Confusion on chain supply cross-border EC Sale VAT

Wed 2nd Jul 2014

The EU’s rules on the application of a VAT exemption on cross-border chain supplies remains complex. This is not helped by Germany still applying varying rules.

EU VAT on chain supplies

Chain supplies occur when goods are traded between a number of parties, but actually only one physical movement of the goods takes place. When the trading happens in one country, there is no VAT issues as all supplies are subject to the country’s national VAT rate.

However, where there was a supply between two EU countries, under the VAT simplification rules there is no VAT due to the seller from the foreign buyer. This is known as an EU Sale, and nil rated for VAT. Generally, the EC Sale transaction (and thus not VATable) is determined by who arranged for and paid for the transport. This is because the buyer is taking control of the goods and deciding to move the goods across the EU border.

A useful determinant in understanding when the allocation of goods happened is through the trading terms (‘Incomterms’) of  the deal. If the trade is done on the international trading Cost, Insurance and Freight (CIF) basis, then that means the delivery is being taken care of. Along with the Electronic Additional Administration Document, this will be sufficient evidence for the tax authorities to be satisfied of a cross-border EC sale and that the transaction is VAT exempt.

This can be contrasted with the other trades in the chain supply which may be done on a Freight On Board (FOB) Origin basis whereby the buyer has to collect and transport the goods. Freight On Board Destination means the seller is responsible for delivery, and effectively is the same Incomterm as CIF.

German intra-community variation

Germany currently (Federal Court) takes a wider view of chain supplies than the EU VAT Directive or the recent European Court of Justice decision in Eurotyre. It will require a full understand of the control of the goods down the chain. So if a buyer in the chain could actually take effective control in an earlier transaction, that is when ownership is received.

Germany has confirmed that it will review and change its rules in accordance with the EU rules.