FISCAL REPRESENTATION, A UNIQUE SELLING POINT
According to the website of Fenex, the Dutch organization for forwarding and logistics, 69% of
A significant proportion of the service providers offering the service, do it in the form of limited fiscal representation. A big risk for both provider and customer.
In this article we explain what fiscal representation is and why it is a missed opportunity if you do not offer it.
In addition, we discuss the difference between general and limited fiscal representation and consider what we consider to be the significant risks arising from limited fiscal representation.
Finally, we want to highlight the benefits of service providers who specialize in tax representation.
Fiscal or tax representation, what is it?
When a company (“importer”) wants to import goods into the EU from a country outside the European Union (i.e. not a member of the VAT union), the importer normally has to pay turnover tax (VAT) at the border. The importer can reclaim this VAT later by means of a declaration.
During the period between the physical import of goods and the recovery of VAT, the importer will have to fund the VAT payment, which may give rise to liquidity issues. These liquidity issues become particularly acute when an importer imports a continuous flow of goods into the EU, giving rise to regular VAT payments, potential continuous liquidity issues and corresponding financing requirements.
One solution to the above issues is for the importer to set up an entity (for example, a private limited company (BV) or a permanent establishment) in the EU. This entity can apply for a VAT number by means of which the payment of VAT at the border can be prevented.
However, establishing an EU based entity is not always the most viable or practical solution. The entity will have to have some substance. This means, for example, establishing an office and / or warehouse in the country concerned, employing local staff (eg. EU sales department) etc. Moreover, adverse tax consequences may arise from the establishment of an EU entity. Corporation tax and transfer pricing issues come into the equation, meaning that, where the only activity a company carries out is the importation of goods into the EU from a base outside of the EU, the establishment of an entity in the EU is often not a viable solution.
A far more practical solution to the problems arising from the payment of VAT when importing into the EU from outside of it, is tax representation. In simple terms, tax representation enables the importer to appoint a representative who manages a VAT number locally within the EU. As a consequence, there is no requirement to pay VAT at the border. The service provider assumes a certain liability for the VAT.
The appointment of a local tax representative with the consequent result of not having to pay VAT at the border can provide significant liquidity and financing benefits. Tax representation is, therefore, an attractive solution for importers and it is likely that they will opt for a forwarding agent who offers this facility (whether or not via third parties) rather than establish their own entity within the EU.
General or limited fiscal representation
With tax/fiscal representation, the service provider has the choice to offer two types of representation - general or limited representation:
Every client has its own VAT number
Declarations are made for all clients under the VAT number of the tax service provider (with their own sub number)
For each client, a general permit and a license article 23 revocation regulation is applied for
For each client, a limited license is applied for. The article 23 license covers the service provider for all his current and future customers at once
The tax authorities require a security for each client based on turnover and VAT criteria
The tax authorities collect a security for all clients aggregated together on the basis of turnover and VAT criteria
The liability of the service provider for additional assessments is limited to the security that the tax authorities have set annually. Note: the service provider will also ask for the client's certainties
The liability of the service provider for additional assessments is unlimited and therefore applies to the entire amount of the tax, interest and penalties due.
The limited advantage of limited representation is less administration in the preliminary stages.
A perceived additional advantage of limited representation is the absence of the requirement for individual security to be provided by the client to the tax authorities. However, this is a false perception as, in reality, the service provider will, in order to reduce its risk, ask each client for a security which is at least equal to the security to be provided by service provider to the tax authorities.
A very important disadvantage of limited representation is the unlimited liability for the service provider.
Limited fiscal representation: A major risk for both provider and customer
Notwithstanding the simpler administrative process offered by limited fiscal representation, the risks presented by it should not be underestimated.
The liability claims that may arise from limited representation can be substantial and have far-reaching consequences for both the service provider (if it cannot fulfill this obligation) and for all its clients (possible discontinuity of the work).
As far as we are concerned, limited fiscal representation can be compared to the circus: Waving at the trapeze, when letting go, hoping that your partner catches you in the knowledge that there is no safety net.
Specialized fiscal representatives
Although logistics service providers who offer fiscal representation will undoubtedly have sufficient quality to carry out the required work, we believe that specialist tax representatives have distinct specialist skills which provide added value to clients.
The tax representative will have experience in providing advice on specific and specialized sales tax issues.
By way of example, particular tax issues arise in the field of distance sales. In B2C sales, each country within the EU has its own turnover limit, in which the VAT rate of the country in question must be adhered to and a declaration made in the relevant country.
Additionally, a specialist tax representative can also act as a discussion partner in situations where the client creates increasing substance in the EU and the transition to an entity in the form of a BV or permanent establishment becomes an alternative to be considered.
The question then is whether the logistics service provider has the quality and capacity to recognize this problem in time and to advise on this matter.
As they say in Dutch: “Schoenmaker blijf bij je leest” or in English:
To each his own, choose Vatko as your partner in tax representation.
Let the cobbler stick to his last. The gunner to his linstock and the steersman to the helm. As a bear has no tail, for a lion he’ll fail
Simplified way to declare VAT for foreign entrepreneurs
As of July 1st 2021 a new VAT directive applies to entrepreneurs when involved in the business to consumer (B2C) sale of goods or services. The European Commission wants to modernize and simplify VAT with this new directive. It also aims to create a level playing field for entrepreneurs inside and outside the EU and to combat VAT fraud on small value packages.
The new VAT directive makes it possible to declare VAT in a simplified way making use of the so-called One Stop Shop (OSS). Whether you want to declare VAT in the EU country where you deliver your products or you owe VAT in another EU country.
The OSS portal, consists of 3 voluntary schemes:
- The 'Union scheme' for EU-based companies with at least 1 establishment in an EU country or companies that make use of an EU-warehouse. This scheme applies to intra-EU distance sales and services. You do not need a VAT registration in other EU countries.
- The 'Non-Union scheme' for non-EU companies without establishment in the EU. This scheme applies to services.
- The 'Import scheme' for distance sales of non-EU goods with a value of up to 150 euros.
The Dutch Tax and Customs Administration arranges that the VAT declared via the OSS portal will end up in the right EU country.
As of July 1st 2021, the threshold amounts for intra-EU distance sales will expire per individual EU country. There will be 1 joint threshold amount of 10,000 euros per calendar year for EU-based companies. This threshold applies to all intra-EU distance sales of goods together with the sale of digital services to consumers in the EU.
You can also indicate distance sales within the EU via the new portal. If you exceed the threshold amount of 10,000 euros with both deliveries, digital services and goods, you can submit your declaration via the OSS portal. Ensuring a timely submission of your OSS application is important.
If you choose not to use the OSS portal you will have to register in each individual country to which you have supplied goods and file a local VAT declaration.
Interested in the possibilities of just one VAT declaration for several different EU countries? VATKO as your tax representative can inform you about all your options.