7 CHANGES IN VAT: Changes in the settlement of chain transactions

On 1 July this year, the changes concerning the settlement of chain transactions will come into force. The changes are aimed at implementing into the Polish legal system the provisions of the amended Council Directive 2006/112, which, as part of the so-called quick fixes package, unifies the settlement of chain transactions across the EU.

The new regulations provide that, in the case of a chain transaction where goods are moved to another EU Member State, the dispatch or transport of the goods is, as a rule, assigned solely to the supply made to the intermediary (an entity organizing the transport), and this supply may be taxed at 0% rate (or be exempt).

So if we have 3 taxpayers (A-B-C) involved in 2 supplies, where:

1. taxable person A sells goods to taxable person B (intermediary)
2. taxable person B sells the goods onwards to taxable person C
3. the goods are sent directly from A to C and the transport is organized by B

then the general rule is that this is a transaction A-B that is subject to 0% rate (exemption) in the member State of dispatch.

However, taxpayer B can change this rule.

If the intermediary (B) is registered for VAT on intra-Community transactions in the Member State from which the goods are dispatched and passes on to the supplier (A) his VAT Id number allocated by that State, this general rule will not apply. In that case, the first transaction (A-B) will be taxed in the Member State of dispatch at the rate applicable to the goods sold locally while the second transaction (B-C) in that Member State of dispatch will constitute an intra-Community supply (taxed at 0%).

This means that it is the intermediary (an entity other than the first supplier of goods; who sends or transports the goods himself or through a third party acting on his behalf) who decides in practice where the transaction should be taxed. If he registers for VAT in the Member State of dispatch, he will be able to decide each time on taxation of transactions in which he participates as such an intermediary.

The above principles will also apply to transactions involving more than one entity – but then additional verification will be necessary to determine which entity acts as an intermediary.

The above rules do not apply to domestic transactions (even involving operators from other countries) and export transactions.

The changes introduced should solve the problem of chain transactions. Taxpayers will certainly have to revise existing business arrangements and terms and conditions for the supply of goods with EU counterparties, which in many cases will “switch” to the new rules set out in the quick fixes.

For Polish entrepreneurs it will also be an opportunity to shape the supply chain more optimally from the VAT point of view, and as explained by the Ministry of Finance, taxpayers will have to apply the once adopted settlement rules in a consistent manner.