Triangulation and reducing EU VAT registrations
VAT triangulation occurs in the EU when goods are moved between three parties located in different EU countries as part of a B2B transaction.
Let’s look at an example: Business A is a supplier, business B is the seller, and business C is the customer. All three are located in three different EU member states and are trading cross-border.
Normally, where cross-border transactions occur within the EU, VAT would be charged at each step of the supply chain — A the supplier would charge VAT to B the seller, who in turn would charge VAT when selling to C the customer. VAT triangulation means that instead of VAT being charged at each step of the process, the VAT liability is transferred directly to the final customer’s country. This means that A the supplier does not charge VAT to B the seller, who also does not charge VAT to C the customer.
The responsibility for charging and reporting the VAT shifts entirely to C the customer, who charges VAT to its end customer — and reports the input and output VAT in its own domestic VAT returns.
Triangulation simplification was created within EU VAT law to reduce the administrative and compliance burdens on businesses and tax authorities alike with the EU VAT system, i.e., by reducing the number of times an EU business has to apply for a VAT registration.
This simplification is implemented across all member states, and reduces the amount of VAT registrations businesses need to get in order to sell and operate compliantly.
Example of EU VAT Triangulation
An example of a triangular transaction: A French business (registered for VAT in France) is selling goods or services to a customer in Germany. The French business must first buy goods from a supplier in Spain, then ship directly from Spain to the customer in Germany. The German business charges VAT to its end customer, then reports the input and output VAT in its VAT return.
What are the rules for triangulation simplification?
In the example given, for the French business to avoid the obligation for a non-resident EU VAT registration in Spain, the following conditions must be met:
- All three parties must have VAT registered with VAT numbers from different states.
- The Spanish business (the supplier) must issue a sales invoice to the French business. The Spanish business must include its VAT number in the invoice, but with no VAT charge as it would be a regular intra-community dispatch of goods.
- The German customer must record the arrival of the goods into Germany as an intra-community supply (shifting the reporting from the French company).
- The French company includes the acquisition and dispatch in its filing.
How to handle the Intrastat and EC Sales Lists
In the example given, the French business must report the sale of goods to the German customer in its French EC Sales List/trade of goods declaration. This is generally done as a single line transaction by the customer for all triangulation sales in that month or quarter. It’s important for businesses not to mix regular sales with triangulated sales.
For Intrastat, the Spanish supplier shows the dispatch, and the German customer shows the arrival of the goods. In most countries, there is no need for the French company to declare any movement of goods as they did not pass through France.
How does Brexit affect VAT triangulation?
Brexit affects both U.K. and EU businesses involved in triangular sales, as triangulation simplification no longer applies (because the U.K is no longer part of the EU). As the U.K. is no longer in the EU, a U.K. VAT number cannot be used to allow triangulation when trading with EU countries and EU customers.
Let’s look at an example: A U.K. business has a supplier in an EU country, and a customer in another EU country. The supplier in an EU country is charging the U.K. business VAT, which the U.K. business wants to recover. However, it also wants to make the sale to the EU customer without having to export the goods from the EU supplier to the U.K., and then have to re-ship from the U.K. to the EU customer. This movement of goods would result in U.K. import VAT and duties being required in the U.K. and again in the EU when re-exported. It also creates unnecessary shipping.
In this scenario, a U.K. company would have four options to take advantage of VAT triangulation simplification in the EU:
Option 1
The U.K. business can register in the country where the goods are being shipped from. This means the U.K. company would make domestic purchases and intra-community sales to its customers in the EU. This option depends on the goods being sold on the Ex Works (EXW) Incoterm, as the U.K. business is responsible for picking up the goods from the arrival country.
This option would be advantageous to the U.K. business if it has a single or small number of countries it’s supplying from, as this would limit the number of VAT registrations needed.
A downside would be that the U.K. business could often find itself in a recoverable position, which could negatively affect cash flow.
Option 2
The U.K. business could register in the arrival country where the goods are being shipped to. This means the U.K. business would make an intra-community acquisition and local sale. The local sale would either be with VAT or under the domestic reverse charge rule (this would depend on the EU country). Sales transactions would be on a DAP basis.
An advantage of this option is that the VAT balance in the U.K. business’s returns is either nil, or it is in a payable position so no refund requests would be needed. If there is only one sale location and multiple purchase locations, then the number of VAT registrations required would be limited.
A potential downside to this option would be if there are many sale locations, in which case multiple registrations would be required.
Option 3
The U.K. business could register in a third country where it has no purchases and no sales. It could use this country as a new triangulation location, then make EC acquisitions and EC sales with this country’s VAT number. No Intrastat would be required of the U.K. business as the goods are not going to the country they’re being sold from. Purchase transactions would be on a DAP basis.
An advantage of this option to the U.K. business is that it would be in a nil VAT position. This means no payments need to be made to a tax office, and no Intrastat needs to be filed.
A potential downside is that registrations for triangulation are not always accepted in every EU country, so there is a risk of a rejected application.
Option 4
This option combines options 2 and 3. If the U.K. business picks one EU country it is selling to, it can obtain a VAT number for the transactions taking place within this country then use the VAT number for triangulation transactions.
An advantage to the U.K. business is that the VAT balance in its returns is either nil or it is in a payable position so no refund requests would be needed. Only a single VAT registration would be needed for the whole of the EU, depending on shipping terms.
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- EU VAT compliance
- Invoice requirements EU VAT
- Triangulation EU VAT registrations
- Supply and install of goods for European VAT
- Reverse charge on EU VAT
- Electronic VAT invoice requirements
- VAT Recovery
- EU VAT returns
- EC sales list (ESL)
- Intrastat reporting thresholds
- Intrastat declarations
- Importing goods and EU VAT
- Call off & consignment stock VAT
- VAT information exchange system (VIES)