VAT_EU_Italy

 

Indirect tax (i.e., VAT) concern was raised when the US entity place the Purchase Order (PO) to Italian supplier under FCA (or FOB) term for direct shipment to the customer in Qatar (also F-term) where the customer collect in Italy where the US entity does not have an indirect tax registration. 

To resolve this issue, there are two proposed solutions. 

(1) between the EU supplier -> US entity: EU supplier can only apply 0% VAT for export, if either EU supplier or the US entity arranges the transport outside EU. If end-customer collects, EU supplier should charge local VAT

(2) US entity -> non-EU end-customer: If EU supplier or the US entity arranged the transport outside EU, then the US entity sale is outside the scope of VAT. If end-customer collects, the US entity should strictly speaking VAT register locally, i.e. Italy in this case.

<=> From a VAT perspective, we should use a C or D Incoterm (but not DDP) to avoid the risk in Italy.

Based on the above inputs, our idea is to propose DAP Qatar to the end-customer in Qatar to avoid any VAT.
Our supplier has contacted their FF to quote transport to Qatar. Please, can you indicate, what incoterm should we ask to the supplier?

---------------------------

The core problem is the US entity potentially triggering an Italian VAT obligation on the sale to the Qatari customer if the customer effectively takes possession or collects the goods in Italy.

The solutions correctly identify that arranging transport out of the EU by either the EU supplier or the US entity is key to achieving 0% VAT on the EU supplier's sale to the US entity and for the US entity's onward sale to be outside the scope of EU VAT.

The plan is for the US entity to sell DAP Qatar to the end customer.

Under DAP, the US entity (seller) is responsible for arranging and paying for the main carriage to the named place in Qatar and assumes all risks until the goods are ready for unloading at that place. Crucially, the US entity is responsible for export clearance from Italy.

1. Italian Supplier -> US Entity.
Based on Solution (1), the Italian supplier can only apply 0% VAT if either the supplier or the US entity arranges the transport outside the EU. If the end customer collects in Italy (which is what the original FCA/FOB + customer collection scenario risked), the supplier must charge Italian VAT to the US entity.
To ensure the Italian supplier can zero-rate the sale to the US entity, and to enable the US entity to fulfill its DAP Qatar obligation, the Incoterm between the Italian Supplier and the US Entity must ensure the goods are immediately put into international transport out of Italy destined for Qatar, arranged either by the supplier or the US entity.
Given your goal for the US entity to sell DAP Qatar (meaning the US entity handles transport to Qatar), the ideal Incoterm for the Italian Supplier -> US Entity leg is one where:
* The Italian supplier is clearly making an export supply, allowing them to zero-rate the VAT.
* The goods are put onto a carrier destined for Qatar from Italy.
Incoterms where the seller (Italian Supplier) is responsible for the main carriage out of the EU work well for ensuring the supplier can zero-rate. These are typically C or D terms.
(a) CPT Qatar (Carriage Paid To): Supplier pays for carriage to Qatar. Risk transfers when goods are handed to the carrier in Italy. Supplier handles export clearance.
(b) CIP Qatar (Carriage and Insurance Paid To): Same as CPT, but supplier also pays for insurance.
* Why CPT/CIP Qatar (Supplier -> US) is also strong: The supplier is responsible for arranging and paying for the carriage to Qatar and handling the export. This also justifies their 0% VAT rate. The US entity effectively takes over responsibility (risk under CPT/CIP) once the goods are with the carrier but receives the goods (cost-wise) in Qatar.

(c) DAP Qatar (Delivered At Place): Supplier delivers to the named place in Qatar. Supplier pays for carriage and assumes risk until arrival. Supplier handles export clearance.
Asking your supplier to quote using a DAP Qatar or CPT/CIP Qatar Incoterm for the sale to the US entity seems the most robust approach from a VAT perspective.

* Why DAP Qatar (Supplier -> US) is strong: The supplier is responsible for delivering the goods to Qatar. This clearly demonstrates an export from Italy by the supplier, justifying the 0% VAT rate on their sale to the US entity. The US entity then receives the goods in Qatar and can proceed with their onward DAP sale to the end customer from that point. This aligns the two legs geographically.

Considering the supplier has contacted their FF to quote transport to Qatar, asking them to quote DAP Qatar for the sale to you (the US entity) is a very logical and VAT-sound request. This aligns their logistics quote process with the required Incoterm for your purchase from them.

Therefore, you should ask your Italian supplier to quote using the DAP Qatar Incoterm for the shipment to the US entity. Alternatively, CPT/CIP Qatar would also work well to ensure the supplier handles the export from Italy. DAP is often simpler as it keeps the risk and cost with the supplier until arrival in Qatar.

In summary, ask the Italian supplier to quote for the goods on a DAP Qatar (named place in Qatar) basis for the sale to the US entity. This ensures the supplier handles the export and qualifies for 0% Italian VAT, allowing the US entity to receive the goods in Qatar ready for their onward DAP sale to the end customer without triggering Italian VAT registration.

If it is not back-to-back F-term....  

Under FCA (Free Carrier) Incoterms 2020, the seller (the Italian supplier in this case) is responsible for the export clearance from Italy.
(1) Seller's Responsibilities (Italian Supplier):
* Make the goods available at the named place (e.g., their premises, a forwarder's warehouse).
* Package the goods.
* Load the goods onto the buyer's collecting vehicle if delivery is at seller's premises.
* Carry out any export clearance formalities required (licences, security clearance, inspections, etc.) at their own risk and cost.
(2) Buyer's Responsibilities (US Entity):
* Nominate the carrier to pick up the goods at the named place.
* Contract for and pay for the main carriage from the named place to the destination (Qatar).
* Assume all risks from the moment the goods are delivered to the carrier at the named place.
* Handle all import clearance formalities in the destination country (Qatar).
Revisiting the F-term + D-term chain with this correction:
* Supplier (Italy) -> US Entity (FCA Italy): The Italian supplier handles and pays for the export clearance from Italy. The US entity arranges and pays for the international transport from Italy to Qatar. The supplier provides the US entity with the goods already cleared for export.
* US Entity -> Customer (Qatar) (DAP Qatar): The US entity is responsible for arranging and paying for the transport to Qatar and delivering the goods there.
Does this chain still avoid the Italian VAT issue?
Yes, generally this structure still avoids the Italian VAT issue for the US entity.
* The Italian supplier makes a supply of goods that are intended for export and handles the export clearance process themselves under the FCA term. Provided they receive confirmation that the goods have left the EU, they can zero-rate their sale to the US entity. The US entity arranging the international transport is the key logistical step ensuring the goods leave the EU.
* The US entity is selling goods that are being transported from Italy (EU) to Qatar (non-EU), and the US entity is arranging this international transport under the DAP term. This sale is therefore considered outside the scope of EU VAT. The Qatari customer is not taking possession or collecting the goods within Italy, which was the trigger for the potential VAT issue.

 

Using FCA from the supplier combined with DAP to the customer, where the US entity arranges the international carriage, does prevent the Qatari customer from collecting the goods in Italy and avoids triggering an Italian VAT obligation for the US entity on the onward sale. The supplier handles the export clearance, and the US entity handles the export transport.