A chain transaction is one where at least three entities (let us call them A, B and C) are involved in the sale of a commodity: A issues an invoice to B, and B issues an invoice to C for the same commodity, but the commodity is shipped directly by A to C. Although the goods are transported only once, each of the entities involved in such a transaction is required to declare the supply of goods for VAT purposes (in such a chain transaction, there are two supplies of the same commodity; see Figure 1). 

The transport of the commodity must be ascribed to one of the supplies in the chain so that the VAT implications of the transaction can be determined for both supplies (the supply to which the transport is ascribed is referred to as a movable supply (or transaction)). The ascription of the transport of a commodity to one of the supplies is particularly important for cross-border chain transactions, where the commodity is moved between different countries. This is because only a movable supply may be considered as an intra-Community supply of goods (where goods are transported between EU countries) and, as such, taxable at the rate of 0% for VAT purposes. All the other supplies within the same chain are taxable at local rates (i.e. the rate that applies in the country of shipment for the supplies occurring before the movable supply, or the rate that applies in the country of destination for supplies occurring after the movable supply).

In order to identify the movable supply in a chain of supplies, it is necessary to identify the party responsible for making the transport arrangements in the chain. If the transport of a commodity is arranged for by A, then the supply made by A will be considered as the movable supply (for example, if a commodity is transported from Poland to France, A will report an intra-Community supply in Poland, B will report an intra-Community acquisition of goods in France and a domestic supply in France to C, unless a simplified solution applies in France, of course). However, if C collects the commodity (or has it collected by a carrier) from A, then the movable supply will be the supply made by B to C (for example, if a commodity is transported from Poland to France, A will report a domestic supply in Poland to B, B will report an intra-Community supply in Poland, a C will report an intra-Community acquisition in France).

On the practical side, the most complicated situation is the one where the transport is arranged for by the party in the middle of the chain, i.e. B. The law as it stands today (Section 22(2) of the VAT Act) is that the transport is ascribed to the supply made by A to B, unless the terms of the supply are such that the transport of the commodity should be ascribed to the supply made by B to C. However, the law does not define the terms of delivery that determine such ascription of the transport. 

The ascription of the transport of a commodity where the transport is arranged for by B has been a highly controversial issue in Poland and other EU countries. What is more, the fact that different member states address the problem differently may result in VAT being charged twice or not at all in the case of supplies made as part of chain transactions (especially because the VAT Directive offered no guidelines in this regard).

The Court of Justice of the European Union has looked into this issue several times before. In its judgment of 16 December 2010 (Case C-430/09, Euro Tyre Holding BV), the CJEU formulated two conditions that must be fulfilled jointly for the transport to be ascribed to the supply made by A:

1. B expresses its intention to transport the goods to another member state and presents its VAT identification number attributed by that other state;
2. the right to dispose of the goods as owner between B and C is transferred to the person acquiring the goods in the member state of destination.

In practice, it is recognised that the right to dispose of the goods as owner is transferred in the member state in which the benefits and burdens related to the goods and the risk of accidental loss of or damage to the goods are transferred to the acquirer as agreed upon by the parties and given the way that the transaction was actually conducted. It may be useful to refer to Incoterms for the purpose of identifying such a member state. It is often the case that the second condition is conclusive.

In the example illustrated in figure 2, the transport might be ascribed to the supply made by A (this supply would be an intra-Community supply in Poland, taxable at the rate of 0%, if other formal requirements are fulfilled), because the right to dispose of the goods as owner would be transferred to B in Poland, but to C in France (as indicated by DAP Incoterms rule, which means that the buyer assumes no risks or obligations related to the goods until the goods are collected at their destination, when the transport is completed).

In the example illustrated in Figure 3, the transport might be ascribed to the supply made by B (meaning that the supply from A to B would be a domestic supply in Poland, taxable at a Polish VAT rate), because the right to dispose of the goods as owner would be transferred in Poland both from A to B and from B to C (as indicated by the Incoterms CPT rule, which means that the seller pays the freight up to the specified destination, but the risks related to the goods are transferred to the buyer when the goods are collected by the first carrier; therefore, it is the country where the goods are collected by the first carrier, not the destination up to which the freight is paid for by the seller, that is the place where the right to dispose of the goods as owner is transferred).

The above examples are obviously a simplification, as there is still some room for interpretation and, therefore, certain doubts as to the ascription of the transport (if only because of the interpretation of the expression "transport arrangements" or in relation to circumstances indicating the "intention to transport the goods to another member state").

Such doubts may be reduced by the provisions adopted by the Council of the European Union on 4 December 2018 amending the VAT Directive, which are to be implemented with effect from 1 January 2020 (the Bill implementing the amended directive in Polish legislation was published on 7 October 2019).

According to the proposed law, in the case of a chain supply that involves the transport of goods between EU member states, the dispatch or transport of the goods is ascribed only to the supply made to the intermediary operator. However, by way of derogation from this rule, the dispatch or transport is ascribed only to the supply of goods by the intermediary operator where the intermediary operator has communicated to his supplier the VAT identification number issued to him by the Member State from which the goods are dispatched or transported. The ‘intermediary operator’ means a supplier within the chain other than the first supplier in the chain who dispatches or transports the goods either himself or through a third party acting on his behalf.

It seems, therefore, that as of 1 January 2020, in both the example in Figure 2 and that in Figure 3, the transport should be ascribed to the supply made by A (this supply will be an intra-Community supply in Poland). This classification of the two chain transactions may be changed if B communicates its Polish VAT number to A. In such a case, A will have to apply a Polish VAT rate to its supply, and B will report an intra-Community supply in Poland.

This, however, may raise doubts, particularly as to the assumption that B is the intermediary operator in both cases. It is obvious that neither A nor C may be considered as the intermediary operator, but it will not always be correct to assume that the intermediary operator will be B in such a chain transaction. This is because it is not enough to be both the vendor and the acquirer in a chain transaction to meet the definition of intermediary operator. It is also necessary to transport the goods or have the goods transported by a carrier.

It is then crucial to know what it means to "dispatch or transport goods". This expression cannot be equated with bearing the cost of the transport. It has been the practice of tax authorities, when identifying the party responsible for transport arrangements within a chain transaction, to determine which party arranges for the transport operationally (i.e. by contacting the carrier, arranging the date of collection, the place of collection, the size and weight of the goods to be transported, the method of loading, the requirements to be met by the vehicles to be used, etc.) rather than which party is invoiced by the carrier. Under the new law, another aspect may be crucial. This is indicated by the draft Explanatory Notes of the European Commission. The document contains interpretation guidelines on how to interpret EU legislation, which are issued by the Directorate-General for Taxation and Customs Union. It has no legal effect, but is an important argument in favour of interpreting EU legislation in a particular way, as it is agreed upon by the finance ministers of the EU member states. 

In the draft Explanatory Notes it was pointed out that, as a rule, ascribing the transport to a given supply in the chain should be based on determining which entity assumes the risk of loss of or damage to the goods while they are being transported. It has been noted however that this criterion might lead in some cases to certain practical difficulties in identifying the intermediary operator. There may be a situation where B has the goods transported by a carrier, but the terms of delivery are such that the risk of loss of or damage to the goods is transferred to C only when the goods are collected by the carrier (meaning that C assumes the risk while the goods are being transported). If the criterion of risk during transport was the only to be applied in such a chain transaction, none of the entities would meet the definition of intermediary operator and, therefore, the presumptions discussed above would not apply.

According to the Explanatory Notes, in such cases the most suitable criterion would be that of the taxable person within the chain that transports the goods himself or makes the necessary arrangements with a third party for the transport of the goods, concluding a contract with that third party. This unless the taxable person in question can prove that in fact the transport was made, or the contract concluded, on behalf of another taxable person in the chain who was in fact bearing the risk of accidental loss of the goods during the transport operation.

If the above is applied to the examples provided above, it can be concluded that the new provisions will indeed apply to the chain transaction illustrated in Figure 2, as well as in Figure 3, assuming that in both cases B concluded a contract for transport on his own behalf. It seems to be a reasonable approach, which may significantly simplify the analysis, considering the fact that the criterion of concluding a contract with a carrier is objective and easy to verify. However it is currently difficult to predict how the Polish tax authorities will interpret the new provisions. It cannot be ruled out that their interpretation of the expression "dispatch or transport goods" will be different from that which is adopted in the Explanatory Notes of the European Commission (or that the final version of the Explanatory Notes of the European Commission will be different – it has already been amended once in a way impacting the chain transactions).

In conclusion, the new provisions will certainly help develop uniform rules for the treatment of EU chain transactions for VAT purposes. The fact that for the first supply to be considered as a domestic supply, it will be sufficient for the intermediary operator to present its VAT number, is good news, as the intermediary operator will, in many situations, will not have to register and report VAT in the country of destination. There are, however, certain aspects of the new provisions that raise doubts and may result in disputes with tax authorities.

Marek Bielawski, Senior Manager, Tax Advice Department, VAT Team, KPMG in Poland