In its judgement passed a few weeks ago, the treatment of European Court of Justice (ECJ) was flexible in the interpretation of the VAT “triangular transactions”. While this decision in favour of the taxpayer creates a tax planning opportunity for businesses involved in international trade of goods, it pays off to be cautions on the other side.
Hans Bühler & Co. in the Bermuda Triangle
A triangular transaction is a special type of international sale in which a sale of goods takes place between taxable entities registered in different member states (A, B and C), where the goods are delivered directly from the first seller in the chain (A) to the last buyer (C), so that the sequence of changes in ownership of the goods differs from the actual physical delivery. The objective of the applicable “simplification rule” is to free the taxable entity in the middle of the chain (B) from the obligation to pay tax and be registered in the destination country, and to give entity C the obligation of declaring the VAT liability resulting from the sale between B and C.
The EU VAT Directive sets a number of conditions for applying the simplified procedure. One of these requirements is that the country of departure of the goods delivery (A) must be different to the member state in which taxable entity B has a VAT number. It’s important to be aware that if the sale does not meet the conditions for applying the simplification rule for any reason, then the directive permits B’s country to levy VAT on the sale.
In the transaction leading to the ECJ judgement No. C-580/16, Hans Bühler & Co. was a German-registered company with a German VAT number, which had goods transported directly to the Czech Republic, but with the company’s Austrian VAT number indicated on the invoices for the purchases and sales. In view of this, the company wanted to apply the simplified procedure. The Austrian tax authority, however, refused this on the grounds that the conditions of the directive are not met, because the company also has a VAT number in Germany.
When more is sometimes less
According to the ECJ, the essence of the problem lies in whether or not the rule concerned, to the effect that the delivery must start from a member state other than the issuer of the VAT number, rules out application of the procedure in cases where the intermediate taxable person (B) is registered or has a VAT number in the state of departure of the delivery.
The judgement accepted the taxpayer’s viewpoint. Based on the principles of tax neutrality, taxation in the destination country and freedom of choice of VAT number, the Court ruled that when deciding whether the conditions of the directive are met, only the VAT number used by the taxable person when performing the intra-Community acquisition of goods needs to be taken into consideration. Therefore, the issue of whether the taxable person has an additional permanent establishment or VAT number in another member state has no relevance to the use of the simplified procedure in triangular transactions.
Why have a foreign VAT number?
An obvious question that arises is how the parties involved could benefit from a situation where, at the time of the sale, the intermediary uses a VAT number issued by a third EU country instead of the country of the sale of goods. There are several answers to this. Firstly, there is a possibility that the tax authority will classify the transaction between A and B as an intra-Community sale of goods, even if A and B participate in the transaction with VAT numbers from the same country. In this case, if the sale is not classed as a triangular transaction, B will unavoidably have to register itself as a taxable person in the country of C. Secondly, if the transaction between A and B is classed as a domestic sale of goods, then VAT will have to be charged directly, which in turn carries the obligation to finance the VAT. And last, but not least, the use of a VAT number issued by a third country could also be beneficial if B sells the product purchased from A in not one, but several EU countries.
What’s the situation in Hungary?
The Hungarian legislation does not specifically prohibit the use of the simplified procedure by a taxable person that also has a VAT number in the member state of departure of the goods delivery. A tax guidance from 2016 (2016/16) shows that the Hungarian tax authority’s interpretation of the conditions relating to VAT numbers have been broadly in line with the ECJ’s recent decision. The guidance makes it clear, among other matters, that whether or not the intermediate taxable person (B) also has a VAT number in the member state of the first sale (A) has no relevance to the assessment of the transaction (provided that the foreign VAT number is not involved in the transaction).
The latest judgment, however, still adds a great deal to the interpretation of the Hungarian tax laws, as the above tax guidance only discusses cases where the taxable person has an additional VAT number in another member state. It is no great stretch of the imagination, therefore, to envisage that without the recent judgment the Hungarian tax authority might take a different view of cases where the taxable person has not only a VAT number, but also a permanent establishment in the member state of departure.
It pays to be cautious
Although the judgement clearly supports the freedom of choice of VAT number, this certainly doesn’t mean that it’s worth “stockpiling” VAT numbers simply in order to gain tax advantages. The judgement does not closely examine the reasons why Hans Bühler & Co. had an Austrian VAT number. It is likely that the tax authorities and national courts will continue to have the task of screening out “VAT number shoppers” who are simply trying to circumvent the tax laws. So in Hungary, too, it remains to be seen what kind of reclassification risks could be entailed, and what the consequences of this could be, if the tax authority decides that the use of a VAT number issued by a country other than the place of economic establishment is simply a means of tax avoidance. Another important question is just what features of the transaction could lead the Hungarian tax authority to such a conclusion.