VAT invoicing requirements in triangulation transactions

The CJEU has held that the requirement to include the words “Reverse charge” on an invoice given to the ultimate recipient of the supply in a triangulation transaction is a strict requirement: Luxury Trust Automobil GmbH v Finanzamt Osterreich (Case C-247/21). In the absence of such wording, the intermediate supplier was not able to rely on the derogation for triangulation transactions, nor was it possible to retrospectively correct the invoices to do so, and in those circumstances the intermediate supplier was itself required to account for acquisition VAT.

The Court has held that in the context of the optional triangulation simplification provisions, the requirement for certainty as to who is liable for payment of acquisition VAT demands strict compliance with the relevant rules.

Background

Luxury Trust Automobil (LTA), a company established in Austria, bought vehicles from a supplier established in the UK and resold them to a company in the Czech Republic (M). Those vehicles were transported directly from the UK to the Czech Republic. Each of the entities involved were VAT registered and provided their VAT identification numbers. The triangular transaction derogation allows for the exemption of an intra-Community acquisition carried out by an intermediary acquiring goods and the transfer of the VAT liability for that acquisition to the final customer established in a third Member State. Accordingly, LTA issued invoices including the reference “Exempt intra-Community triangular transaction’ on the basis that the transaction was covered by the triangulation rules and did not account for acquisition VAT in Austria.

However, following a tax inspection, the Austrian tax authorities considered that the transaction did not qualify for the triangular transaction scheme because the invoices at issue did not contain the necessary wording “Reverse charge” so as to transfer of the tax liability. The transaction was therefore deemed to be a failed triangular transaction that could not be remedied after the event. Instead, due to the use of LTA’s Austrian VAT identification number, there was an intra-Community acquisition in Austria and the tax authority assessed LTA to the VAT payable. According to the Austrian tax authority, the acquisition must be regarded as having taken place in Austria unless and until LTA demonstrated that the acquisition was taxed in the Czech Republic.

After that tax inspection, LTA sought to correct the invoices, adding a reference to “Reverse charge”. However, there was no evidence that those amendments had actually been served on M. Furthermore, it appeared that M was in fact a ‘missing trader’. Although M was registered in the Czech Republic for VAT purposes, the Czech tax authorities had not managed to contact it and M neither declared nor paid VAT in the Czech Republic in respect of those supplies.

On appeal, the Austrian courts referred questions concerning the correct application of the triangulation derogation, noting that the purpose of the words ‘Reverse charge’ on invoices relating to triangular transactions is to ensure that the final customer in such a transaction can clearly and easily recognise that the tax liability is transferred to it. According to the referring court, that objective could also be achieved by the reference to ‘Exempt intra-Community triangular transaction’ appearing on the invoices, particularly if account is taken of the fact that VAT was not charged on the invoice.

Decision of the CJEU

The Court noted that the general rule concerning the place of taxation of an intra-Community acquisition is subject to the derogation in Article 42 in the context of triangular transactions where: (i) the person acquiring the goods establishes that they have made the intra-Community acquisition for the purposes of a subsequent supply, in relation to which the person to whom the supply is made has been designated in accordance with Article 197 as liable for payment of VAT, and (ii) the person acquiring the goods has satisfied the obligations in Article 265 relating to submission of a recapitulative statement.

In accordance with Article 197(1)(c) of the VAT Directive, the invoice issued by the intermediary acquiring the goods must be drawn up in accordance with Sections 3 to 5 of Chapter 3 of Title XI. Among those provisions, Article 226(11a) requires the invoice to include the words ‘Reverse charge’ where the customer is liable for payment of the VAT.

According to the Court, it follows that, in the specific context of the derogation applicable to triangular transactions, the intermediary acquiring the goods in a triangular transaction cannot substitute another statement for the words ‘Reverse charge’ since Article 226(11a) of the VAT Directive expressly requires those words to be used. The use of those specific words is a strict requirement for applying the derogation.

This interpretation was borne out by the objective pursued by the provisions. Although the purpose of the triangulation derogation is to avoid a situation whereby the intermediary acquiring the goods has to satisfy identification and declaration obligations in the Member State of destination of the goods, Articles 41 and 42 are intended to ensure that the intra-Community acquisition in question is subject to VAT payable by the final customer, while avoiding double taxation of that transaction. One of the purposes served by an invoice, and its details required under Article 226, is to inform the recipient of the invoice of their obligations. This is particularly important since the triangulation derogation is optional, so that it is the formality required by Article 226(11a) which makes it possible to ensure that the final recipient of a supply is aware of his or her tax obligations.

Secondly, the Court considered whether it was possible to correct the omission of the words “Reverse charge” and if so, whether the validity of such a correction is conditional on it being received.

Clearly there are scenarios where the Court has recognised that the fundamental principle of VAT neutrality requires that the deduction or refund of input VAT be allowed even if the taxable person has failed to comply with certain formal requirements of the VAT system. However, in this case, the Court has held that there can be no question of correcting the invoice where a condition for the application of the derogation applicable to triangular transactions, such as the wording required by Article 226(11a) of the VAT Directive, is not met. The retrospective fulfilment of a mandatory condition for transfer of the VAT liability to the recipient of a supply does not constitute a correction.

Comment

There are many recent decisions where the CJEU has held that formal requirements, especially in relation to VAT invoicing, should not deny a taxpayer a right to recovery of input VAT on the basis that the fundamental principle of neutrality in the VAT system overrides such formal requirements.

This case demonstrates, however, that there will be circumstances where taxpayers are held to the formal requirements laid down in the VAT Directives, even where such treatment appears somewhat arbitrary. In particular, in cases where the formal requirements are necessary to determine the relative obligations of taxpayers to account for VAT within a triangulation transaction, the Court has held that these are conditions that must be met at the outset and may not be later corrected.