Another Polish case covering safe VAT settlement of international supply chains will be examined by CJEU.  On July 12, 2024, while analyzing factors that are crucial to properly settle ICS and export for VAT, the Provincial Administrative Court in Warsaw (III SA/Wa 1231/24) decided to refer questions to CJEU. The judgment may once again proof that engaging operational staff in collaborating with the tax department can be challenging, but it's crucial for ensuring smooth and compliant tax processes.

The background of the case

The issue addressed by the Polish Court involves a common scenario where the initial arrangements between a supplier and a customer do not align with the actual transaction (flow of goods). In this case, the Polish supplier anticipated that the goods would be moved within the EU, but the customer ultimately transported the products outside the EU. Consequently, there is uncertainty about how to classify and report the transaction for VAT purposes. Additionally, there is inconsistency in the documentation, with discrepancies between the initial agreement, the transportation documents and the customs data.

The questions raised to CJEU are focused on practical aspects of such issue:

  • Classification of the transaction for VAT purposes: Should the supply of goods declared by the supplier as ICS be considered an export if the customer exports the goods not to another EU member state, but outside the EU?
  • Level of the supplier’s knowledge: Does it matter if the buyer exported the goods outside the EU independently, without the supplier’s knowledge or agreement?
  • Documentation discrepancies: Does it matter if the export of goods outside the EU is based on tax authorities' findings from customs documents, which contradict the transport documents held by the supplier?

Polish view: importance of distinguishing between ICS and Export

It is crucial to differentiate between an intra-Community supply and an export for several reasons:

  • 0% VAT rate: Both intra-Community supplies and exports are generally exempt from VAT with right to deduct VAT (0% rate in Poland), but the criteria and documentation required to claim these exemptions differ. Accurate classification ensures compliance with tax laws and avoids potential penalties (or at least discusses with tax authorities whether 0% VAT rate may be applied).
  • Documentation and compliance: The documentation standards for intra-Community supplies and exports vary. Proper classification helps businesses maintain the correct records, which is essential for audits and inspections by tax authorities.
  • Polish tax authority requirements: Misclassification can lead to misunderstandings or disputes with tax authorities, affecting the company’s tax liabilities and potentially leading to fines (including lack of right to use 0% VAT rate like in Polish case of Unitel, 17 October, 2019, C-653/18; or additional VAT for ICA in Polish case of B., May 15, 2021, C-935/19). As long as the transaction would be treated as export, Polish tax authorities are much more open to use 0% VAT rate. However, standards expected from suppliers that are trying to defend ICS are much more higher (and taking into account Polish VAT rules as well as our recent experience, it’s likely that 0% VAT rate will be challenged by tax authorities).

Implications for VAT taxpayers

Future CJEU judgment could have significant results for businesses involved in cross-border transactions:

  • Clarification on VAT reporting: The judgment will clarify whether VAT exemptions for intra-Community supplies can still apply if goods are ultimately exported outside the EU. This could impact how businesses declare and document their transactions to ensure compliance.
  • How deep supplier (customers / sales teams) should cooperate with buyer: The ruling may once again emphasize the need for better coordination and communication between suppliers and customers regarding the final destination of goods. Suppliers might need to implement stricter verification processes to confirm the buyer’s actions. The role of cooperation has been underlined many times when it comes to chain supplies – it is likely that such approach will be keep also in that case.
  • How the process of checking documents for 0% VAT rate should be structured: Taxpayers often face challenges in convincing logistics teams or customer service staff to verify that received documents (such as CMRs) align with the initial assumptions regarding the flow of goods. From business perspective, this task typically should fall outside the responsibilities of accounting staff (who should use for settlement reliable transaction data without deep investigation each month). The key issue is identifying who should perform these checks and how to respond to discrepancies. The judgment is expected to provide guidance on the evidentiary requirements for claiming a 0% VAT rate. This could necessitate changes in the current processes for gathering and verifying VAT-related documents.

How might businesses need to adjust their documentation practices and processes based on the CJEU's forthcoming judgment? How can businesses improve their process to receive key data from the customers to ensure VAT compliance in cross-border transactions? Feel free to reach out to our VAT experts for personalized advice and support.