VAT Triangulation – Effective 2 Scenario-based Handbook

What does it mean VAT Triangulation and when does it apply?

Triangulation is the term used in cases that involve the supply of the same goods between three different traders in three different  EU member states. With specific conditions, business entities can avoid registering for VAT purposes in other EU Member states therefore simplify VAT compliance across the EU.

Trader A who is VAT registered in Member State 1 (MS1) sells to Trader B who is VAT registered in Member State 2 (MS2) who in turn sells to Trader C who is VAT registered in Member State 3 (MS3) and the goods are transported directly by Trader A to Trader C.

In such circumstances, there could be situations which trigger the requirement to register in more than one Member State and adhere to VAT compliance in different Member States in view of the fact that the trader would be deemed to be making intra-community acquisitions followed by a domestic supply in particular countries.

The EU Directive has implemented a simplification measure to reduce the administrative and compliance burdens on traders and the relevant tax authorities with regard to registration and accounting. The simplification measure is referred to as ‘Triangulation Simplification’ and can only operate when the three traders involved are all registered for VAT in the European Union.

In the diagram above, one has to consider the relation of the transport of the goods, i.e. whether the supply is a supply with transport or without transport. Therefore in this case there may be two situations.

Scenario 1 – The transport of the goods is done or contracted by Trader C or by Trader B as the seller to Trader C. 

The Triangulation Simplification measures can never be applied in Scenario 1 as in such cases, the transaction can either be a domestic one or a normal intra-community transaction.

Trader A – Trader B: Without Transport

In such case there is a supply without transport by Trader A to Trader B. Place of supply of goods that are not transported takes place where goods are placed at the disposal of Trader B. Therefore, MS1 because at this stage the goods are not transported. The transaction is considered as a domestic supply by Trader A in MS1 and Trader A has to charge VAT to Trader B in accordance with the rules of MS1.

Trader B – Trader C: With Transport

The supply by Trader B to Trader C is a supply with transport. The place of supply with transport takes place where the goods are at the time when transport begins. Therefore in MS1. In this situation, Trader B is always required to register for VAT purposes in MS1. The transaction between Trader Band Trader C shall be considered an exempt intra-community supply and thus exempt from VAT to the extent that the following conditions are satisfied:

1. Trader C has a valid VAT identification number in MS3; and
2. Goods are transported out of MS1

Trader C is then making an intra-community acquisition in MS3 for which he is liable to pay VAT.

Scenario 2 – The transport of the goods is done or contracted by Trader A or by Trader B as the purchaser of A to provide goods to Trader C.

The Triangulation Simplification measures may apply in Scenario 2.

Trader B can avoid registration in MS3 by applying the Triangulation Simplification procedures. These procedures apply if Trader C is a taxable person and the liability to pay VAT on the transaction is shifted by Trader B to the customer Trader C in MS3. In other words, Trader B would no longer be obliged to register in MS3, but Trader C would need to report such transactions instead of Trader B.

However, if Trader C is a not a taxable person, then Trader B has to register in MS3 and charge the VAT of MS3.

Under such Triangulation Simplification procedure:

1. Trader A issues an invoice to Trader B without charging VAT and quoting Trader B’s VAT identification Trader A should report this supply on its Recapitulative Statement as an intra-community supply.
2. Trader B issues an invoice to Trader C without charging VAT endorsing it with the words “VAT Simplification Invoice”. Trader B should report the supply to Trader C on its Recapitulative Statement quoting Trader C’s identification number and the code (T) to denote triangulation
3. Trader C should account for the purchase from Trader B in his VAT Return by Reverse Charge mechanism.

If Trader B is a company resident in Malta

If MS2 is Malta, then it is deemed to be an Intra-Community Acquisition by Trader B in Malta and subject to VAT in MS3 (the place where the transport of goods ends). However, the intra-community acquisitions made by Trader B for the purpose of a subsequent supply are exempt from VAT if the following conditions (listed in Item 1 of Part 3 of the Fifth Schedule to the VAT Act) are satisfied:-

1. The acquisition of the goods is made for the purpose of a subsequent supply of those goods in Malta;
2. The goods acquired have been directly transported from a Member State other than that where that person is identified for VAT purposes to the person to whom the subsequent supply is made (in this case from MSl to MS3);
3. The person to whom the subsequent supply is made (Trader C) is a taxable person or a non­ taxable legal person registered under Article 10 or 12;
4. The person to whom the subsequent supply is made (Trader C) is liable for the payment of the tax on that supply.

The liability to account for and pay VAT in MS3 is shifted from Trader B to the customer Trader C. Code “T” must be reported in the recapitulative statement of Trader B for the supply made to Trader C. Trader B reports this sale to Trader C in the box “IC supply exempt” in his VAT return.

If Trader C is a company resident in Malta

If MS3 is Malta, ie. Malta is the country of arrival of the goods and Trader C is a Maltese taxable person:-

• Trader B shall be exempt from VAT upon its intra-community acquisition of goods in Malta from Trader A (Trader A sells to Trader B and transports the goods to Malta, therefore Trader B makes an intra-community acquisition in Malta). The exemption applicable is found in Item 1 of Part 3 of the Fifth Schedule to the VAT Act as discussed in point II
• The liability for the payment of VAT in Malta shall be shifted to the final customer, Trader C if the conditions listed in terms of Article 20(2)(a) of VATA, are met. The following are the conditions to be satisfied:-
• Trader C must be a taxable person registered under Article 10 or 12 or a non-taxable legal person registered under Article 12 who is identified as such on a tax invoice for the supply
• Trader B must be identified for value-added tax purposes in a Member State (other than from Malta) and has made an exempt intra-community acquisition of those goods in Malta for that supply; and
• the goods acquired under the said intra-community acquisition by Trader B were transported from a Member State, other than the State where the taxable person who made the supply is so identified (i.e. not from MS2), to the person to whom the supply is made (i.e. Malta); and
• Trader B designates the person (i.e. Trader C being the customer) to whom the supply of goods (i.e. the domestic supply) is made as the person liable to pay the tax on that supply.

Thus if the above conditions are satisfied Trader B would not be obliged to register in Malta for VAT purposes whilst Trade C would account for reverse charged VAT on the supply of the good.

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