In more detail 

CEO Caltrans Preda — VAT exemption on carriage services (imports)

Article 144 of the VAT Directive sets out the exemption for the supply of services related to importations of goods, where the value of these services is included in the taxable amount, in accordance with Article 86(1)(b) of the VAT Directive. Following that, Article 86(1)(b) states that the following should be included in the taxable amount of imports: incidental expenses, such as commission, packing, transport, and insurance costs, incurred up to the first destination within the territory of the member state of importation, as well as the expenses resulting from transport to another destination within the EU if that other place is known when the chargeable event occurs.

The background of Cartrans Preda is Romania, where the tax authorities found that the documents submitted by Cartrans Preda showing the carriage services were inadequate to prove that the exemption applied. Romanian law specifies the documents needed to prove the exemption, which include the invoice, the specific transportation document, the contract, etc.

Regarding VAT, two main questions have been raised to the CJEU:

• For the purposes of granting a VAT exemption for transport operations and services relating to the importation of goods, in accordance with the provisions of Article 86(1)(b), should this article be interpreted as meaning that the recording of an import operation (for example, the raising of an entry summary declaration by the customs authority by allocating a "master reference number" — MN) always entails the inclusion, in the basis of calculating the customs value, of the transport costs? Does the existence of an MRN implicitly prove that all the expenses provided for in Article 86(1)(a) and (b) have been included in the customs taxable amount?

The CJEU has clarified the requirements for the exemption in Article 144 of the VAT Directive to apply. First, the supply of services (in this case, carriage services) must be connected to the importation of the goods. Second, the value of that supply must be included in the taxable amount for the VAT purposes of the imported goods.

Based on Article 85 and Article 86 of the VAT Directive, those transport costs are not necessarily included in the value for customs purposes of imported goods. Similarly, Article 86 cannot hold that the recording of an import transaction systematically entails that the costs of the transport carried out by a taxable person are included in the taxable amount for VAT purposes of the imported goods. If those services are not already included in the value for customs purposes, those costs must then be included in the taxable amount for VAT purposes of the imported goods, in accordance with the requirements of Article 86(1)(b) of the VAT Directive.

In summary, the CJEU concludes that recording an import transaction does not systematically mean that the costs of carriage are included in the taxable amount of the value for customs purposes. 

However, the CJEU states that documents such as the CMR consignment note and the transit accompanying document, as well as the invoice and the transport contract, constitute evidence that the tax authorities must consider when determining whether carriage services connected with the importation of goods have a right to VAT exemption.

• Do the provisions of Article 144 and Article 86(1)(b) and (2) preclude the member state's taxation practice, by which the VAT exemption for transport services is refused on the ground that no strictly formal proof of the inclusion of transport costs in the customs value has been provided, even where other relevant documents accompanying the import — the summary declaration and the CMR consignment note showing delivery to the recipient — have been produced?

According to the proportionality and neutrality principle, the CJEU states that a national measure goes further than necessary to ensure the correct collection of the tax if, in essence, it makes the right of exemption from VAT subject to compliance with formal obligations, without any consideration of the substantive conditions and, in particular, without it being necessary that any consideration be given as to whether those requirements have been satisfied. That is, the VAT exemption should be allowed if the substantive conditions are satisfied, even if the taxable person has failed to comply with some of the formal requirements, and the tax authorities should verify if the substantial requirements have been met.

The exemption cannot be granted subject to the mandatory condition that specific documents required by national legislation be provided, to the exclusion of any other evidence capable of shoring up the competent tax authority's conviction. The competent tax authorities must examine all the information available to them and cannot deduce that this was not the case just because the person liable is unable to produce one or more of the specific documents required by national legislation.

The CJEU clearly resolves this second question, stating that Article 86(1)(b) and (2) and Article 144 of the VAT Directive must be interpreted as precluding a member state's tax practice of automatically refusing the exemption from VAT for carriage services connected with the importation of goods because the person liable has not produced the specific documents required by national legislation, even though that person has produced other documents capable of establishing that the conditions for entitlement to VAT exemption have been satisfied.

This judgment aligns with the criteria established by the CJEU regarding the proportionality and neutrality principle and the need for substantial requirements to be met instead of making VAT exemptions contingent on formal requirements. We see in different jurisdictions that sometimes the tax authorities tend to deny VAT exemption based on the concrete proof that should be filed per local regulation. The Cartrans Pereda judgment should be one of the cases that will help taxpayers defend their case.

Concept of "importer" — VAT deductibility on imports

The concept of "importer" and, more specifically, the requirements to deduct the VAT on imports that the importer must meet could vary from one country to another. In this section, we will analyse the approaches adopted by local tax authorities in each of the jurisdictions below.

Spain

According to Article 201 of the VAT Directive, VAT on imports should be payable by any person designated or recognized as liable by the member state of importation.

In Spain, the concept of "importer" — considered as the VAT-taxable person of the import — is linked to the concept of the importer of record or customs purposes. The following, specifically, can be considered importers for VAT purposes:

1. The recipients of the imported goods, whether they are purchasers, assignees, owners, or consignees.
2. The travelers, for the goods that they drive when entering the territory in which the tax will be applied.
3. The owners of the goods in the cases not contemplated above.
4. The purchasers or, where appropriate, the owners, lessees, or certain charterers of the goods.

To deduct input VAT amounts borne by the imports, the Spanish tax authorities consider that the general requirements to deduct input VAT apply. Basically, the party entitled to deduct input VAT is the importer, the imports should be linked to the business performed, and the business should entail deducting input VAT, and the formal requirements to deduct should be met (e.g., Tax Ruling V1895-23 of 23 June 2023). 

Therefore, in Spain, being the owner of the goods is not a requirement to deduct import VAT. This was recently confirmed by the Spanish tax authorities in Tax Ruling V0197-23 of 8 February 2023, where they analysed the case of a toll manufacturer of medicines that imported raw materials in Spain, while its clients maintained ownership of the goods.

United Kingdom

Importer for VAT purposes

Similar to the approach enacted in Spain, Section 15 of the VAT Act 1994 (VATA) sets out that the importer of goods into the UK for VAT purposes will be the same person as that liable for import duty. Under UK VAT law, as derived from Article 201 of the VAT Directive, the importer is liable for import VAT (or where two or more persons are treated as the importer, those persons have joint and several liability for import VAT).

In practice, the importer for VAT purposes will be the person identified as the consignee on the import declaration. If the importer is a business, it should be identified as the consignee by recording its UK EORI number in box 8 of the import declaration. There is an important distinction between the consignee and the person acting as the "importer of record" for customs purposes, with the importer of record being the declarant listed in box 44 of the import declaration who is obliged to pay import VAT on behalf of the consignee.

Accounting for import VAT

Historically, UK import VAT was required to be paid upfront to HM Revenue and Customs (HMRC). This changed from 1 January 2021 when the UK introduced Postponed Import VAT Accounting (PIVO), which gave UK VAT-registered importers the option to account for import VAT through their VAT returns. PIVA has proved popular due to the cash flow advantage this gives.

Import VAT recovery

The right to import VAT recovery has been a "hot topic" in the UK for several years following HMRC's publication of guidance in 2019 and 2020, confirming its view that import VAT should only be recoverable by importers that have ownership over the goods (RCB 2 (2019), RCB 15 (2020) and HMRC Internal Manual VIT13300).

HMRC's guidance discusses that "ownership" should be given its regular meaning in a VAT context (i.e., "the right to dispose of goods as the owner") and accepts that the precise timing of legal title to the goods is not necessarily relevant. Therefore, as long as the goods are imported under a contract that envisages that title will transfer and the consignee will become the "owner" of the goods, the consignee should have the right to import VAT recovery (assuming those goods are imported in the course and furtherance of business).

This guidance acknowledges that certain importers, particularly toll operators, had historically not taken this position and listed several customs simplifications that taxpayers that regularly import goods owned by other parties could use to comply with HMRC's position. However, in practice, these customs simplifications are often complex to implement and administer, and this guidance has created compliance issues for a widespread cohort of importers.

HMRC's position has recently been litigated within the UK's First-Tier Tribunal (Tax) (FTT) (Piramal Healthcare UK Ltd [2023] TC 08966). Piramal is a pharmaceutical company that imports pharmaceutical products (API) owned by third parties into the UK to undertake certain services on those products, before sending them back to the owner or other third parties for further processing. Piramal incurred and recovered import VAT in relation to these products. Although HMRC had previously approved the recovery of this import VAT, it later assessed Piramal for over-recovered import VAT, which Piramal appealed to the FTT.

The FTT ultimately agreed with HMRC's position that import VAT should only be recoverable as input tax if the imported goods formed a "cost component" of the person who incurred the import VAT. In reaching its decision, the FTT cited EU legislation (from which UK VAT legislation was initially derived), domestic case law and CJEU case law. The FTT reached its decision despite noting that arguments put forward by Piramal were "persuasive," suggesting that the FTT sympathized with the taxpayer's position.

The FTT's decision is ultimately not legally binding on other UK taxpayers. However, it is persuasive. In the absence of a conflicting decision from a higher court, HMRC's position remains in place, and importers should only recover import VAT where they owned the imported goods at the point of import. Any other approach would likely be challenged by HMRC.

Germany

The entrepreneur can deduct the import VAT incurred as input tax if the goods have been imported for their business in Germany. It is generally not relevant which person has been the importer of record.

An import for the company's business is deemed to have taken place if the entrepreneur clears the imported goods in Germany for release for free circulation under customs and tax law and then uses them to carry out transactions as part of their business activities. This requirement is met by the entrepreneur who has the power of disposal over the goods at the time of release for free circulation under customs and tax law (for these purposes, the time of delivery is to be determined according to the relevant VAT place of supply; this also applies to chain transactions).

It is not decisive who actually brought the imported goods across the border on behalf of the entrepreneur entitled to deduct input VAT. If a foreign trader allows a domestic trader to use an item without giving them the right to dispose of the item, the domestic trader is therefore not entitled to deduct the import VAT as input tax (see BFH judgment of 16 March 1993, V R 65/89, BStBl II p. 473).

It is not necessary for the entrepreneur to have paid the import VAT themselves. They can also deduct it as input tax if their agent (e.g., the forwarding agent, the carrier, or the commercial agent) is the debtor of the import VAT. In these cases, the deduction depends on the entrepreneur having the relevant customs document or a customs-certified substitute document for the input tax deduction handed over to them. 

If the supplier is the importer of record (and the tax placed for VAT purposes is hence shifted into Germany), the supplier is only entitled to deduct the import VAT if it clears the goods for its own disposal in Germany for release for free circulation under customs and tax law and then delivers them to its customer.

The case law has based the power of disposal on the fact that the price of the import VAT has been included in the price of the output transactions (deliveries/services) rendered by the entrepreneur.

Persons who have merely participated in the import without being able to dispose of the goods (e.g., freight forwarders, carriers, commercial agents, customs warehouse operators) are also not entitled to a deduction if they temporarily store the imported goods in accordance with their client's instructions (see BFH judgment of 11 November 2015, V R 68/14, BStBl 2016 II p. 720).

There is further detailed guidance on special scenarios, including many exceptions or simplifications, e.g., in the context of destruction or loss of goods imported into Germany, leasing supplies, and various types of construction services and supplies. 

The entrepreneur must provide evidence that import VAT has been incurred. There are specific rules regarding the required documents and recordings.

The Netherlands

Article 18(1) of the Dutch VAT Act specifies what is to be understood by "importation of goods". Article 1 of the same act defines a taxable event as follows:

1. The introduction of goods from third countries.
2. The introduction of goods from parts of the customs territory of the EC to which the VAT Directive does not apply.
3. Removal of goods from a customs regime.
4. The provision in the Netherlands of means of transport with goods that are not in free circulation.

Generally, and in cases where goods are imported into the Netherlands compliantly, the person liable for import VAT will, therefore, be the debtor of the customs debt on the import as defined by EU customs.

However, based on Article 15(1)(c)(1) of the Dutch VAT Act, the right to deduct the VAT paid on the importation of goods is given to the person for whom the goods are intended. That person can deduct the import VAT that, according to their books and records, has become due during the period of declaration under Article 22 of the Dutch VAT Act in relation to the importation of goods intended for that person. This provision is the implementation of Article 168 (e) and Article 178 (e) of the VAT Directive.

The main rule for the method of levying VAT on imports is contained in Article 22 of the Dutch VAT Law. It is levied in accordance with the provisions of customs law. The article also contains a rule for granting a remission or refund of import VAT. An important simplification to the main rule is contained in Article 23 of the Dutch VAT Law. This article regulates the possibility of levying the import VAT due upon the importation of goods from the entrepreneur for whom the goods are intended. When using Article 23, for which a license is required, the import VAT is charged in the same way as the tax due on the supply of goods, and the tax is paid with the domestic periodic tax return. This results in a cash flow advantage.

The following conditions must be met:

1. The company is established in the Netherlands.
2. The company regularly imports goods from non-EU member states.
3. The company keeps a separate administration that easily shows how much VAT you have to pay upon importation.

Please note that you may still obtain an "Article 23 license" even though you are not established in the Netherlands if you have a fiscal representative.