Local purchases and sales abroad, what are the VAT consequences?

Businesses trading internationally increasingly buy in one country and resell there locally. The VAT liability that goes with it is not always recognised.

A Dutch trading company gets the opportunity to buy and resell goods within a single member state. The locally established supplier delivers the goods directly to the locally established end customer. This is an ABC transaction in which the Dutch company is party B.

People often think of the simplified triangulation rules, but they do not apply here, because there is no cross-border transport. These are two trading transactions, both governed by local VAT rules.

When is a local registration needed?

In every case the supplier charges VAT of the member state concerned. That VAT is recoverable, but how depends on your own sales invoice. For each member state you must check whether you have to charge local VAT yourself or whether it is reverse charged to the customer.

Where it is reverse charged, you need not show local VAT on the sales invoice and no local registration is required. The VAT paid to the supplier can then be reclaimed through the Dutch Tax Administration using the electronic refund procedure.

Where a member state has no local reverse charge, you do need a VAT number and must issue a sales invoice under that number showing VAT at the local rate.

Three member states by way of illustration

Belgium has a reverse charge for the situation in which the supplier is established outside Belgium and the customer is established there. The Dutch trader then need not register and can reclaim the input VAT in the Netherlands. Where the trader does hold a Belgian VAT number as a non-established business, the VAT remains reverse charged to the end customer and the input VAT can be reclaimed through the Belgian return.

Germany is where things often go wrong in practice: there is no general reverse charge for transactions in goods. Every Dutch intermediary must register and charge German VAT to the buyer. The input VAT can be reclaimed through the German return.

Poland has a mechanism comparable to Belgium's. Where the Dutch intermediary holds a Polish VAT number, however, for instance because it must declare intra-Community acquisitions, the reverse charge to the Polish customer falls away.

Non-EU countries

Countries such as Norway, the United Kingdom and Switzerland also levy VAT, closely resembling the European system. None of the three has a reverse charge.

Pitfalls

Every member state has its own rules. People too readily assume the VAT has been reverse charged to a local customer. The examples above show that several scenarios are possible.

The sales invoice assumes an intra-Community supply. This often stems from the invoicing system: a delivery address in the EU is entered, so the system assumes an intra-Community supply. That then wrongly finds its way into the Dutch VAT return and recapitulative statement. As long as the goods never physically enter the Netherlands, these transactions do not belong there.

Input VAT is reclaimed without thinking. Foreign VAT is reclaimed through the electronic refund procedure, and it is assumed the same applies to this input VAT. Where the outgoing invoice creates a local VAT liability, however, the input VAT must be reclaimed through a local return. A request through the electronic procedure will be refused.

Input VAT is passed on. Sometimes the intermediary in effect passes the input VAT on: it is neither reclaimed nor accounted for. In substance it is then invoicing as an agent. Where the intermediary acts in its own name, however, there are two separate transactions and it is itself liable for VAT on the sale, unless a local reverse charge applies.