Oct
Zero rate for exports applies if supplies does not have relevant proof but the export has clearly taken place
Who this will interest: businesses that export goods from the EU, especially those that use the EXW Incoterm (the customer picks up the goods and manages the customs clearance).
Key point(s): In the EU, zero rating exports is possible even if not all required documentation is available as long as it is clear that the goods have left the EU.
Essentia’s take: This is an important ruling as it clearly outlines the application of the zero rate is based on an objective test, namely whether the goods have left the EU or not. Disallowing the zero rate can only be done in cases where the evidence that the goods have left is not sufficient or the case involves fraud.
Action points: Check you have appropriate evidence for all your export transactions. The focus should be on documentation clearly showing the goods have left the EU.
The Case In Detail
The European Court of Justice (“the Court” or “the CJEU”) has been asked to provide its view on whether the zero rate for exports (called an exemption with deduction right) applies where the supplier was not aware the goods had been exported (case W. sp. z o.o. – C 602/24).
Although this might seem like a somewhat odd case with limited applicability, it does in fact offer very useful information on how the mechanism for zero rating all exports is meant to work. Furthermore, the Court decided you can in fact apply the zero rate in this case, which makes it all the more important to understand why the CJEU took this view.
Background
W. sp. z o.o. (“W” or “the Company”) is a business established and VAT registered in Poland. The Company sold apples to a UK business with a Latvian VAT registration number. The customer was in charge with transporting the goods from Poland to Lithuania. The Polish Company zero rated the supply believing it to be an intra-EU supply of goods to Lithuania based on information available on the CMRs it was provided with by its customer. However, the goods were not shipped to Lithuania but to Belarus.
The Polish Tax Authorities informed W that, based on customs records, the goods had been shipped to Belarus and disallowed the zero rate on the sale as the supply did not qualify as an intra-community supply of goods. Instead the authorities considered the sale to be of a domestic nature and applied VAT.
W appealed the decision of the Polish Tax Authorities arguing that since the Polish Tax Authorities had evidence the goods had been exported to Belarus it should accept that the sale qualified as a zero rated export of goods.
The Court’s decision
The Court was essentially asked if, given the circumstances, W was entitled to apply the zero rate for exports.
In its decision the Court outlined that existing caselaw already states that an export of goods takes place and the zero rate becomes applicable if certain substantive conditions are met:
- the right to dispose of the goods as owner has been transferred to the person acquiring the goods,
- the supplier establishes that those goods have been dispatched or transported outside the European Union, and
- as a result of that dispatch or that transport, the goods have physically left the territory of the European Union
The Court then outlined that the concept of “supply of goods” is objective in nature and applies without regard to the purpose or results of the transactions concerned. As such, it was irrelevant that the transaction had initially been considered an intra-community dispatch of goods by the supplier and that the goods had been shipped outside of the EU without the knowledge of the supplier.
If the substantive requirements have been met, the principle of fiscal neutrality requires the zero rating to be granted even if certain formal requirements have been omitted by the taxable persons.
The Court also outlined that while EU Member States can impose formal requirements, such as the exporter being in possession of certain documentation, these should not go beyond what is necessary to ensure the correct collection of the tax and should be proportionate to meeting this objective.
Denying the zero rating could only take place in two circumstances:
- a breach of the formal conditions (not having the required documentation) means it cannot be determined if the substantive conditions are met (that the goods have been sold and shipped outside of the EU);
- if the taxable person has participated in tax evasion.
In this case neither of the two cases was applicable, therefore the zero rating should not be denied based on formal conditions not being met.
This meant that the Polish Tax Authorities should not deny the application of the zero rate because the supplier did not have access to evidence that the goods had been exported. In fact the Polish Tax Authorities were already in possession of the export evidence and there didn’t seem to be any doubt it had taken place.
What does it mean for exporters?
The Court’s decision in this case outlines that zero rating an export should be possible even in cases where the supplier did not know an export had taken place and therefore did not have appropriate documentation.
Furthermore the Court clearly outlines that the zero rate should be applied as long as the substantive conditions have been met.
For exporters this means it might be possible to zero rate such supplies even if the business does not have all the evidence required by the legislation as long as it is clear that a sale has taken place and the goods have left the EU.
If you have any questions concerning this case or would like to discuss zero rating exports please get in touch with us.