The recent decision of the Court of Justice of the EU (CJEU) in case C-696/20 (B. v Dyrektor Izby Skarbowej w W.) offers a cautionary tale of what could happen when tax authorities challenge parties' characterization of a chain transaction. Although the CJEU did not accept a double levy of non-deductible VAT, the CJEU confirmed that a misclassification of a supply as a domestic supply could result in a single levy of non-deductible VAT.  

Adding insult to injury, as of 2020, correcting VAT mistakenly charged on an intracommunity supply is virtually impossible, leaving the taxpayer with an additional VAT burden.

Key takeaways

Now more than ever, attention must be paid to the VAT consequences of intra-EU chain transactions. 

• The CJEU supports — at least partially — a rigid approach such as the one demonstrated by the Polish tax authorities. 
• Looking for additional VAT revenue, more member states may scrutinize chain transactions.
• Charging (and accepting) local VAT as a fallback position is not a sensible approach, as from 2020, VAT mistakenly charged on an intra-community supply cannot be corrected.

Background

In its decision of 7 July 2022 in case C-696/20 (B. v Dyrektor Izby Skarbowej w W.) the CJEU addressed the rather rigid approach taken by the Polish tax authorities on chain transactions originating in Poland. 

Facts

The transactions under scrutiny from the Polish tax authorities involved a Polish supplier of goods (A), an intermediary, established in the Netherlands but using a Polish VAT identification number (B) and customers (C) in other EU member states.

In this case, A sold the goods to B, B sold the goods to C and the goods were transported directly from the Polish premises of A to customer C in another EU member state. 

Parties assumed that the transport of the goods should be linked to the second supply in the chain (i.e., B-C). The A-B-C chain thus consisted of a domestic supply in Poland (i.e., A-B) that was followed by an intracommunity transaction (i.e., B-C) from Poland to C in another EU member state. VAT was charged, reported and claimed back accordingly. 

The Polish tax authorities, however, found that the transport should have been linked to the first supply in the chain. The A-B-C transaction thus resulted in an intracommunity supply (i.e., A-B) followed by a domestic supply (i.e., B-C) in the EU member state where the goods arrived. 

As a result of these findings, the tax authorities argued that B could not deduct the Polish VAT charged by A, as this VAT was wrongly charged on an intracommunity supply. On top of that, the Polish tax authorities claimed that by using a Polish VAT identification number, B had performed an intracommunity acquisition in Poland for which (non-deductible) VAT had become due. A substantial (i.e., a 46% rate) VAT assessment was issued to B and legal proceedings followed.  

Questions referred to the CJEU

The Polish Supreme Administrative Court ("Referring Court") supported the view of the Polish tax authorities that the transport should have been linked to the supply from A-B, so that this supply was the intracommunity transaction in this chain transaction. The Referring Court doubted however, how the rules for a number-acquisition in this specific situation should be applied. At the end of the day, an intracommunity acquisition was reported by C in the EU member state where the goods arrived. The Referring Court also doubted whether the principle of proportionality and neutrality allowed the proposed additional levy of 46%, given the fact that B's actions did not involve any fraud but were merely the result of a misclassification of a chain transaction. 

The decision of the CJEU

In its decision, the CJEU recognized the possibility of a non-exempt intracommunity supply, as stated by the Referring Court, resulting in non-deductible VAT. 

On top of that, the CJEU recognized the possibility, as advocated by the Polish tax authorities, that an intracommunity transaction triggered a number-acquisition in the country of dispatch when the VAT identification number of that country was used. This number-acquisition could indeed result in non-deductible VAT. 

However, in the case at hand, the CJEU found that the principles of proportionality and fiscal neutrality prevent a double taxation (i.e., a non-exempt intracommunity supply and a non-deductible number-acquisition). As a result, the member state where both the non-exempt intracommunity supply and the number-acquisition takes place cannot levy VAT on the latter. At the end of the day, however, the taxpayer is still confronted with non-deductible VAT on a non-exempt intracommunity supply. 

Quick Fixes 

The above CJEU case related to transactions in 2012. Since then, the rules for exempting intracommunity supplies were tightened as part of the so-called Quick Fixes (Council Directive (EU) 2018/1910). As of 2020, an intracommunity supply is thus only exempt if a VAT identification number is used from an EU member state other than the member state of dispatch, and this number is timely included in the recapitulative statement. It is important to note that these formalities cannot be corrected or supplemented afterwards. 

When it appears that a supply is (mistakenly) treated as a domestic supply, it is usually too late to meet these new formal conditions for exempting the intracommunity supply retroactively. As a result, the VAT mistakenly charged remains due. Following the reasoning of the CJEU in Facet/Facet Trading BV (Joined cases C-536/08 & C-536/06) it is likely that this VAT is not deductible. 

Recommended actions

Given the above, a VAT-sanity check of current and contemplated chain transactions is advisable. Our VAT experts can assist you with this and can identify and minimize VAT exposure.