Triangulation is a situation that involves a sale of goods, where three different member states in the EU are involved and where there are two sales transactions but one transport transaction. This is best understood by the following definition and illustration.
Triangulation means a sale from a taxable person in Member State 1 to a taxable person in Member State 2, who sells these goods further to a taxable person in Member State 3. Goods are transported directly from Member State 1 to Member State 3.
In the above definition a taxable person means a person who carries on an economic activity and who has a valid VAT registration number.
But how will such transactions be treated for VAT purposes? Where will the VAT be chargeable? This depends on the transport of the goods so one has to determine who will be responsible for the transport.
To understand better it is advised to make reference to the following definition of supply of goods which can be found in the Third Schedule, Article 1 of the Value Added Tax Act:
(a) a supply of goods that are not transported takes place where the goods are at the time when they are placed at the disposal of the person acquiring those goods;
(b) a supply of goods that are transported takes place where the goods are at the time when the transport of those goods begins;
(c) when the transport of goods begins outside the Community and ends in a Member State the supply of those goods by the importer and any subsequent supply up to the acquisition of those goods takes place in the Member State where they are imported.
The following examples will give an insight of the different scenarios:
Case 1 Sale 2 is a sale with transport
In this case Sale 1 between A and B is a sale without transport which according to the above definition takes place where the goods are at the time when they are placed at the disposal of the purchaser and therefore at MS1. Therefore Sale 1 is taxable in MS1.
Sale 2 between B and C is a sale with transport. This supply of goods takes place where the transport begins and therefore at MS1. Therefore B would have to register for VAT purposes in MS1 and report the transaction in the VAT return there.
In theory, B would be subject to pay VAT on Sale 2 in MS 1 but it is exempt from VAT because goods are transported from MS 1 to another Member State and to a taxable person.
Case 2 Sale 1 is a sale with transport
In this case Sale 1 between A and B is a sale with transport and therefore the supply of goods takes place where the transport begins that is, in MS 1. In theory, this sale is subject to VAT in MS 1 but is exempted because goods are transported outside MS 1 to another Member State and to a taxable person.
Sale 2 between B and C is a sale without transport, which takes place where the goods are at the time when they are placed at the disposal of the purchaser and therefore at MS3. Therefore Sale 2 is taxable in MS3. B would therefore have to register for VAT in MS3 and charge MS3 VAT on the supply and report the transaction in MS3 Vat return.
However in this case one can apply the Triangulation Simplification Procedure. Simplification procedure is only applicable if the transport is arranged by A or by B as purchaser, as in Case 2.
Simplification avoids B to register for VAT purposes in MS3 and fill in the VAT returns there.
To benefit from this procedure B has to:
1. Issue a tax invoice to C, which has to indicate clearly that it is a Triangulation and a simplification invoice.
2. B must include this supply on its Recapitulative Statement (EC sales Listing) in MS 2 quoting the VAT number of C in MS 3 and indicate that it is a triangulation operation.
3. The intra-community acquisition made by B in MS 3 is exempt from VAT and B is not obliged to register for VAT purposes in MS 3
Case 3 - False Triangulation
Normally triangulation is a term used in cases that involve the supply of the same goods between three different member states. If one of the three countries involved in the transaction is not an EU member state, then this referred as false triangulation.
An intra-community supply takes place where the transport begins, however in the case of imports it takes place where the goods are imported. Therefore, the supplies of goods by an importer and any subsequent supply up to the acquisition of those goods, takes place in the member state where they are imported.
But where are the goods imported?
The goods are imported where the Vat becomes chargeable (at Customs) and therefore the importer must be registered for Vat there.
In the above scenario if B is importing goods in MS3 it must register for Vat in MS3. However if B sells goods to C but C imports goods himself then B is not required to register in MS3 since C will pay the Vat.
The above has been written in the context of the Maltese scenario and legislation.
See also FAQ about triangulation and false tringulation .
For more information contact Clive Farrugia