Transitional arrangements for intra-EC supplies to VAT registered customers in acceding countries.

March 1, 2004

On March 1, 2004, Tax Executives Institute filed the following comments with the European Commission. The submission was prepared under the aegis of TEI's European Chapter with the assistance of the International Tax Committee.

On behalf of Tax Executives Institute, I am pleased to provide comments in respect of the practical implications of making intra-EC supplies of goods to VAT-registered customers in Acceding Countries on or after 1 May 2004. As the pre-eminent international association of business tax professionals, TEI has a significant interest in promoting tax policy, as well as in the fair and efficient administration of the tax laws, at all levels of government. TEI appreciates any assistance that the Directorate may provide in reducing the administrative burdens in the period immediately following Accession.

I. Background

TEI was founded in 1944 to serve the professional needs of business tax professionals. Today, the organization has 53 chapters in North America and Europe. Our 5,400 members represent 2,800 of the largest companies in the United States, Canada, and Europe. In 1999, TEI chartered a chapter in Europe. The European Chapter encompasses employees of a wide cross-section of European and multinational companies. TEI members are accountants, lawyers, and other corporate and business employees responsible for the tax affairs of their employers in an executive, administrative, or managerial capacity. The Institute espouses organisational values and goals that include integrity, effectiveness and efficiency, and dedication to improving the tax system. TEI appreciates the opportunity to comment on the practical implications of making intra-EC supplies of goods to VAT-registered customers in Acceding Countries on or after 1 May 2004.

II. Trade with Acceding Countries

On 1 May 2004, the European Union will admit an additional 10 countries to its existing 15. With the addition of Cyprus, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Malta, Poland, Slovakia, and Slovenia, approximately 75 million new consumers will be added to the EU--the largest expansion since the EU's inception in 1957.1 As of 1st May, existing VAT laws in those countries will be replaced by the rules of the EC Sixth VAT Directive.

To qualify for zero-rating intra-EU supplies of goods, (1) the supplier must provide evidence that the goods have been transported out of the EU Member State; and (ii) a proper VAT invoice must be issued by the supplier to the customer, stating a valid VAT registration number for the customer (including the country prefix) of an EU country other than that of the country from which goods are dispatched.

It is our understanding that many businesses (established and non-established) will not receive their EU VAT registration number until at least April 2004. TEI is unaware of any guidance by tax authorities in either the existing Member States or the Acceding Countries providing that the current rules on zero-rating cross-border supplies of goods--specifically, the requirement to state a valid EU VAT number--will be relaxed during a transitional period. There is a significant risk that customers in the Acceding Countries may be unable to provide an EU VAT registration number--even though they may have registered for VAT or sought registration in advance of 1 May 2004--or that the suppliers' systems will not be updated in time to print the number on invoices.

TEI is concerned that the continued delay in issuing VAT registration numbers to businesses in the Acceding Countries--and the lack of mechanisms to register non-established foreign businesses in those countries--will prejudice cross-border trade in the months immediately following 1 May 2004. Our concerns include issues relating to--

Uncertainty regarding the ability to zero-rate cross-border supplies;

* The inability to charge and account for VAT; and

* The lack of penalty relief during the transition period.

These concerns may force businesses temporarily to suspend non-essential trade with these countries as of 1st May, or to defer transactions until the position becomes clearer. Such action will benefit neither businesses nor governments.

A. The Need to Update Billing Systems. Most businesses will have a maximum of one month (including the Easter break) to collect the VAT number of each business partner and enter that number into their systems. Updating billing systems must begin very soon to provide sufficient lead-time to make the required changes. The administrative burden imposed by this task should not be underestimated by the taxing authorities.

B. The Need for Penalty Relief. Because of the delays outlined above, businesses for commercial reasons may be forced to zero-rate intra-EU supplies, even though the strict conditions for zero-rating cannot be met. Such an approach will expose the supplier to penalties and interest. The customer could also be exposed to penalties and interest in the arrival country for not holding a valid invoice to support recovery of acquisition VAT.

As an alternative, the supplier could charge the VAT of the originating country. This approach, however, will expose the supplier to the commercial risk that the customer will not pay the invoice because of concerns over its ability to recover the VAT. From a technical standpoint, a supplier may, in certain circumstances, trigger a VAT-registration obligation in an Acceding Country by exceeding the distance-selling threshold.

Transitional relief is needed to avoid the necessity of the supplier's cancelling and reissuing invoices once the customer's EU VAT number is known. The Member States and Acceding Countries should provide penalty relief during the transition period.

C. The Adverse Effect on Business. Businesses do not like uncertainty. Concerns about the exposure to penalties and interest and the difficulty of obtaining VAT numbers may seriously affect cross-border trade in a transitional period. Without relief, businesses may simply defer or suspend non-essential transactions until the tax authorities' position is clarified.

III. TEI Recommendations

To address these concerns, TEI recommends that:

* All Acceding Countries and existing Member States should be encouraged to relax the requirement for an EU-compliant VAT registration number to support zero-rating for a transitional period commencing 1 May 2004, and ending on 31 December 2004.

During this period, a customer's domestic VAT registration number in an Acceding Country should be accepted as sufficient evidence of taxable status to support zero-rating of intra-EU trade, provided that the supplier has taken reasonable steps to confirm that the customer is in business and likely to be VAT registered (e.g. credit checks, checks on trade register details, etc.).

If the customer does not have an existing domestic VAT number, but has applied for VAT registration, zero-rating should also be allowed for intra-EU trade, if the customer has provided evidence of the registration application. The customer should be required to advise the supplier of its new VAT registration number within the transitional period.

* Suppliers should not be required to reissue or amend any invoices issued to customers in Acceding Countries for intra-EU supplies made during the transition period where an old VAT registration number has been used or evidence of the VAT application has been obtained. Again, this should be subject to the supplier's obtaining the customer's new VAT registration number by 31 December 2004.

* Countries where zero-rating applies only if a VAT Information Exchange System (VIES) statement is available to confirm that the customer VAT number is valid in an Acceding Country should suspend this rule during the transitional period.

IV. Related Issues

A. VAT Information Exchange System. No announcement has been made concerning whether the VIES database will be able to validate VAT numbers issued by the Acceding Countries before 1 May 2004, or when that validation of VAT numbers will be available. Thus, suppliers will be unable to validate VAT numbers when they update billing systems prior to Accession. TEI urges the Commission to issue a statement clarifying this issue as soon as possible.

B. Information regarding Accession Tax Regimes. Another issue concerns the provision of information on the procedure for a non-established business registering for VAT in Acceding Countries or seeking a new VAT registration number if already registered. TEI commends the Directorate for providing a link on its website to general VAT-related information for some Acceding Countries. Unfortunately, this information is not available for all countries. The EU Commission should encourage the tax authorities of the Acceding Countries to make information on the VAT registration process and other general information available in English and ensure that it is kept updated.

V. Conclusion

Tax Executives Institute appreciates this opportunity to present our views on the practical issues relating to trade with the Acceding Countries and commends the work of the Directorate-General Taxation and Customs Union in trying to ensure the smooth integration.

These comments were prepared under the aegis of TEI's International Tax Committee, with guidance from TEI's European Chapter. If you have any questions about the Institute's views or need additional information, please contact the chair of the European Chapter's Indirect Taxes Committee, Fabio De Angelis at 41.21.924.2501 ([e-mail]), its vice chair Mark Keogan at 44.11.321.54908 ([e-mail]), or Fred F. Murray or Mary L. Fahey of the Institute's legal staff at 1.202.638.5601 ([e-mail] or [e-mail]).

(1) See Stephen James & Duncan Stocks, EU Enlargement--Are You Ready?, 55 THE TAX EXECUTIVE 458, 458 (Nov.-Dec. 2003).