A triangulation cannot be put right retrospectively
A triangulation cannot be put right retrospectively
Why a missing mandatory statement on an invoice may prevent the triangular transaction simplification from being used
What conditions must be met for the triangular transaction simplification to be applied correctly for VAT purposes
What the latest Court of Justice case law means and why some invoicing errors cannot be corrected retrospectively
The use of the triangular transaction simplification is optional. Its benefit for a taxable person is that they do not have to register for VAT in the country to which the goods are supplied, which makes the simplification attractive and widely used. However, because it is an exception to the standard tax rules, the Court of Justice considers that the conditions for using the triangular transaction simplification must be strictly observed.
Conditions for applying the triangular transaction simplification
A basic prerequisite for using the triangular transaction simplification is that the goods are supplied between three businesses registered for VAT in three different countries. Another prerequisite is that the goods are delivered directly from the seller’s country to the buyer’s country. For invoicing purposes, the tax document for the supply of goods is issued by the seller to the intermediary and by the intermediary to the buyer.These requirements are usually met when the triangular transaction simplification is applied. However, recent Court of Justice case law also requires other conditions to be met, which taxable persons sometimes underestimate: mandatory information on the tax document issued by the intermediary to the buyer.
The required wording is “customer to account for the VAT” and “triangular transaction”. The wording of the second statement is not prescribed, so it may be as brief as “triangular transaction” or more detailed, such as “this is a triangular transaction”.
In December 2022, the Court of Justice delivered its judgment in Case C-247/21, Luxury Trust Automobil, holding that the words “customer to account for the VAT” are a substantive condition for applying the triangular transaction simplification and that without them the simplification cannot be used.
Missing information cannot be corrected retrospectively
This October, the Court of Justice considered the case of an Austrian company that had not stated on the original documents that the transaction was a triangular transaction, although it had reported it as such in its tax return and recapitulative statement.The Austrian tax authority refused to recognise the application of the triangular transaction simplification because the statement was missing from the document. The Austrian company subsequently corrected the invoices concerned by adding a reference to the triangular transaction and the reverse charge of VAT.
The tax authority did not take this correction into account, so the Austrian company brought a dispute with the tax office, which eventually reached the Court of Justice.
The Court ruled that subsequently adding the wording to invoices by way of a correction does not give the supplies the legal effect of the triangular transaction simplification; consequently, they cannot be reported as triangular transactions either from the date the information is added or at any time afterwards.
Rejection of the triangular transaction simplification may have significant tax consequences
It should be borne in mind that, although the primary purpose of the triangular transaction simplification is to save the intermediary from registering in the buyer’s country, rejection by the tax administrator has broader consequences than simply having to register in the buyer’s country.Section 11(2) of the Czech Act, which is based on Article 41 of EU Directive 2006/112, provides that tax must be paid in the country that issued the VAT ID used to purchase the goods.
If a Czech taxable person acts as an intermediary outside the triangular transaction simplification and uses its Czech VAT ID to acquire goods, it must report the purchase in its Czech tax return, even if the goods are not delivered to the Czech Republic but, for example, to Slovakia.
By contrast, under the triangular transaction simplification, where goods travel directly from Germany to Slovakia, for example, and are invoiced by the German manufacturer to the Czech trader and by the trader to the Slovak customer, the Czech taxable person reports a triangular transaction in its tax return without having to pay VAT on its purchase of the goods from the German manufacturer. It also does not have to register in Slovakia, where the goods from the German manufacturer arrive.
Risk of additional VAT assessments, interest and penalties
However, reporting VAT in the Czech tax return would not in itself cause a problem for a domestic taxable person if the tax administrator refused to recognise the triangular transaction simplification.The real problem is that the aforementioned Section 11(2) provides that, in such a case, the taxable person is not entitled to deduct the tax.
They may correct the return and recover the tax paid, but only after proving that they declared the tax on the acquisition in the country to which the goods were delivered.
In the meantime, they are a tax debtor and face all the negative consequences, including late-payment interest and a penalty of 20% of the additional tax assessed.
It is therefore important not to underestimate the requirements for the tax document in a triangular transaction: as noted at the outset, the tax administrator’s refusal to allow the simplification can prove very costly for the taxable person.