Zero-rated VAT on cross-border transactions

When determining a 0% VAT application it is important to consider intra-community supply regulations introduced in the European Union (EU) as Quick Fixes in 2020. In order to benefit from 0%, application-specific conditions should be fulfilled and specific documents must be ensured.

Intra-Community transactions

According to Article 138 (1) of the VAT Directive Member States shall exempt the supply of goods dispatched or transported to a destination outside their respective territory but within the Community, by or on behalf of the vendor or the person acquiring the goods, for another taxable person, or for a non-taxable legal person acting as such in a Member State other than that in which dispatch or transport of the goods began.

The respective provision of the VAT Directive is introduced in Latvian VAT Act with Article 43 (4) that provides: the 0% rate applies to the supply of goods within the European Union if both of these conditions are met:

1) the consignee of the goods, as indicated in the transport documents accompanying the goods and in the tax invoice, has provided the supplier of the goods with a taxable person registration number valid in another Member State at the time of the transaction;

2) the goods have been dispatched or transported from the domestic territory to their final destination in another Member State, as evidenced by the accompanying documents in the possession of the supplier of the goods.

In Latvia, since the EU accession, the basic requirement for applying the 0% VAT rate to supplies of goods to taxable persons registered in the other EU Member States is to indicate on the invoice a valid VAT number of the purchaser of the goods. However, this was not a mandatory requirement in the several Member States so far. However, Member States have been aware of the burden of such differences on tax administrations in controlling transactions and administering VAT and have therefore agreed that, from 1st January 2020, all Member States should apply the same exemption (0% rate) for supplies of goods to the other EU Member States, requiring the consignor to have and to invoice the recipient’s VAT registration number.

Chain transactions

Chain transactions within the meaning of Article 36a of the VAT Directive refer to successive supplies of the same goods (which means that there are two or more consecutive supplies) where the goods supplied are subject to a single intra-community transport between two Member States.

Council Directive (EU) 2018/1910 has introduced a new Article 36a in the VAT Directive. This Article addresses the issue of what is the supply to which the intra-community transport or dispatch of the goods is to be ascribed when a chain transaction takes place, that is to say, what supply is to be considered as the intra-community supply.

For Article 36a of the VAT Directive to apply, the following conditions have to be met:

• The goods must be supplied successively. Therefore, at least three persons must be involved in the chain transaction.
• The goods must be dispatched or transported from one Member State to another Member State. As a result, chain transactions involving imports and exports, or involving only supplies within the territory of a Member State, are not covered by the provision.
• The goods must be transported or dispatched directly from the first supplier to the last customer in the chain.

If the above conditions are met the general rule is that the dispatch or transport of the goods is ascribed to the supply made to the intermediary operator.

However, introduced changes also provide for derogation from the general rule when the intermediary operator communicates to his supplier his VAT identification number issued by the Member State from which the goods are dispatched or transported. In this situation, the dispatch or transport of the goods is ascribed to the supply made by the intermediary operator.

To prove its intermediary operator status, a business will need to keep evidence that it transported the goods, or that it arranged the transport of the goods with a third party acting on its behalf.

The intermediary operator is the supplier in the chain other than the first supplier, who dispatches or transports the goods, himself or by a third party on his behalf. To prove his status as an intermediary operator, he must keep evidence that he transported the goods on his behalf or that he arranged the transport of the goods with a third party acting on his behalf.

The proof of transport

As of 2020, the Implementing Regulation provides for the proof of transport that should be presented in intra–community supplies. According to the Implementing Regulation (Article 45a Paragraph 1 (b)) the vendor should be in possession of at least two items of non-contradictory evidence referred to in point (a) of paragraph 3 that were issued by two different parties that are independent of each other, of the vendor and of the acquirer, or any single item referred to in point (a) of paragraph 3 together with any single item of non-contradictory evidence referred to in point (b) of paragraph 3 confirming the dispatch or transport which were issued by two different parties that are independent of each other, of the vendor and of the acquirer.

The acquirer shall furnish the vendor with the written statement referred to in point (b)(i) by the tenth day of the month following the supply.

Documents to be provided as evidence in paragraph 3 of Article 45.a of IR are as follows:

Table 1: List of proofs (documents) required for application of 0% VAT