Declaring an import based on the supplier’s invoice may seem natural. However, this practice can lead to the wrong amount being reported, in the wrong tax period and sometimes even… in the wrong country.
We regularly encounter this issue when reviewing VAT returns or international flows.
The reason is quite straightforward: in many organisations, VAT returns are populated using data from accounts payable. An invoice received from a supplier established outside the European Union is then treated as an import.
However, purchasing goods from a non-EU supplier and importing goods are two different transactions.
To handle an import correctly, it is necessary to understand not only the commercial transaction but also the customs journey of the goods: where did they enter the European Union? Under which customs procedure? Where and when were they released for free circulation? What value was declared to customs? Who is identified as the importer?
It is precisely at the intersection of VAT and customs that the correct treatment of these transactions lies.
Here are 5 mistakes that we frequently encounter.
Mistake No. 1 – Assuming that an invoice from a non-EU supplier necessarily corresponds to an import
A Luxembourg company purchases goods from a supplier established in the United States, Switzerland, the United Kingdom or China.
It therefore receives an invoice from a non-EU supplier.
However, this does not necessarily mean that an import must immediately be declared in Luxembourg.
Why?
Because an import is determined by the customs journey of the goods, not solely by the supplier’s location.
For example, goods may:
- Be released for free circulation as soon as they arrive in Luxembourg;
- Enter the European Union under a transit procedure before being cleared through customs in Luxembourg;
- Be placed in a customs warehouse;
- Be placed under the temporary admission procedure;
- Be placed under another customs suspensive procedure;
- Or be released for free circulation in another Member State before being transported to Luxembourg.
In some of these situations, import VAT will become immediately due in Luxembourg. In others, it will only become due at a later stage. In yet other situations, no import will need to be declared in Luxembourg at all.
First rule of thumb: do not start with the invoice. Start with the physical flow of the goods and their customs treatment.
Mistake No. 2 – Declaring the import on the supplier invoice date
The date of the commercial invoice does not determine when import VAT becomes due.
This is particularly important when goods are placed under a customs suspensive procedure.
Let us take an example.
Goods originating in the United States arrive in Luxembourg in January and are placed in a customs warehouse.
They are not released for free circulation until April.
Import VAT should not be declared in January simply because the goods arrived in Luxembourg or because the supplier’s invoice was issued during that period.
In this example, it is the release for free circulation in April that triggers the chargeability of import VAT.
The same issue may arise in particular with:
- Customs warehousing;
- Temporary admission with total relief from import duties;
- Inward processing;
- External transit.
As long as the goods remain duly placed under the relevant customs procedure, import VAT is not necessarily due.
This is where a sound understanding of customs becomes essential to the proper preparation of the VAT return.
An ERP system that automatically generates an import entry based on the posting date of the supplier’s invoice cannot, on its own, determine the correct time at which import VAT becomes due.
Mistake No. 3 – Declaring the invoice amount as the value of the import
Another common automatic assumption is to use the supplier invoice amount as the basis for calculating import VAT.
However, the taxable amount for import VAT purposes is not necessarily equal to the amount shown on the commercial invoice.
It is determined in accordance with the applicable customs and import VAT rules.
It is based, in particular, on the customs value, to which various elements may need to be added in order to determine the taxable amount for VAT purposes.
Depending on the circumstances, it may be necessary to take certain duties and taxes into account, as well as incidental expenses such as transport, insurance, commission or packaging costs.
An invoice issued by a supplier for EUR 100,000 therefore does not necessarily mean that the taxable amount for import VAT purposes is EUR 100,000.
The value to be reported must be determined using the import data and the corresponding customs documentation.
This issue once again illustrates why VAT and customs cannot be dealt with separately.
Mistake No. 4 – Declaring an import in Luxembourg when it actually took place in another Member State
The fact that the buyer is a Luxembourg company does not mean that the import takes place in Luxembourg.
Let us take the example of a Luxembourg company purchasing goods in China.
The goods arrive in Belgium, are released for free circulation there and are then transported to Luxembourg.
The import takes place in Belgium, not in Luxembourg.
The company should therefore not declare this transaction as a Luxembourg import simply because it is established in Luxembourg and the invoice from the Chinese supplier is recorded in its accounts.
However, the analysis does not end there.
The subsequent transport of the goods from Belgium to Luxembourg may give rise to an intra-Community transaction and, depending on the applicable arrangement, an intra-Community acquisition to be declared in Luxembourg.
We may therefore have the following sequence of events:
Purchase in China → import in Belgium → intra-Community movement → intra-Community acquisition in Luxembourg.
A single commercial invoice may therefore be associated with several VAT and customs events.
Conversely, the first Member State into which the goods physically enter the European Union is not necessarily the country of importation.
For example, goods may arrive through the port of Rotterdam under external transit, be transported to Luxembourg and then be released for free circulation there.
In this situation, provided that the conditions of the customs procedure are met, physical entry into the Netherlands does not necessarily mean that the import for VAT purposes takes place in the Netherlands.
It is therefore necessary to distinguish between the country of physical entry into the European Union and the country in which release for free circulation and importation for VAT purposes take place.
Once again, only an analysis of the customs flow makes it possible to determine the correct VAT treatment.
Mistake No. 5 – Deducting import VAT without holding the required customs document
This is probably the most important point.
The customs declaration is not only useful for determining the date, amount or country of importation.
It also plays an essential role in exercising the right to deduct import VAT.
To exercise its right to deduct input VAT, a taxable person must, in particular, hold a document certifying the importation that identifies that person as the consignee or importer and states, or enables the amount of, the VAT due to be calculated.
The mere fact of:
- Having purchased the goods;
- Owning the goods;
- Having received an invoice from the supplier;
- Or having recorded import VAT in the accounts;
does not replace this documentary requirement.
Every amount of import VAT claimed as a deduction should therefore be traceable to a customs document identifying the company concerned as the consignee or importer.
This requirement is particularly important in Luxembourg because of the import VAT payment deferral mechanism.
Where this mechanism applies, the company does not necessarily pay the VAT to customs upfront: it accounts for import VAT in its VAT return and may, provided that the relevant conditions are met, exercise its right to deduct that VAT at the same time.
However, the absence of an upfront cash payment does not mean that the import becomes a mere accounting entry.
The substantive and formal conditions for the right to deduct must always be met.
During a tax audit, a company that is unable to produce the customs documents corresponding to the amounts of import VAT deducted may therefore face a challenge to the VAT treatment applied.
The supplier invoice documents the purchase. The customs declaration documents the import.
This is probably the simplest principle to remember.
The supplier invoice documents the purchase.
The customs declaration documents the import and constitutes an essential document for substantiating the right to deduct the corresponding VAT.
The two documents serve different purposes.
A VAT process that identifies imports exclusively on the basis of supplier invoices therefore presents a structural risk.
It may result in the declaration of:
- An import that has not yet taken place;
- An import in the wrong tax period;
- An incorrect taxable amount;
- An import in the wrong Member State;
- Or VAT for which the conditions for deduction are not sufficiently documented.
Does your VAT process genuinely enable you to answer these 5 questions?
Before declaring and deducting import VAT in Luxembourg, it should be possible to carry out five checks:
1. Have the goods actually been released for free circulation?
Or are they still placed under a customs suspensive procedure?
2. On what date did import VAT become due?
Does this date correspond to the reporting period used for the VAT return?
3. What is the taxable amount for import VAT purposes?
Does it correspond to the customs data rather than simply to the amount shown on the supplier invoice?
4. In which Member State did the import actually take place?
Did an intra-Community movement take place afterwards?
5. Do you hold the customs document identifying your company as the consignee or importer?
Can you reconcile this document with the import VAT claimed as a deduction?
If your system does not enable you to answer these questions, reviewing supplier invoices alone will not be sufficient to ensure that your VAT return is correct and compliant.
VAT and customs: expertise that must be combined
Imports are an excellent example of why VAT and customs should not be handled in separate silos.
Understanding the invoice and its accounting treatment is not enough.
It is necessary to be able to reconstruct the customs journey of the goods, identify the procedures used, understand the data contained in customs declarations and reconcile that data with accounting records and VAT returns.
This is precisely the combined approach we develop at VAT Solutions.
Our team works on both international VAT and customs matters, enabling us to analyse a flow as a whole: from the physical entry of goods into the customs territory of the European Union through to their release for free circulation, any subsequent placement under a suspensive procedure and their treatment in the VAT return.
In particular, we can assist companies with:
- Reviewing the VAT and customs treatment of their import flows;
- Analysing customs declarations and the customs procedures used;
- Reconciling customs data with VAT returns;
- Identifying discrepancies between supplier invoices, accounting records, customs declarations and VAT returns;
- Ensuring that the conditions for deducting import VAT are met and properly substantiated;
- Reviewing ERP processes and configurations relating to imports;
- And identifying customs procedures that may be suitable for the company’s flows.
An import is not a supplier invoice with VAT to be declared. It is a customs flow that gives rise to VAT consequences.
And it is by understanding and managing both dimensions that the correct treatment can be ensured.
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