Most multinational enterprises (MNEs) have a central procurement function who selects suppliers and negotiates terms and conditions. The advantages of a central procurement function are obvious:
· The company is in a stronger position to negotiate;
· Controls and processes are centralised.
Ideally, the supplier will contract with only one legal entity of the MNE, invoicing only happening to this legal entity. It avoids the other group entities having to onboard the supplier, register him in their systems and process the invoices.
For the sake of statutory accounting and, for sure, for transfer pricing purposes, the buying entity will likely recharge the costs to the other group entities, to the extent these benefit from the supplies. The central procurement function might also look for an appropriate supplier to fulfil the need of an individual company of the MNE and contract centrally with the supplier.
The question raises whether under EU VAT law, the central invoicing process can be organised in a compliant and tax neutral manner. The key question that needs to be answered is whether EU VAT law permits breaking down the central procurement in two taxable supplies, one from the supplier to the central procurement entity and one from the procurement entity to the using entity.
In case EU VAT law would not consider the central procurement entity as the recipient of the supply, but the end user directly, then a central invoicing process cannot be organised. In this case, the supplier will have to send individual invoices to all users, which can be hundreds of legal entities for large MNEs. Efficient central procurement then becomes almost impossible.
EU VAT law defines a taxable supply as a supply of goods or services for consideration by a taxable person acting as such. A supply of goods is defined as the transfer of the right to dispose of tangible property as owner.
According to the CJEU judgment in Case C-320/88, the concept does not refer to the transfer of ownership in the legal forms provided for by the national law of the member states.
This covers any transfer of tangible property, which empowers the other party to dispose effectively of that property as if it were its owner. Services are not really defined. Any transaction that is not the supply of a good is a supply of service, according to Article 24 of the VAT Directive.
A central procurement entity will normally not be able to dispose of goods as if it was the owner or be able to benefit from services it procures on behalf of the group, unless the central procurement entity would also buy for own use part of the goods or services. Therefore, doubts arise whether the transaction between a supplier and a central procurement entity can be considered a taxable supply.
Case law
The case law of the CJEU seems to push us to the conclusion that this is not the case. In the Vega case a central procurement entity provided fuel card to group entities for them to fuel up their vehicles. The fuel supplier invoiced the central procurement entity. The central procurement entity recharged the fuel with a mark-up to the group entities.
The CJEU, referring to the older Auto Lease Holland case in its ruling in the Vega International dispute, decided that because the central procurement entity could not dispose of the fuel, the entity could not be considered buying the fuel but only financing the purchase of the fuel.
However, an important concept of EU VAT law was not discussed in the fuel card cases. The commission agent’s principle. This is somehow surprising because the CJEU can correct, reformulate, or take account of provisions of community law, which the national court has not referred to in its question (see Case C-233/05), but there might have been good reasons from a contractual or factual perspective.
Article 14(2)(c) of the VAT Directive equates with a supply of goods the transfer of goods pursuant to a contract under which commission is payable on purchase or sale. Article 28 lays down that where a taxable person acting in his own name but on behalf of another person takes part in a supply of services, he shall be deemed to have received and supplied those services himself.
These provisions create the legal fiction of two identical supplies provided consecutively, with the operator, who takes part in the supply of services and who constitutes the commission agent, being considered to have first received the services in question from the supplier before providing, secondly, those services to the person on behalf of whom it acts (see Case C-464/10).
In a purchase commissionaire structure, the commission agent acts on behalf of the recipient of the supply and in a sales commissionaire structure the commission agent acts on behalf of the supplier. It is former structure that is relevant for central procurement.
According to the CJEU there are two conditions that need to be fulfilled before applying the commission agent’s principle:
1. There needs to be a commission agreement, which can be oral, between commission agent and principal;
2. The goods and services that are recharged by the commission agent need to be identical to those charged by the third-party supplier to the commission agent.
Because of this broad interpretation, intermediaries who cannot be regarded as commission agents under commercial law can still fall under the commission agent’s principle in VAT. Any person who buys on behalf of another person and recharges the costs, with or without mark-up can be considered a commission agent for VAT (see Case C-274/15).
Condition one: there needs to be a commission agreement
The procurement company needs to purchase something on behalf of the principal, who accepts the purchase, because of the oral or written mandate given to the procurement company. It is not necessary that the procurement company accepts (full) liability for the good or service. The procurement company only acts as an agent.
One recent CJEU case concerning Fenix International v HM Revenue and Customs drills a bit further into the condition to have a commission agreement. The Fenix case is specific to intermediation in electronically supplied services, which is regulated by a specific article of the VAT regulation.
Article 9a of the VAT Regulation says that where electronically supplied services are supplied through a communications network, an interface or a portal such as a marketplace for applications, a taxable person taking part in that supply shall be presumed to be acting in his own name but on behalf of the provider of those services unless that provider is explicitly indicated as the supplier by that taxable person and that is reflected in the contractual arrangements between the parties.
The conditions in the VAT Regulation do not apply to other undisclosed agency structures but do shed light on when to apply the commissionaire principle or as opposed to a direct sale from supplier to customer.
Only when it can be demonstrated that there is a direct contractual arrangement between supplier and beneficiary, whereby the supplier is indicated as the person performing the supply, we can speak of a direct sale. This means that when the supplier contracts with the undisclosed agent and not with the customer, there is no direct sale and the commission agent’s principle applies.
However, the principle of economic reality needs to be observed in a sense that parties cannot simply indicate the supplier as contracting entity to avoid the application of the undisclosed agency principle in VAT. The fact that the customer knows the identity of the supplier does also not avoid the application of the undisclosed agency principle.
The problem of the commission agent principle not having been considered in the fuel card cases has been debated by the VAT Committee with its working paper published in September 2022.[1] I agree with the Commission that a fuel card system structured in the form of a commission agent agreement should fall under Article 14(2(c) of the VAT Directive. In this case, the manager of a fuel card system does more than simply financing the supply of fuel.
Condition two: the goods and services need to remain identical
The goods and services need to remain identical. A commission agent using the supplies as input for supplies of its own, stops being a commission agent but becomes a supplier.
If the commission agent buys goods or services to become part of a package of services in a sense that the additional services are a means to better enjoy the main supply provided by him, the additional services get bundled with the main supply and undergo the same VAT treatment. The commission agent principle does not apply under these circumstances.
This article was written in a personal capacity.
