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Tax consultant: international trade – one of the major tax risks

Export is an important part of Lithuanian international trade. Our country’s economy is dependent on foreign markets; therefore, the development of export is one of the most significant factors in expanding the gross domestic product (GDP). Exports generate around one-third of the GDP of the country.
Currently, the external environment of Lithuania’s economy has slumped. This is impacted by a situation in Russia, with which Lithuania is linked with close economic ties. Lately, with a conflict between Russia and Ukraine not subsiding, the geopolitical tension still continuing and indefiniteness increasing, a risk remains for this to affect the activity of Lithuania’s economy

Stability brings delight

Algirdas Kviklys, senior tax adviser at Leinonen Lietuva Company, when evaluating a situation states that Lithuanian statistical data are quite promising. They witness of the sufficient stability of international trade indicators in our country. Export volumes in 2014 shrank by 0.6%, even though they stayed at a level of EUR 24.5 billion similar to that in 2013. More than a half of this value (EUR 13.3 billion) consisted of supplies to the European Union (EU) Members States. The transactions when goods are shipped from Lithuania and the EU Customs Union territory are zero-rated for VAT in accordance with the Law on VAT, and the supplier of goods must justify its application by the transaction accompanying documents.
“It is noteworthy that each such transaction requires a careful assessment, on the part of the supplier, of conditions for goods shipment and transfer to the purchaser and their proper documentation. In the opposite case, in the event of such evidence lacking a proposal may come from the State Tax Inspectorate to a taxpayer to apply the standard rate of VAT and its recovery from the purchaser almost leaves no hope. Lack of at least one document or information therein may involve a taxpayer into a tax dispute and to win it is also not that easy,” says Algirdas Kviklys, senior tax adviser at Leinonen Lietuva.

A high price for lacking documents

This is well-illustrated by the practice of the Supreme Administrative Court of Lithuania (LSAC). During the period of 2010 – beginning of 2015, hearing of over 20 administrative cases was completed where the right of a taxpayer to apply zero-rate of VAT to the supplies to another EU state was examined. These cases reached the LSAC after hearing of taxpayers’ disputes at the Commission on Tax Disputes under the Ministry of Finance and the regional administrative courts. Statistics is not favorable – the LSAC adopted decisions favorable to taxpayers only in two cases, i.e. cancelled or partly cancelled decisions relating to the State Tax Inspectorate tax inspection acts whereby the right of a taxpayer to apply a zero-rate of VAT was denied and additional VAT obligation, default interest and penalties were determined.
In most cases, documents provided by taxpayers during tax inspection contained shortcomings (e.g., not signed, not properly completed shipping waybills or it was not clear whether the undersigned actually represented the purchaser, the recipients of goods were not indicated in the supply documents, places of goods transfer were not clear). Basing on them, it is possible to state just the sale of goods, though they are insufficient to justify the actual fact of goods shipment.

Where is the main problem?

It would seem at first sight it would be enough to ensure the proper filling in of shipping waybills, their stamping and signing. Certainly, it would help to protect from a VAT risk, accompanying international trade transactions; however, in most cases it would be enough only in the event that shipment of goods is organized by the seller. Where goods are supplied under Incoterms EXW, FCA and similar conditions, the seller basing on the law practice shall be able to prove that the purchaser transported the sold goods from Lithuania, i.e. did not transfer goods to other persons within the territory of the country. The suppliers of goods quite often assert that one cannot know of the purchaser’s behavior; however, institutions undertaking assessment of such transactions may raise questions as regards the supplier’s honesty and negligence. In this case the absence of additional accompanying documents will be treated as a shortcoming in seeking to protect the taxpayer’s position.

A non-final list of proofs

According to Algirdas Kviklys, senior tax adviser at Leinonen Lietuva, the main problem of documentation of international trade transactions arises due to the fact that a list of proofs that may justify the application of the zero-rate of VAT, provided in the comment to Article 56 of the Law on VAT, is not final, whereas tax disputes are based on the actual circumstances for performance of transactions that are determined and confirmed by transaction-accompanying documents. Documents, not mentioned in the comment to the LAW on VAT, may become a proof in tax disputes. Thus, how is it possible for the supplier of goods to identify and evaluate what documents are necessary in his supply scheme?
Practice, based on the decisions of the European Union Court of Justice, being formed by LSAC generated three main conditions to be assessed in seeking to identify whether a taxpayer was entitled to apply the zero-rate of VAT to the supplies: 1) whether goods were supplied to the VAT payer registered in the corresponding Member State and whether they were supplied by a VAT payer; 2) whether the purchaser acquired the right to dispose of the goods as their owner and 3) whether the goods were physically shipped from the territory of the supplier’s country.
In the cases where goods are shipped by the purchaser, the second condition may be an additional provision whether the purchaser (foreign entity) did not transfer the right to dispose of the goods to a third person within the territory of the country. If an answer to this question would be negative, such supply of goods could not be considered as the supply of goods to another EU Member State and the standard rate of VAT should be applied to such supply.

To prove that the purchaser participated in the transaction is of major importance

If the first condition could be justified by verifying the validity of the purchaser’s VAT number in the VIES system and the third condition should be confirmed by orderly shipping waybills confirmed by persons possessing a signature right, the verification of the second condition and supplementary conditions thereof quite often needs additional efforts on the part of taxpayers. Rather often questions are raised whether a purchaser exists really, whether he had opportunities to accept the supplied goods, and whether he declared the acquisition of goods in his own state. It becomes complicated to answer these questions in case the transaction circumstances have not been properly documented during the supply of goods and the purchaser no longer performs his activity. One of the main proofs is the real participation of the purchaser in the goods supply transaction in seeking to confirm that the supplier transferred the right of disposal of goods and fulfilled the second condition.

Not enough is just to know of the fair performance of the activity

With account of the LSAC practice and aiming to help collect and document such proofs, the STI prepared recommendations for verification of reliability of the future business partners where the main aspects were laid out to be taken into consideration in seeking to get protected against negative tax consequences. These recommendations for many may seem to be excessive; moreover, specific documents that could prove the control actions performed by the supplier are also not indicated.
Leinonen Lietuva undertakes organizing seminars on documentation of international transactions wherein it shares its practice in appraising the clients’ transactions, experience of their representation in tax disputes and practical advice, of how judicial practice and STI recommendations could be turned into documents confirming the actual circumstances of transactions. Experience of training organizers shows that taxpayers have further questions as regards the additional documents to be received and documentation of actual circumstances of transactions.

Tax disputes regarding not performed “homework”

Even though quite often it is considered that the activity of unfair suppliers was assessed in the cases that reached the LSAC and the fair taxpayers should not experience negative tax consequences, however, the LSAC decisions in these cases have formed the practice for assessment of the circumstances of transactions which is used as guidance for the STI in performing control actions. The actual circumstances may be verified by performing efficient checks, interrogating carriers, agents and other transaction parties concerned. Thus, where the company has nothing for justification of its statements, it may get involved in tax disputes. This shall take much time and efforts while negative tax consequences may overshadow the company’s success in entering new foreign markets. In most cases this is just predetermined by the non-performance of company’s “homework” – absence of allocation of responsibilities for information verification and documentation, lack of internal control processes over the conditions of the supply of goods, sometimes – negligence and lack of knowledge.

Attention will not slacken

The STI action strategy notes that application of the unjustified zero-rate of VAT remains one of the main tax risks to be accorded high attention. For that reason the ability to document reasonably the international trade transactions in progress and already carried out should be implemented in the activities of the companies.


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