Value added tax: an important factor not only in chain transactions

Companies often treat value added tax (VAT) as an afterthought – it’s just a transitory item, after all. But if they fail to pay adequate attention to VAT on their transactions in and with foreign countries, even small errors can bring enormous VAT risks – especially if business with partners abroad is growing and, through regular repetition, unrecognised errors grow with it.

So knowing how to handle VAT correctly is especially important in international contexts, and not just in chain transactions. The crucial question in chain transactions is what company plays what role in the transaction. However, there are many other situations in which careful attention needs to be paid to getting VAT right.


VAT in chain transactions

In a chain transaction, multiple companies conclude transactions regarding the same object, which is transported or dispatched from the first company in the chain directly to the last. A classic example of a chain transaction is a situation where one company orders something from another company, which does not have the item in stock. The second company orders the item from a third company, which dispatches it directly to the original purchaser. When determining the VAT on the transaction, the decisive questions are which party arranged for the item to be transported or dispatched and where its journey began and ended. Especially if a supply crosses several international borders, these questions are crucial. The answers determine which country VAT arises in and what VAT requirements, including registration obligations, are applicable.


VAT on cross-border supplies of goods and services: tax exempt, reverse charge, or with VAT after all?

Getting VAT right is a constant concern when goods and services are supplied across borders. As a general rule only, cross-border B2B supplies of goods are exempt from VAT. In the case of private individuals, however, the “distance selling” arrangements apply. Distance sales of this kind are especially frequent in the e-commerce field. Under these arrangements, supplies to another country are generally not taxable in the country of origin – but are taxable in other EU countries. Because online cross-border business is so readily scalable, the risks arising from incorrect VAT treatment are particularly pronounced because the sums involved can quickly mount up.

Services to businesses are regarded as having been supplied at the place where the recipient is established. In transactions with other EU countries, the reverse charge procedure is often used. In this case the VAT is payable by the recipient of the service as required by the rules of its home country. Things are more difficult for businesses supplying services to private individuals or to companies based outside the EU. Here the applicable rules must be determined on a case by case basis. Sometimes, the business supplying the service must itself ensure payment of VAT in the other country.

It is a good idea to seek advice from a qualified tax advisor on all your international relationships. Missing or incorrect information may have significant fiscal and even criminal consequences – at home and abroad. So you should plan ahead and ideally set up your flows of goods and services in a way that avoids VAT errors upfront.


Work deliveries and construction contracts or contracts with builders abroad

Often, the reverse charge procedure is also applicable to work deliveries (Werklieferungen) and to construction contracts or contracts with builders for activities carried out abroad. In these cases the VAT is payable by the client, i.e. in case of construction of a building, the building owner and in case of installation of a large facility, the company where the facility is installed. For VAT, the determining factor is the place at which the “authority to dispose” of the building, facility or machine has been granted, i.e. the place where the item is accepted by the customer in finished or operational condition. However, the reverse charge procedure does not apply to work deliveries and construction contracts or contracts of builders with private individuals. Especially in border regions, skilled trade companies are at risk of applying domestic rather than foreign VAT, creating VAT risks in the foreign country.


Risk analysis and implementing an individual VAT-CMS

More and more companies are implementing internal control systems to meet the challenges of domestic and foreign VAT. These systems, known as VAT compliance management systems (VAT-CMS), help companies fulfil their tax obligations and reduce the liability and reputational risks associated with incorrect VAT treatment.

A VAT-CMS must be set up correctly from day one. Standard cases must be comprehensively assessed and regulated so that all involved know what and what not to do. Only then does a VAT-CMS help a company keep its outlay to a minimum and identify and pre-emptively minimise VAT-related risks. A specialist tax advisor helps you implement a VAT-CMS customised for your business.

Input tax refund procedure

Input tax refund procedure in EU member states and third countries

The input tax refund procedure enables businesses to obtain refunds on VAT paid abroad. In Germany, refunds of VAT paid in other EU member states can be requested centrally and electronically. This is subject to certain requirements and time limits, however. The conditions of the input tax refund procedure vary from state to state.

The process is less convenient for companies which have paid VAT in non-EU member states. They must apply for refunds directly in the state concerned and transmit all necessary supporting documentation and applications to the competent authority there. Every country has its own application forms, which are not exchanged between the different authorities. This makes the refund procedure lengthy and burdensome.


How Schultze & Braun helps you with VAT

To protect you against VAT errors, Schultze & Braun’s tax experts attach great importance to providing comprehensive tax advice, particularly on cross-border situations. We give clear and concrete answers to your VAT questions, identify VAT risks and help you pre-empt and avoid them.

Our experts also have extensive experience and provide general support across multiple fields: cross-border supplies of goods and services, chain transactions and triangular transactions, or work deliveries and contracts with builders abroad. We develop solutions for specific VAT-related issues and help you analyse risks and implement an individual VAT-CMS. We prepare your VAT returns abroad and steer you through the input tax refund procedure in other EU countries and third countries. We also offer tailored in-house training to get your employees up to speed on the latest developments in domestic and foreign VAT matters.

What questions do you have?


Mario Schnurr
Steuerberater (Tax consultant), Dipl.-Betriebswirt (BA) (certified business accountant), MBA (International Taxation)


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