When making use of simplified triangulation, can wrong invoice references lead to VAT liabilities?
In an Austrian case, the European Court of Justice (Case C-247/21; Luxury Trust Automobil GmbH) was asked to deal with this question.
The court confirms the earlier position of Advocate General Kokott.
An explicit reference to 'reverse charge ' on the invoice appears to be a key requirement to benefit from the simplified triangulation.
The mechanism of simplified triangulation constitutes an exception to the basic rule in the EU VAT legislation that if goods are subject to a supply accompanied with a cross border (intra-EU) transport, the seller needs to report an exempt supply in the Member State of departure and the acquirer needs to report a taxable acquisition in the Member State of arrival.
Triangulation covers situations where three parties (A, B and C) are involved in a chain of transactions with goods directly being dispatched from one Member State (MS 1) to another Member State (MS 3).
In principle, it only concerns supply chains whereby the cross-border transport has been arranged between party A and B (excluding pick up transactions by C).
The VAT relief allows B to avoid a VAT liability triggered by a taxable acquisition in the Member State of arrival (MS 3) followed by a subsequent local supply to party C in the Member State of arrival (MS 3).
Instead, the simplification allows party B to declare the acquisition under another Member State's VAT system (MS 2) and to shift the liability for the acquisition in MS 3 towards party C.
In this respect, the EU VAT legislation (combined articles 141 and 197 of the VAT Directive 2006/112/EC) imposes several conditions to the use of triangulation:
• Party B is not established in MS 3, but is VAT registered in another EU Member State (MS 2);
• Party B acquires the goods from MS 1 for subsequent delivery in MS 3;
• The goods are directly transported from another EU Member State than the one where party B is VAT registered towards party C in MS 3;
• Party C is VAT registered in MS 3;
• A, B and C are different legal entities (no branches or VAT registrations of the same legal entity);
• Party C has been designated as liable for payment of the VAT due on the supply of party B.
In practice, we observed that country specific provisions implementation of the EU provisions on the simplified triangulation regime may differ slightly and/or administrative practice in EU Member States may approach the conditions in a different way.
This case concerned a pre-Brexit flow involving a supply of vehicles between parties established in UK (A), Austria (B) and the Czech Republic (C), with the vehicles being shipped directly from the UK to the Czech Republic.
Party C was identified as a so-called missing trader and did not collect any VAT on his supplies in the Czech Republic.
B did not include the appropriate reference on his invoice, i.e. the statement “reverse charge”, to transfer the VAT liability to his customer in the Czech Republic.
Because of the missing “reverse charge” reference, the Austrian tax authorities challenged the application of the simplified triangulation.
The referring Court asked whether: “article 42(a) of [the VAT Directive] in conjunction with Article 197(1)(c) of that Directive … to be interpreted as meaning that the person to whom the supply is made is to be designated as liable for payment of VAT if the invoice, which does not show the amount of value added tax, states: “Exempt intra-Community triangular transaction?”
Translated in simple terms: does the fact that the invoice includes the wording “exempt” instead of “reverse charge” prevent the application of the simplified triangulation?
The referring Court also asked whether an invoice correction can be made with retrospective effect (question 2) and according to which invoicing country rules the invoice is to be corrected (question 3).
Question 1: need for an invoice to expressly refer to “reverse charge”?
The Advocate General had already concluded that the mere indication of the statement “Exempt intra-Community triangular transaction” is not sufficient when taking advantage of the VAT relief for simplified triangulation.
Indeed, based on the content of the invoice, suppliers can decide whether or not to make use of the triangular simplification measure (optional system). This means that without an invoice with explicit reference to the 'reverse charge', the normal VAT treatment of chain (ABC) transactions applies.
Under the normal (non-simplified) scheme, B must pay (non-deductible) VAT on the intra-Community acquisition in Austria (VAT identification number used for the purchase; cf. safety net foreseen in Article 41 of the VAT Directive).
The Court also finds that an invoice under the simplified triangular can only be valid if there is an explicit reference to the "reverse charge mechanism". In the Court’s view only then can it be guaranteed that the final recipient is aware of his tax obligations.
Question 2: Is it possible to correct an invoice retroactively?
The court confirms that as long as the relevant irregular invoice exists, the conditions of the simplification are deemed not to have been met.
Subsequent compliance (adding the “reverse charge” reference) cannot be regarded as a correction of the invoice but is regarded as an initial issuance of the required invoice.
This means that as long as the corresponding invoice exists, the conditions of the simplification scheme for an intra-Community triangular transaction are deemed not to have been met.
In other words: the conditions for the use of a simplification scheme cannot be fulfilled retroactively.
Question 3: Which country is competent to set the rules on corrections?
The answers to the first questions show that the answer to this question is no longer relevant to settle the dispute.
Since the relevant invoices from B lack an explicit reference to the “reverse charge”, party C has not been correctly designated as VAT debtor.
Under the normal (non-simplified) scheme, B must pay (non-deductible) VAT on the intra-Community acquisition in Austria (VAT identification number used for the purchase; cf. security provision provided for in Article 41 of the VAT Directive).
In any case, the relevant EU principles (Article 42, Article 141(e) and Article 226(11a) of the VAT Directive) cannot be assessed differently across EU. Regardless of which country has jurisdiction over invoicing rules, the referring court must respect these EU principles in the same way.
The conclusions are somewhat surprising and go against the trend in more recent EU case law where 'content' has often been considered to take precedence over 'form'.
In theory, VAT should be neutral, but this case illustrates that VAT neutrality is not always guaranteed. To prevent VAT leakage, it is therefore important that VAT formalities are handled correctly, especially when VAT simplifications are used.
This case is yet another example that demonstrates the importance of the need to correctly comply with the VAT rules and associated formalities.