Triangular Trade

Triangulation is the term used to describe a chain of supplies of goods involving three parties – selling party (the company owing the customer order), delivering party and receiving party – in two or three EU member states. The goods are delivered directly to the last party in the chain, instead of physically passing from one party to the next. A fiscal representative can be involved for each one of these parties.

In a scenario where only two EU member states are involved, the intermediate supplier (the party owing the original customer order based on the external customer's order) would in normal circumstances be required to register for VAT in the country where the goods are delivered and declare VAT there on their supply. To avoid imposing this burden on intermediate suppliers (sellers), all European Union countries have agreed on a simplified procedure. This simplified triangulation means that if goods are purchased from a company in one EU member state and sold via an intermediate supplier to a company in another EU member state, the latter company can zero-rate the goods. All parties involved must be registered for VAT.

Triangular trade scenarios

A triangular trade scenario can occur in sales to external customers and in sales involving two divisions of the same company:


Case	Base country	From/To country	Third-party country
1	EU member state A	EU member state C	EU member state B
2	EU member state A	EU member state B	EU member state A
3	EU member state A	EU member state B	EU member state B
4	EU member state A	EU member state A	EU member state B
5	EU member state A	Non - EU member state C	EU member state B
6	EU member state A	EU member state A	Non - EU member state B
7	EU member state A	EU member state C	Non - EU member state B
8	Non - EU member state A	EU member state B	EU member state B
9	Non - EU member state A	EU member state C	EU member state B
10	EU member state A	Non - EU member state C	EU member state A
11	Non - EU member state A	Non - EU member state C	Non - EU member state B
12	Non - EU member state A	Non - EU member state B	Non - EU member state A
13	Non - EU member state A	Non - EU member state B	Non - EU member state B
14	Non - EU member state A	Non - EU member state A	Non - EU member state B
15	Non - EU member state A	EU member state C	Non - EU member state B
16	Non - EU member state A	Non - EU member state A	EU member state B
17	Non - EU member state A	Non - EU member state C	EU member state B
18	EU member state A	Non - EU member state B	Non - EU member state B
19	EU member state A	Non - EU member state C	Non - EU member state B
20	Non - EU member state A	EU member state C	Non - EU member state A

Countries involved

M3 Business Engine identifies a triangular trade scenario in its VAT decision based on the countries of these three parties:

The party owning the customer order
The party delivering the goods, that is, the delivering warehouse or the third party supplier
The party receiving the goods, that is, the customer's delivery address.

The customer's country itself is irrelevant in the VAT decision. The identification of the base country and the From/To country differs depending on whether the sale is external or company-internal.

The third party in the triangular trade is:

For sale of goods with direct delivery from an external supplier based on a customer order with line type 2, the third party is the external supplier.
For triangular trade with inter-division supply through an internal customer order, the third party on the internal customer order and the external customer invoice is the delivering warehouse. On the internal MUC invoice between the selling and the delivering division, the third party is the country of the external customer's delivery address on the external customer order.
For purchase of goods from an external supplier that delivers the goods directly to the selling company's customer, the third party is the country of the customer's delivery address on the customer order that is connected to the purchase order at the selling party.

Sale to external customer using external supplier

From the perspective of the intermediate, selling party, the base country on the original customer order and the customer invoice is the country of the selling facility (United Kingdom). The From/To country is the country of the customer's delivery address (France). The third-party country is the country of the external supplier delivering the goods (Sweden).

From the perspective of the external supplier, the base country is the country of the fictive receiving warehouse on the purchase order (United Kingdom). The From/To country is the country of the delivering supplier (Sweden). The third-party country is the country of the customer delivery address on the customer order that is linked to the purchase order (France).

Sale to external customer using internal supplier

The base country on the original customer order and the customer invoice is the country of the selling facility (United Kingdom). The From/To country is the country of the customer's delivery address (France). The third-party country is the country of the delivering warehouse (Sweden). The internal (MUC) customer invoice is sent from the delivering warehouse to the selling facility. The internal (MUC) supplier invoice is sent from the selling facility to the delivering warehouse.

Limitations

Standard M3 Business Engine does not manage VAT in triangular trade in these constellations:

The countries of the division owing the customer order, the delivering division, and the receiving party are the same EU member state.
The countries of the division owing the customer order, the delivering division, and the receiving party are all non-EU member states.
Two of the countries of the division owing the customer order, the delivering division, and the receiving party are non-EU member states and one is an EU member state.
The sale involves an internal supplier within the same division as the facility owing the customer order.
One or several of the parties involved do not have a VAT registration number.