Cross-border transactions in times of pestilence | In Principle

The difficulties in international transport caused by the pandemic may have a major impact on VAT settlements of Polish exporters. These complications may carry over to the possibility of applying the 0% VAT rate, thus affecting taxpayers’ cash flows.

Restrictions caused by the state of epidemic may affect the possibility for businesses to apply the 0% VAT rate. A basic condition for applying this rate to exports and intra-Community supply (ICS) of goods is the physical movement of goods out of Poland.

In the event of difficulties in the transport of goods, it may be hard to demonstrate compliance with this condition. This may be due to various circumstances: temporary closing of borders, the need for a driver crossing the border to enter quarantine, or closing of a logistics centre due to detection of an outbreak of illness. For VAT purposes, such situations raise two types of problems.

First, the question arises whether an interruption of transport, often long-lasting, means that the transaction ceases to be a cross-border transaction. This would lead to total rejection of the right to apply the 0% rate. The approach of the courts and tax authorities to this problem is described in more detail below.

Second, the delay in the taxpayer’s obtaining evidence that the goods have left Poland and been delivered to the buyer results in payment of the tax due at the rate applicable to domestic transactions (i.e., as a rule, 23%). Effectively, the taxpayer acquires the right to apply the 0% rate when it receives such proof. However, this causes an effective burden on the cash flow of the Polish exporter, which must credit the State Treasury with an amount of undue tax for a certain period. Under current regulations, this situation cannot be easily resolved. Therefore, a significant relief for businesses would be to temporarily extend the deadline for providing evidence of exports during the pandemic and the resulting economic crisis.

The goods do not reach their destination

A particular condition for applying the 0% rate to ICS is for the taxpayer to obtain evidence that the goods have been removed from the territory of the country and delivered to the buyer in the territory of another member state. Therefore, the mere fact of export will not be sufficient to apply the 0% rate. Thus if for example a delivery to an Italian customer is stopped in Austria (e.g. due to border closure), the Polish supplier will not be entitled to apply the 0% rate until the Italian customer confirms delivery of the goods.

In such a situation, the question arises whether it is possible to change the destination during transport. One can imagine that during transport the buyer instructs the supplier to direct the delivery to another collection point, even in another EU country, due to epidemic restrictions. It seems that national regulations do not prevent such a change. Moreover, the VAT Act does not explicitly require the recipient to be registered for VAT purposes in the country of receipt. The buyer is to provide the supplier with a valid identification number for intra-Community transactions, assigned by the member state of the buyer.

The situation described above is to some extent similar to that in which goods undergoing delivery are stolen after they leave Poland. As indicated by the tax authorities in individual interpretations, in such situations the right to apply the 0% VAT rate is determined by the terms of delivery, namely the moment of transfer of ownership. If after transfer of the right to dispose of the goods as owner to the recipient and after the goods cross the border, the recipient loses the goods as a result of theft, it is accepted that the buyer does not have to prove that the goods reached their destination (a position indirectly confirmed e.g. in the individual interpretations of 19 February 2016, ref. ILPP4/4512-1-374/15-4/BA, and 22 January 2013, ref. IPPPP3/443-991/10/12-5/S/KT). This simplifies the situation of Polish suppliers who apply, for example, INCOTERMS from group C, where the risk passes at the time of transfer of the goods to the carrier, or EXW, where ownership passes at the time the seller makes the goods available to the buyer at the seller’s premises.

An analogy to theft seems to apply to other situations where after leaving the country, the goods subject to ICS do not reach their original destination. But a condition for applying the 0% VAT rate is physical relocation outside Poland. Proving this can be problematic with respect to intra-Community transactions. However, for this purpose alternative evidence of the goods leaving the territory may be used.

If there is a delay in the export of goods from Poland, an effective remedy seems to be a contractual agreement between the parties that the transfer of the right to dispose of the goods as owner is deferred at least until leaving the country. In this situation, the emergence of a tax obligation is deferred, which also leads to a reduction of the risk associated with the need to pay VAT at the rate for domestic supplies.

Interruption in transport

The impact of transport interruption on the possibility of considering a given delivery as ICS or export of goods should also be assessed. As indicated in the case law, such a break does not affect the application of the 0% VAT rate if it is dictated by logistical reasons. It seems that an interruption caused by pandemic difficulties meets this criterion, even if it involves the transhipment of goods to another means of transport or is of a long-term nature.

It is different if, during a break, operations affecting the goods, such as processing, packaging or even repackaging, take place. In such situations, the right to the 0% rate may be questioned, as the continuity of supply is interrupted (e.g. Supreme Administrative Court judgment of 10 February 2017, case no. I FSK 628/15, and Province Administrative Court in Gdańsk judgment of 11 October 2017, case no. I SA/Gd 973/17). The delivery ceases to be considered as ICS/export and is subject to taxation as a domestic supply. Again, a risk-mitigating measure may be the appropriate choice of delivery terms, in particular the moment of transfer of ownership. If operations on the goods take place at a time when the right to dispose of the goods has already been transferred and the goods have left Poland (or in case of export, the European Union), there are arguments that such a break does not affect the recognition of the transaction as ICS/export.

Jakub Macek, attorney-at-law, tax adviser, tax practice, Wardyński & Partners