Receiving goods on consignment from an EU counterparty does not trigger an obligation to account for an intra-Community acquisition of goods at the time of receipt of goods
On 12 December 2017, the Supreme Administrative Court gave a ground-breaking judgment ref. no. I FSK 350/16, according to which the release of goods to a domestic consignee by a consignor established in another EU Member State, under a consignment contract, constitutes the supply referred to in Article 7 paragraph 1 item 4 of the VAT Act, in connection with which the tax liability is triggered pursuant to Article 19a paragraph 5 item 1 point a), i.e. upon receipt of all or part of payment.
Definition of consignment according to civil law
First it is worth reminding a definition of consignment according to civil law. Pursuant to Article 765 of the Civil Code, two types of consignment contracts may be distinguished: consignment purchase and consignment sale.
Under a consignment purchase contract, the consignee undertakes, within the scope of operations of his enterprise, to buy movables on the consignor’s account but on his own behalf. While in consignment sale the consignee undertakes, within the scope of operations of his enterprise, to sell movables on the consignor’s account but on his own behalf.
Dispute with tax authority – administrative proceedings
According to background information of the case, under concluded consignment sale contract, the German consignor brought to Poland accessories (among others clothes – owned by the consignor) and delivered the same to sale outlets of the Polish consignee. Accessories were properly stored in the sale outlets of the consignee who made available his premises for displaying purposes. The consignee had no right to dispose freely of the accessories, in addition he was not liable for their destruction or theft. The consignee sold said accessories to third parties on his own behalf but on the consignor’s account (the consignor remained the owner of the accessories by the time they were sold by the consignee). The consignee’s remuneration was calculated on the basis of the value of accessories sold by the consignee in a given settlement period less commission due to the consignee.
In the opinion of the consignee Company, the supply of goods by the German counterparty to the Company’s sale outlets did not trigger an obligation for the Company to account for an intra-Community acquisition of goods within the meaning of Article 9 of the VAT Act (at the time of release of the accessories by the consignor). According to the Company, it was obligated to account for VAT only upon receipt of an invoice from the consignor, so if the goods have actually been sold. In a binding ruling issued to the Company, the Minister of Finance, acting through Director of Fiscal Chamber in Poznań, found the Company’s position to be correct with respect to tax liability connected with an an intra-Community acquisition of goods and to be incorrect with respect to recognition of the transaction as an intra-Community acquisition of goods and taxable base of the acquisition.
According to tax authority, in this case two separate transactions were in place: a supply of goods between the German taxable person and the Company, which on the part of the Company should be treated as an intra-Community acquisition of goods within the meaning of Article 9 paragraph 1 of the VAT Act, and a domestic supply effected between the Company and third parties. Consequently, tax liability in VAT was triggered on the part of the Company already when the accessories were released to it by the German counterparty. Thus, the tax was to be due on the whole value of the goods, regardless whether they were sold or not.
The Company did not agree with the position of tax authority and lodged a complaint to the Provincial Administrative Court in Wrocław, which issued its judgment on 28 October 2015, ref. no. I SA/Wr 1243/15, and shared the position of Director of Fiscal Chamber in Poznań. According to the court, a VAT taxable transaction within an intra-Community acquisition of goods is already the fact of placing goods on consignment. Therefore, the German supplier of goods recognises an intra-Community supply of goods, which in principle is subject to VAT at the rate of 0%, and the Polish purchaser accounts for an intra-Community acquisition of goods applying a domestic rate. While consignment sale made by the consignee to customers constitutes the supply of goods which is to be accounted for separately.
We should emphasise here that the ruling given by the Provincial Administrative Court in Wrocław in the present case is consistent with the position presented by tax authorities to date, according to which the taxable base in the case of “cross-border” consignment and an intra-Community acquisition of goods is the whole value of the supply in connection with which the supplier has received or is to receive payment from the purchaser (Article 29a and 30a of the VAT Act). The fact that Polish consignees may not sell the goods received on consignment right away is of no significance – determination of the taxable base in transactions involving an intra-Community acquisition of goods effected under a consignment contract is not in any way connected with the date (period) of further sale of such goods, and so the obligation to account for an intra-Community acquisition of goods is triggered already upon the supply of such goods. For example, such position was presented in a binding ruling issued by Director of Fiscal Chamber in Warsaw on 23 April 2015, ref. no. IPPP3/4512-201/15-2/MC, and on 13 August 2015, ref. no. IPPP3/4512-536/15-2/MC.
Judgment of the Supreme Administrative Court – consequences for taxable persons
The Supreme Administrative Court shared the position of the Company and reminded that an element necessary for an intra-Community acquisition of goods, as referred to in Article 9 paragraph 1 of the VAT Act, is the acquisition of a right to disposal as the owner. However, when goods are released to the consignee by the consignor under a consignment sale contract, in the opinion of the Provincial Administrative Court it cannot be found that such release constitutes the transfer of goods for the purpose of disposal as the owner. In the case of consignment sale, upon release of goods the consignee becomes only the holder of the goods – while the consignor continues to be the owner-like possessor. Consequently, tax liability in connection with release of the goods to the consignee by the consignor will be triggered under Article 19a paragraph 5 item 1 point a) of the VAT Act. Therefore, in the court’s opinion tax liability in connection with release of the goods to the consignee by the consignor under a consignment contract is triggered only upon receipt of all or part of payment.
Furthermore, the Supreme Administrative Court noted that as the consignee receives payment in principle after the goods on consignment have been sold by the consignee to a final customer, it has to be found that tax liability in connection with the supply of goods between the consignor and the consignee is in fact dependent on making the sale of goods to a final customer.
In the opinion of the Supreme Administrative Court, such interpretation of the above provisions takes into account the economic essence of a consignment contract wherein from the point of the consignee the sale (in economic sense) is only the sale to a final purchaser.
Thus the ruling of the Supreme Administrative Court is very significant for taxable persons who, when accounting for VAT in transactions involving consignment sale, recognised VAT already at the time of receipt of goods, not at the time of receipt of an invoice (actual sale of goods by those taxable persons). This judgment is definitely favourable for taxable persons, especially simply in economic terms. Nevertheless, we have to wait till the case law and position of tax authorities in this regard is established after the judgment in order to be able to make a real assessment whether it will actually change the approach of tax authorities to that type of transactions.
Rafał Mielko, Tax Consultant, ATA Tax Sp. z o.o.