VAT distance selling scheme can also apply if the customer concludes the transport agreement
These days selling goods online is big business. For VAT purposes, in pursuance of the so-called distance selling scheme, distance sales (e-commerce supplies) are subject to VAT in the EU Member State where the transport of the goods ends, if the said goods were dispatched or transported ‘by or on behalf of the supplier’. Very recently the Court of Justice of the EU ruled in the KrakVet Marek Batko case (no. C-276/18) on VAT and e-commerce, which centred on the question whether the distance selling scheme also applies if the transport of the goods is set up contractually by the buyer. In this article we discuss this case, as well as its practical importance.
KrakVet, established in Poland, sells animal products via the internet to private individuals in, amongst others, Hungary. KrakVet does not have a business location in Hungary and the goods are supplied to the private individuals from Poland. Through the website of KrakVet customers can opt for the use of the transport services of the Polish transport company KBGT. KrakVet regularly works with KBGT and recommends KBGT. However, KrakVet is not a party to the transport agreements closed between KBGT and the customers. KBGT organises the transport of the goods from Poland to Hungary.
The Polish Tax Administration takes the standpoint that the distance selling scheme is not applicable and KrakVet is liable to pay Polish VAT. However, the Hungarian Tax Administration is of the opinion that the scheme is applicable and KrakVet is therefore liable to pay Hungarian VAT (i.e. the country of destination). The Hungarian court referred questions to the European court for a preliminary ruling.
Ruling of the Court of Justice of the EU
At an earlier stage Advocate-General Sharpston has already concluded that the distance selling scheme only applies if the goods are dispatched or transported by or on behalf of the supplier. This implies that the supplier must be involved directly in the dispatch or the transport of the goods.
The Court of Justice of the EU notes that the consideration of the economic and commercial realities forms a fundamental criterion for the application of the common VAT system. For the distance selling scheme to apply, the role of the supplier must be predominant in terms of initiating and organising the essential stages of the transport of the goods. In this respect it is important whether the transport is specific to the commercial practice of the supplier and what the payment terms comprise. In addition, it plays a role who bears the risk of transport and who makes the choices regarding the transport method and conditions. The Court indicates that transport by or on behalf of the supplier cannot be inferred on account of the mere fact that the contract concluded by the customers for the purposes of delivering those goods is concluded with a transport company which collaborates with that supplier for activities other than the sale of the latter’s goods.
Changes VAT rules for e-commerce (2021)
In the context of this ruling we note that the VAT rules for e-commerce shall change significantly in 2021. Originally, the date of entry into force of the changes was 1 January 2021 but due to the coronavirus crisis this shall probably be delayed. For a discussion of the new VAT rules, we refer to our publication about this topic.
In view of the ruling of the European Court in the KrakVet case we note that the new VAT rules also contain a provision about the transport of goods in the context of distance sales. Yet to be implemented article 5a of the VAT Regulation (no. 282/2011) enumerates a number of situations where the goods are deemed to have been transported by or at the expense of the supplier. One of these situations is when the supplier promotes by any means the delivery services of a third party or puts the customer and the third party in contact.
Consequences for your business
The ruling of the European court in KrakVet underlines the importance of the correct VAT handling of cross-border e-commerce transactions. It is crucial to establish clearly whether the goods are transported by or at the expense of the supplier. An incorrect application of the distance selling scheme may result in additional assessments and fines in multiple Member States. In addition, the new VAT rules shall have significant consequences for the VAT handling of cross-border distance sales. It is recommended to already take preparatory measures. This can safeguard a smooth transition.