ARTICLE 138 EU VAT DIRECTIVE
Exemptions with the right to deduct
Although the general principle is that the input VAT on purchases and acquisitions that go directly towards the making of an exempt supply is not deductible, there is a broad range of exempt transactions the input VAT associated with which is nevertheless deductible. In many cases, this is because VAT is collected in some other part of the chain. So, for example, an intra-EU supply may be exempt but the corresponding intra-EU acquisition will be taxed.
What is an intra-EU supply?
An intra-EU supply of goods is a transaction in which goods are dispatched or transported by (or on behalf of) the supplier or the customer from one EU country to a destination in another EU country. This includes declarations of goods at the EU frontier for the purposes of the payment of EU Import Duty, but putting the EU customer’s VAT Number in another EU member state as consignee, meaning that Import VAT is zero-rated to the customer’s destination premises.
The right to deduct
Although an intra-EU supply in these circumstances is normally exempt, the input VAT incurred on goods and services used for the purposes of making that supply may be deducted by the supplier (Article 169(b) VAT Directive). This is because the corresponding acquisition is taxed.
Exemptions for triangular transactions
Introduction
A triangular transaction is one in which a business established in EU country A supplies goods to a customer in EU country B, but the goods are shipped directly to the customer from a third EU country (C).
Example
A business in the Germany receives an order for widgets from a customer in Poland. The widgets are made on behalf of the German supplier by a manufacturer in Latvia, who ships them directly to the Polish customer.
Thus, there are two supplies and an intra-EU acquisition:
• The Latvian manufacturer makes an intra-EU supply of goods to the German business. The place of that supply is Latvia (Article 32 of the VAT Directive).
• The German business makes an intra-EU acquisition of goods. The place of that acquisition is Poland (Article 40 VAT Directive).
• The German business makes a supply of goods to its Polish customer. The place of that supply is Poland (Article 31 VAT Directive).
Under the normal rules, the German business would have to register for VAT in Poland where it makes the intra-EU acquisition and account for Polish VAT on that acquisition and on its supply to the Polish customer.
However, under the simplification rule in Article 141 VAT Directive, the intra-EU acquisition made by the German business is exempt (with the right of deduction), provided that the Polish customer is registered for VAT in Poland and is liable to account for the VAT on the supply to him. Since the acquisition is now exempt, the German business does not need to register for VAT in Poland in respect of that triangular transaction.
The general rule
More generally, an EU country (Country A) must take measures to ensure that VAT is not charged on an intra-EU acquisition made within its territory, where:
• A business that is not established in Country A but is registered for VAT purposes in another EU country (B) makes that acquisition in Country A;
• The acquisition is made for the purposes of the subsequent supply by that business of those goods in Country A;
• The goods are directly dispatched or transported from an EU country (C) other than Country B to the customer of that subsequent supply; and
• The customer is a business or a non-taxable legal entity (such as a public body), registered for VAT purposes in Country A, which has been designated as liable for payment of the VAT due on that subsequent supply.
Exemptions on exportation
What is exportation?
An exportation of goods takes place when goods are dispatched or transported from the territory of an EU country to a place outside the EU.
Why is it exempt?
It is a fundamental principle of VAT in the European Union that exports do not bear VAT, so that transactions that involve exportation (or are treated as doing so) are exempt but with the right to deduct, so that EU exporters are not penalised by having to reflect the VAT they have incurred in the price of their export goods.
Exemptions for customs warehousing etc.
What is exempt?
EU countries may exempt certain supplies of goods and other transactions relating to customs warehouses and similar arrangements for storing imported goods before their release into free circulation. Also included under this head are goods intended for drilling rigs etc.
These are all exemptions with the right to deduct.
Preventing double taxation
Once goods are taken out of or cease to be covered by these customs arrangements, import VAT becomes payable. The EU country concerned must take measures guarding against double taxation.
(Article 163 VAT Directive) Exemptions for tax warehouses etc
Thanks again to Portcullis Ltd for their valuable insight.