Zoom in on EU Value Added Tax
What is it and why does it matter for EU ship supply?
Remco De Bruijn serves as the Tax Director for B&S International BV. As a VAT specialist, he is also the head of the OCEAN VAT subgroup. With over two decades of experience in indirect taxes for one of Europe's major IT companies in the consumer goods industry, he responds to challenging questions from the OCEAN Secretariat about the role of VAT in European ship supply.
OCEAN: Remco, thank you for taking time out of your busy schedule to talk to us about VAT. You have an impressive CV in the area of indirect tax. Tell us a little more about you, please.
RdB: Thanks! At present, I am the Tax Director of B&S International BV and responsible for the B&S Group’s total tax position, which means managing/coaching a group of tax specialists in all tax fields (VAT, Customs, Excise, CIT). Before I was a Concern Controller for Indirect Tax –with a strong focus on tax technology, designing in-house developed tax engine for our ERP software. VAT has always been a very prominent part of my work and education. Over the last 20 years, I have been preparing, reviewing & filing VAT returns for several group companies in multiple jurisdictions worldwide. So I think I know what I am talking about when it comes to VAT.
OCEAN: In the ship supply sector, there is a lot of confusion around how VAT works. This is because there are many different actors involved and each actor has their own responsibilities when it comes to paying VAT. The concept of supply in the ship supply industry is quite complex. Can you try to explain how things work from a VAT perspective?
What is ship supply?
OCEAN: In your own words, how would you define ship supply?
RdB: Ship suppliers are companies that supply ships. They are involved in supplying food, fuel and spare parts, crewing ships and other services related to ship operations. Ship chandlers can be found in ports throughout the world; these companies purchase goods from manufacturers and distribute them directly to vessels or through agents at various locations around the world. In addition to supplying ships with goods from land-based providers, it is also possible for vessels to receive supplies from other ships moored nearby.
The VAT rules for the ship supply sector are rather complex
OCEAN: The VAT rules for the ship supply sector are rather complex. They vary depending on whether you supply goods or services within or outside of Europe and whether your customer is VAT registered (or not). They also vary from Member State to Member State. Can you help us understand this minefield and why it matters to ship supply?
What is VAT?
RdB: Sure. Let me try, at least! Overall Value Added Tax, or VAT, in the European Union is a general, broadly based consumption tax assessed on the value added to goods and services. It applies more or less to all goods and services that are bought and sold for use or consumption in the European Union. At its easiest, I think of VAT as that is often charged when goods are consumed in the European Union. Let's be honest, it is one of the main ways that the Member States make money.
The final consumer pays
RdB: In simple terms, the system is set up so that, in the end, the person who uses or buys goods or services on "European soil" pays a certain percentage of the price. In theory, VAT applies to all business activities involving the making, selling, and giving of goods and services, including ship supply.
How much do I have to pay?
OCEAN: How is VAT charged?
RdB: VAT is charged as a percentage of the price, so the actual tax burden can be seen at every step in the production and distribution chain. EU law only says that the standard rate of VAT has to be at least 15% and the reduced rate has to be at least 5%. The rates that are actually used vary between EU countries and between different kinds of goods. Also, some EU countries have kept different rates for certain products. In 2022, the standard rate will range from 17% in Luxembourg to 27% in Hungary. In my country, the VAT standard rate is currently 21%.
How do businesses pay VAT?
OCEAN: How is VAT paid?
RdB: Broadly speaking, VAT is taken in small amounts. Businesses that are registered for VAT pass on the VAT they have collected on behalf of the government to the authorities in regualr VAT returns. Before they do that though, they can deduct the amount of VAT they paid to other VAT-registered businesses on purchases they made for their business. With this system, the tax is always the same, no matter how many transactions take place.
Who pays VAT?
OCEAN: Who is responsible for paying this tax?
RdB: That's easy, the "taxable person", of course!
OCEAN: But who is this?
RdB: Well, it is usually the person selling the goods that charge the VAT to their consumer and collects it. As discussed, it then pays the tax to the government. But - to repeat - this VAT is part of the price that the buyer pays to the seller. A key condition is that the sale must take place in the VAT territory of the Member State. So a Dutch business selling to a Dutch customer charges VAT at the Dutch VAT rate. The same Dutch business would, however, not charge VAT for a sale to their Belgium neighbour - a different, reverse charge mechanism, would apply. I'll save that debate for another time.
No VAT! How?
OCEAN: Yet I heard that there are exceptions to the payment of VAT! Can you elaborate?
OCEAN: Yes, there is a key exception! Goods sold for export or services sold to customers outside of the country are usually not subject to VAT. There are also other exemptions, for example about international transport.
Now, think about it in the context of ship supply!
Most of the time, the "consumer" of our products is the international crew of an international vessel. Or the vessel requires maintenance while on the high sea - the product the captain bought in Rotterdam may only be used when in the middle of the Atlantic.
Just imagine an American captain orders paint to give his Australian-flagged ship a new colour :-). We supply this paint in the port of Rotterdam and they start opening the paint cylinder 5 miles out of the Port of Rotterdam and start painting. They finish the paint somewhere between Madeira and Venezuela. Where is the consumption of this paint? In the Netherlands?
So, do you charge VAT or not?
Which VAT shall we charge?
You are right, the answer is NONE whatsoever as there is no domestic Dutch supply and the consumption takes place in international waters.
The 70% rule
OCEAN: Oh, this should be complicated. Can you elaborate?
RdB: European ship supply has always been in a very unique position. We operate at the "fringes" of the EU Single Market. Ship supply is international and, therefore, complicated!
But, it does not have to be. For supplying merchant ships, the rules have always been pretty easy to understand: With the help of customs documents, we can prove that the goods had left the Union, which confirms that we were correct in not charging VAT.
Although, the rules are a little bit more complicated now. Now, you have to be able to show that (1) a ship is only used for business and (2) spends at least 70% of its time on the high seas.
And then there are a lot of different floating and sailing vessels that we also supply like cargo ships, cruise ships, ferries, (super-)yachts, offshore installations, work ships, barges, fishing boats of all sizes, and so on. This could make meeting the 70% rule more challenging to prove.
OCEAN: So, no one rule fits all?
RdB: The type of business we are in affects whether or not VAT should be applied to deliveries made by ship suppliers. Vessels that sail around the world can choose where to buy their goods, and a 10–15 per cent difference in price because of VAT could hurt competition in this day and age of tight budgets and cost-cutting. Competition might not be as important for ships that trade in European waters, but only if everyone has the same chances of success.
Harmonisation of rules: What harmonisation?
OCEAN: Why not harmonise the VAT rules across Europe for ship supply?
RdB: It is not that easy. VAT is not harmonised at the EU level. So, in their own laws, EU countries follow the rules set out in the VAT Directive. Because of this, each EU country has its own way of putting the rules into practice. This can create headaches! As a result, I am getting more and more questions from ship suppliers about how EU Directives on VAT should be interpreted in national laws. Since VAT is not (yet) standardized across the European Union, it is hard for us to know how the rules are applied in this area. Even though the OCEAN Board would like to support talks about national VAT laws, there aren't many ways to talk about VAT at the European level as long as taxes are set at the national level.
It's more important than ever that the government and lawmakers talk about VAT as a whole
When thinking about it or not VAT applies for ship supply, depending on national legislation, one may have to consider and discuss with the national authorities the impact of the following:
- Types of vessels supplied: cargo vessels, cruise vessels, ferries, fishing boats, yachts, superyachts, work ships, barges, offshore installations, etc.
- Types of clients: ship owners, management firms, catering companies, etc.
- Types of suppliers (from your national perspective): national supplier, EU-supplier, non-EU-supplier.
- Types of goods supplied: stores, provisions, veterinary goods, free-floating goods, custom goods, etc.
- Types of services: port services, services carried out during the next trip, transport services, etc.
- Is the next destination (EU or third country) relevant?
So, you see, it is not as clear as one may think and many factors need to be considered.
The future of VAT in EU ship supply
OCEAN: So what do you think about the direction of VAT in the future and, in particular, for ship supply?
RdB: I say that, when looking into the future of VAT, VAT-free ship supply is crucial to keep our valuable European ship supply industry in Europe! I can only stress again that VAT-free ship supplies need to be kept at all costs. We need national and EU laws to make it clear that we don't have to pay VAT and excise duties on our ship supplies - the logic I have already explained to you earlier, right? Remember the paint example!
And we are not alone here: The tax- and duty-free use of goods and services is one of the most important parts of international shipping!
I fear that the impact of changing the current system and beginning to charge VAT can be felt almost instantly: A ship can get supplies at every port it stops at, so where the vessel refuels and refills will also depend on how much goods cost, how well they move, and what services are available in each port.
The formula is simple: High auxiliary port costs + high taxes = Fewer vessels calling EU ports! Is this what we want? Really?
OCEAN: We want ships to call EU ports! Well, time is flying when you are having fun. What would you say is the key message you wish your readers to take away?
RdB: It was a pleasure to talk to you. Thank you.
I understand that many observers in the maritime world believe that talking about VAT, VAT rules, and European VAT laws and policies are not so exciting.
But I beg to differ! I have dealt with VAT my entire professional career and studies. It is very complex for sure, but also so interesting and their study rewarding. Above all, it is dynamic and continues to evolve. This is why I urge ship supply businesses to not only stay interested and informed but also to engage with your national and EU decision-makers. If we share our practical experiences and provide case studies, and examples to those that decide the rules, we can assist in creating effective and efficient VAT practices and laws that positively impact businesses and citizens alike.
I will close on a word specific to ship supply: Please remember that we are in global competition. Ship supply exists everywhere! Freedom of duty has a big effect on the price of goods and this affects where the vessel may call - inside the EU or directly outside our beautiful Union. I think it is reasonable to keep this aspect of global competition in mind when thinking about the future VAT rules for ship supply.
OCEAN: What a closing statement! Many thanks for your insights.
RdB: My pleasure. Dank U!