European Union – Supply Chain optimization and VAT

Optimizing your Supply Chain means gaining efficiency and competitiveness. However, poor knowledge of VAT rules can nullify the savings achieved. Discover how to avoid VAT risks to optimize your Supply Chain safely.

What is the Supply Chain and why optimize It?

The supply chain (logistics chain) encompasses the entire process implemented to deliver a product, from sourcing raw materials to distributing it to customers or points of sale. It involves various stakeholders, resources, and flows of goods and services, covering procurement, production (manufacturing and assembly), transformation, storage, and logistics—from warehouse management to transportation and final delivery to the consumer.

An optimized supply chain helps reduce costs related to procurement, production/transformation of raw materials, storage, and transportation while improving production and delivery times, as well as customer satisfaction.

Supply chain optimization plays a strategic role in a company’s performance and competitiveness.

Supply Chain optimization: what are the VAT challenges?

Evolution of your supply chain: a source of VAT risks

Optimizing your Supply Chain without anticipating VAT impacts is a mistake that can nullify the savings achieved in logistics. Here are a few examples:

Implementation of a New Local Purchase-Resale Flow Abroad: To reduce transportation costs, a Swiss company decides that its German suppliers will now deliver products directly to its customers in Germany, bypassing Switzerland. As a result, the company now carries out a taxable local purchase-resale operation in Germany.

For this flow, the Swiss company must collect and report local VAT. This requires registering for German VAT to file local VAT returns, recover, and remit the VAT amounts paid and collected.

This change may necessitate hiring a German service provider to handle VAT filings and requires reviewing the invoicing software settings, as well as adjusting internal administrative and accounting processes to ensure smooth VAT compliance in Germany.

Poor mastery of Incoterms : A French company purchases goods from a U.S. supplier and arranges for direct delivery to its VAT-registered customers in Italy, bypassing France. However, the company has neither an establishment nor VAT registration in Italy. It chooses an unsuitable Incoterm: it buys under CIF Genoa but sells to its Italian customer under DDP Genoa (Delivery Duty Paid – meaning duties and taxes paid).

By selling under Incoterm DDP, the French company is responsible for paying import VAT in Italy. Due to specific VAT rules applicable to its sale, it must then go through a local refund procedure to recover this VAT—a lengthy and costly process.

This setup has a double negative impact:

– Cash Flow Impact – The company must advance a potentially high VAT amount at customs.

– Administrative Burden – Recovering this VAT requires a reimbursement request, involving long

Setting up storage at a foreign subsidiary : To reduce logistics costs, a Luxembourg company purchases goods from a Czech supplier and decides to temporarily store them at its Polish subsidiary before shipping them to its VAT-registered customers in Eastern Europe. Believing that storage within its own group does not create tax obligations, it overlooks the VAT implications in Poland.

However, as the owner of goods stored in Poland, the Luxembourg company must register for VAT in Poland and comply with local reporting requirements.

If these obligations are not anticipated and met, the company exposes itself to non-compliance risks and potential penalties.

In all these scenarios, a prior VAT analysis would have helped identify these tax risks and allowed for an informed decision, considering all the issues at hand.

Supply chain optimization is a complex process that should not be approached in isolation, flow by flow. To optimize the supply chain, it is essential to view the company’s situation as a whole and take into account all the factors, including transportation costs, logistics, commercial and financial aspects, as well as VAT and customs!

Poor management of VAT or customs can lead to tax adjustments, penalties, late interest, and disastrous consequences for the company.

Therefore, it is essential to be supported by a service provider like VAT SOLUTIONS to find solutions that allow you to optimize and secure your supply chain while minimizing your VAT reporting obligations and ensuring the customs aspect of your operations is secure.

Optimizing Your Supply Chain Through VAT

In terms of VAT, there are several simplification regimes that limit the obligations related to intracommunity and international VAT while optimizing the supply and delivery chain.

This is especially true with:

The Bilateral Processing Regime: This allows a company to ship goods abroad for processing and then reintroduce them into the country of origin without creating a VAT obligation for the principal in the foreign country.

The Stock Under Deposit Agreement Regime: This regime allows a supplier to store goods at the premises of its VAT-registered customer in another EU member state, with the intention of selling them later (within a maximum period of twelve months) without creating a VAT obligation for the supplier in the country where the goods are stored.

The Regime 42 for Importation: The Customs Regime 42 allows goods to be imported into an EU country with exemption from import VAT, provided these goods are then delivered to a VAT-registered customer in another EU country. This regime helps improve cash flow by avoiding the need to advance import VAT.

The Simplified Triangular Transactions Regime: This allows a European company (EU1) to purchase goods from a European supplier (EU2) and have them delivered directly to its own customer in another EU country (EU3) without creating a VAT obligation in the foreign country (EU2 or EU3), as long as the conditions set by law are met.

Attention: These regimes must be used with caution. To benefit from them, several conditions must be met, and additional obligations must be fulfilled (such as specific invoice details, reporting requirements, record-keeping, etc.).

Finally, when no simplification measures are possible, you can enlist a tax representative or agent to register for VAT in one or more strategic countries within the European Union.

Discover our services

VAT SOLUTIONS offers various services to support you with your VAT requirements in Luxembourg and internationally:

– Diagnosis of your VAT organisation, your activities, and procedures for keeping evidences of exempt operations ; measure of the impact of the new VAT rules;

– Confirmation of the VAT treatment of your activities;

– Coaching/trainings;

– Management of VAT obligations in Luxembourg and abroad : assistance, preparation and filing of the VAT registration form and of VAT returns.

Contact us

Phone number: +352 26 945 944

Mail : info@vat-solutions.com

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