes the new owner of the goods; a customer who will apply VAT in the final destination and that thus, there will be no other change of ownership during the transport (so called chain transaction). We will come back to this issue briefly in the next part of our article. 

Acquisition of goods from another member state 

Let us look at this transaction from the viewpoint of the customer who really does acquire the goods into another member state. At first glance, it might seem that there are no risks here; the tax burden will be shifted from the supplier to the customer and this all makes it a simple matter. However, in practice we often see that the customer gives to the supplier from another member state a VAT registration number issued by a different member state than the state which is the final destination of the goods. Some companies conduct business in more countries and therefore are liable to register for tax in all of them, which results in one company having been issued more VAT registration numbers. It may also happen purely by accident that the supplier is given a different VAT registration number than the one issued by the final destination state. Sometimes, as a result of a sudden business case, the goods may be delivered to a country, in which an obligation to register for tax arises for the customer subsequently. However, the customer might not be registered at the moment of delivery yet, hence not have a VAT registration number, and that is why the supplier will be given a VAT registration number issued by some other country (usually it is the domestic country of the customer). 

However, this situation has serious consequences arising from the ESD C-536/08 X ruling. The conclusion is that if goods are delivered to another state than the member state which issued a VAT registration number provided by the customer to the supplier, and if a tax obligation arises due to the acquisition in the state that issued this registration number, the claim for tax exemption on input does not arise. The Czech Act on VAT provides for this as well in Section 11; for example, if a customer provides a German supplier with a Czech VAT registration number but the goods are actually transported from Germany to, let’s say, Poland, the tax obligation arises for the customer in the Czech Republic and in relation to the above mentioned ruling, the customer would not be liable to exemption from income tax. The Act on VAT also provides a correctional mechanism, however, if one is not aware of the mentioned provisions, it could lead to additional tax including penalties, even in cases where the tax might be returned under certain conditions. Even in cases where one is aware of the possible effects of this provision, a similar procedure could negatively affect cash flow. 

Export 

Trade with goods does not happen only within the European Union and that is why we look at export in this article, too. Leaving aside the fact that different issues have been previously discussed by the coordination committees of the Chamber of Tax Advisers of the Czech Republic and the Financial Administration (and thus there are cases in practice which are not entirely obvious), we would like to mention at least the elemental errors that might occur. 

The most basic error is, of course, failing to provide evidence for the export of goods. In this case, the warnings and advice mentioned above are applicable, especially concerning the evidence of delivery of goods into another member state. However, “export” for these purposes means goods leaving the territory of the European Union and entering a non-member state, if the goods have gone through the export customs procedure, outward processing arrangements or external transit, or have been exported again. It follows that if a taxpayer wants to claim for exemption from VAT upon export, he or she must be able to provide indisputable evidence that the goods have left the territory of the European Union. As a decisive piece of evidence, one can use the decision of the customs office about the export of goods into a third country including a confirmation from the border customs office on the entering of goods into the third country. This is not the only means of proof available but from our experience, this is what the Financial Administration asks for primarily when assessing evidence.  

However, even if one is able to prove that the goods were exported, it might not be enough to argue the exemption from VAT. This may happen in a situation where VAT was applied erroneously due to the fact that wrong conditions were set at the very beginning. This is because delivery can be exempt from VAT upon export if it is a delivery during which the goods are sent or transported from domestic territory to a third country by the supplier or a person authorised by the supplier, or the customer or a person authorised by the customer, but only if the customer does not reside or run any establishments in the domestic territory. In practice, we have seen cases where on the condition of delivery of EXW or FCA the goods were delivered by a Czech supplier to another company which subsequently arranged for the export of goods into a third country. And despite the fact that there was proof of the goods having been exported into a third country, the Czech supplier did not get to claim exemption from VAT upon export. 

Should you have any questions concerning the discussed topic, we are happy to consult them with you. 

Milan Kolář