What is triangulation?
Triangulation is a simplification measure to reduce the administrative and compliance burdens on traders and the tax authorities. It is designed to reduce the administrative and compliance burdens associated with registering and accounting for VAT. This simplification measure can only operate when the three traders involved are all registered for VAT in the European Union.
Triangulation involves two supplies of goods between three Value-Added Tax (VAT) registered traders in three different European Union (EU) Member States. For example, where a trader established in one Member State (MS1) sells goods to a trader established in a second Member State (MS2). The goods, however, are delivered to a trader in a third Member State (MS3).
In general, the simplification measure works as follows:
- There is a zero-rated intra-Community supply (ICS) from company A to company B.
- The supply is listed in the VAT information exchange system (VIES) return by company A to company B.
- As company B has quoted its VAT number, it has made an intra-Community acquisition (ICA). Company B accounts for this ICA in its VAT return.
- Company B makes a VAT-free supply to company C. Company C accounts for this transaction in its VAT return as a received supply. In this way company C is deemed to have accounted for company B’s VAT liability in Member State 3.
Where company C is entitled to reclaim VAT, it takes a simultaneous credit for this transaction in the relevant VAT return.
Transactions involving more than three companies
The simplification measure can only operate in a classic triangulation situation as set out above. If there are more than three companies involved (for example, successive sales between companies in Member State 2), the strict legal position will apply. In such cases, registration may be required in at least one other Member State depending on the precise circumstances.
Evidence required for ICS of goods
Documentation is required to prove the dispatch and removal of goods from the State. The documentation required will depend on who arranged the transportation.
Transportation arranged by the supplier
Where the supplier has arranged the transportation of goods to a customer, the commercial documentation related to the supply and transportation should be retained by that supplier.
- order document
- delivery docket
- supplier’s invoice
- transport document, such as a bill of lading
- evidence of transfer of funds from foreign banks for payment.
Transportation arranged by the customer
The business customer may arrange transport for the goods or take the goods away in their own transport. In such circumstances, the supplier must be satisfied that the goods have been transported or dispatched to another EU Member State.
The supplier should obtain and retain documentary evidence from the customer. This documentation is used as evidence of receipt of the goods in the other Member State. In such cases, documentary evidence may include:
- copies of warehouse receipts
- delivery dockets.
Details of the means of transport used by the customer for transportation of the goods should also be retained, such as:
- vehicle registration number
- flight number
- ship sailing details.
Suppliers are advised to take special care. Suppliers should ensure that the four conditions for zero-rating are met for sales and deliveries of goods to other Member States. Doubt can arise where, for example:
- the customer is not previously known to the supplier
- the customer arranges to collect and transport the goods
- the customer’s transport arrives at the supplier’s premises without advance notice or correspondence
- the customer pays in cash
- the type or quantity of goods being purchased is not consistent with commercial practice bearing in mind the purported destination of the goods.
Where one or more of these factors are present the supplier must proceed with particular caution.
If any doubt arises, the supplier should charge Irish Value-Added Tax (VAT). If the conditions for zero-rating are subsequently established the customer is entitled to recover the VAT paid to the supplier, from the supplier. The supplier can then make an adjustment in their VAT return for the period.
The supplier may be in doubt about the validity of the VAT registration number provided by the customer. In such cases, the VAT registration number provided by the customer should be verified by the supplier using the VAT number validation system. The VAT registration number provided by the customer should be verified before applying the zero-rating.
Suppliers should take all reasonable steps to verify that the conditions for zero-rating are satisfied. Where a supplier has taken such steps, that supplier will not be penalised if it subsequently transpires that a problem has arisen with a particular consignment. However, the tax due at the Irish rate will be recovered from any supplier who has failed to take all such reasonable steps. Please see How to protect your business from becoming involved in fraud.
Penalties for fraudulent claims
There are penalties for making fraudulent claims for zero-rating.
The penalties are as follows:
- Seizure and forfeiture of zero-rated goods which have not been dispatched or transported outside the State.
- The use of an incorrect VAT number for each transaction is liable to a penalty of €4,000. This penalty is in addition to the amount of tax which would be chargeable.
- You may be subject to arrest.
- Civil and criminal penalties ranging up to €126,970 and imprisonment for up to five years.