Fiscal representatives in M3 and their impact on VAT calculation and internal invoicing

Outcome

These are what you can learn:

• Why domestic VAT or EU VAT is added automatically to customer invoices or internal invoices in trade within the EU
• The situations where internal invoice transactions can be created between warehouses belonging to the same division
• How to set up your company's fiscal representatives in M3.

M3 fiscal representatives are used for these purposes:

• To enable M3 to retrieve correct VAT registration numbers automatically so that the appropriate VAT (domestic VAT, EU VAT, or no VAT) is applied in trade within the EU.
• To generate internal invoice transactions between the fiscal representative and another warehouse within the same division as a basis for Intrastat and EU sales transactions. See Trade Statistics Scenarios within the European Union.

Use the information to define fiscal representatives in 'Fiscal Representation. Open' (TXS030).

Background to the solution

It is important to know the concept of Intrastat and EU sales reporting, as described in Introduction to Reporting of Trade Statistics in the European Union.

This solution uses the country of the delivering party as one of the key factors is introduced by the program, 'Fiscal Representation. Open' (TXS030).

Limitations

Structure

Generally, a fiscal representative is a local resident party that accepts joint liability for taxes payable by a company in another country. In M3 a fiscal representative basically represents a VAT registration number for a specific division in another EU member state.

Fiscal representation is defined for each division in a table where each line represents one combination of fiscal representative and delivering country. Whenever an intra-EU sales or distribution order case has a match in (TXS030), domestic VAT is calculated instead of EU VAT.

Each fiscal representative consists of a combination of these values:

• Country code of the fiscal representative
• State of the fiscal representative
• Country of delivering warehouse for goods or services (physical or fictitious warehouse)
• Internal customer, that is, the customer functioning as the fiscal representative (the receiving party)
• Internal supplier, that is, the supplier representing the division of the delivering warehouse (the delivering party)
• Tax declaration number, a company-internal tax declaration number used to differentiate trade statistics reports created in 'EU Sales/Purchase. Open Proposal' (TXS130). The tax declaration number is defined for the division in 'Company. Connect Division' (MNS100/G). For the reporting of EU sales, however, the tax declaration number can also be defined for specific fiscal representatives. This number will override the number defined for the division.

All of these values are mandatory except for the state. Normally, the only European case when the state is a required parameter is when the fiscal representative is located in Monaco. The practical consequence is that a company must register all possible combinations of delivering countries for each fiscal representative in the cases where domestic VAT is calculated.

The country code and the VAT registration number, which are used to calculate the appropriate VAT on internal and external invoices, are retrieved from the internal customer and the internal supplier. Note that the country of the internal customer and supplier must be the same as the country of the fiscal representative. The warehouse should have the same internal customer as the fiscal representative.

How applied

• During external invoicing

  When an order is invoiced, for example in 'CO Invoice. Print' (OIS180) or 'SO Invoice. Print' (SOS180), M3 verifies these in 'Fiscal Representation. Open' (TXS030):

  • Whether there is a fiscal representative in the country to which the goods or services are delivered
  • Whether the goods or services are regarded as delivered from that fiscal representative.

  For distribution orders, the receiving division is also verified. If a fiscal representative is found, the VAT registration number is retrieved from the internal customer (for the receiving party) and the internal supplier (for the delivering party). The receiving division is verified only if the goods pass a border between two EU member states.

  Manually Created Invoices

  When you manually create customer invoices in any of the following programs, M3 only verifies the country of the fiscal representative, since a delivering warehouse cannot be specified for these invoices:

  • 'Customer Invoice. Enter Manual' (ARS120)
  • 'Interest Invoice. Open' (ARS660)
  • 'Fixed Asset. Sell' (FAS130).
• During internal invoicing of distribution orders

  If there is a fiscal representative for either the receiving country or the delivering country in (TXS030) when goods are distributed between warehouses, M3 creates a record in the CMUFTR table, which stores transactions to be invoiced internally. This record is created even if the delivery is made between two warehouses within the same division and regardless of whether the warehouses belong to the same facility or different facilities. In previous versions, no CMUFTR records were created for deliveries between two warehouses within the same division. When the sales division creates internal invoices in 'Internal Invoice. Create' (MFS100), these internal invoice transactions automatically generate the EU sales transactions required for trade statistics reporting. Also, when the distributed goods are received, Intrastat transactions are created by function MMS952.

Comments on VAT

• Fiscal representatives versus triangular trade

  In triangular trade, also called three-party trading, goods are moved directly from a supplier in one EU member state to the final customer in another member state on the instructions of an intermediate party, the middleman, located in a third member state. The middleman does not pay VAT on such third-party acquisitions. However, if the middleman has a fiscal representative in the country of the supplier, the trade is not regarded as triangular trade from a fiscal perspective. The middleman is therefore required to pay VAT. This rule also applies to inter-division sales, where the seller or middleman belongs to another division than the supplier.

  See VAT Management in M3 Business Engine.

  To manage VAT exemption for the middleman in triangular trade, see VAT Exemptions.

• Retrieval of 'Our' VAT Registration Number

  In scenarios with company-external customers, M3 retrieves 'our' VAT registration number for invoices, EU sales transactions, and Intrastat transactions based on this search path:

  1. From the fiscal representative in (TXS030)

  2. From the delivering warehouse in 'Warehouse. Open' (MMS005), when applicable

  3. From 'Settings – Internal Invoicing' (MFS010), when applicable

  4. From the division in 'Company. Connect Division' (MNS100).

• Specification of domestic VAT

  Any invoices created in another EU member state where there is a fiscal representative are recorded with the same base country as the fiscal representative and with domestic VAT. If the domestic customer is invoiced in a foreign currency, VAT is added in that foreign currency and, according to EU legislation, another invoice line is also added displaying the VAT in the local currency of the base country.

  M3 automatically identifies the local currency based on the country selected for the division issuing the invoice in 'Company. Connect Division' (MNS100). The exchange rate used to convert VAT amounts in foreign currency to local currency is retrieved from the exchange rate type selected for the division in 'Settings – Trade Statistics' (CRS726). However, if there is a fiscal representative and the base country on the invoice is not the same as the country of the division issuing the invoice in (MNS100), M3 retrieves the currency from the country of the company in 'Country. Open' (CRS045) and then uses the exchange rate retrieved from (CRS726).

• EU VAT

  The phrase "EU VAT is applied" in the following scenarios means that no VAT is calculated on the external invoice issued by the sales division. Instead of a VAT amount, an exemption text is printed on the invoice explaining why no VAT is calculated. See VAT Exemptions. The receiver of the invoice is responsible for creating the corresponding VAT payable and VAT receivable transactions for the EU VAT. For more information about EU VAT, see the description of VAT methods in Create VAT codes for VAT transaction entry and reporting.

• Fiscal representatives and ship-via addresses

  Companies incorporated in countries outside the EU that register for VAT in the EU must report VAT, EU sales and Intrastat for the country through which their goods, intended for European customers, initially enter the EU market. When goods from a non-EU member state enters a port in an EU member state, this port is considered the ship-via address and M3 Business Engine uses the country of this address as the base country in the VAT decision. The only exception is when the company division has a fiscal representative in the country of the customer; the country of the fiscal representative is then the base country, regardless of the ship-via address.

  For each EU member state where the company has a ship-via address, there must be a blank fiscal representative in (TXS030) with only the ship-via address, internal customer and internal supplier entered. For more information about the setup, see Setting Up the M3 Tax Engine. M3 Business Engine checks whether there is a matching fiscal representative with a ship-via address when making the VAT decision. If such a fiscal representative exists, the country of the ship-via address is used as the base country of the transaction. Note that if there is a 'regular' fiscal representative with the same country as the customer and a via country, this fiscal representative country is always the base country. This functionality is implemented for customer orders, service orders and maintenance customer orders.

  • Example 1

    A division in Norway, a non-EU member state, sells goods to a customer in the Netherlands (NL), an EU member state. The division has no fiscal representative in the Netherlands. The sale has a ship-via address as the delivery address. The fiscal representative in (TXS030) has these setup:

    Fiscal Repr. Country	Delivering Warehouse Country	Via Country	VAT Decision
    		NL	The base country is NL. The From/To country is NL. The transaction is regarded as a local sale within the NL and domestic VAT is charged.

  • Example 2

    A division in Norway sells goods to a customer in France (FR) with a ship-via address in the Netherlands on the delivery address. The division has a regular fiscal representative in France:

    Fiscal Repr. Country	Delivering Warehouse Country	Via Country	VAT Decision
    FR	NO	NL	The base country is FR. The From/To country is FR. The transaction is regarded as a local sale within FR and domestic VAT is charged, since a fiscal representative always overrules a ship-via country.

  • Example 3

    A division in Norway sells goods to a customer in the United Kingdom (UK) with a ship-via address in the Netherlands (NL) on the delivery address. The division has no fiscal representative in the UK. This is the setup in (TXS030):

    Fiscal Repr.	Delivering Warehouse	Via Country	VAT Decision
    Country	Country
    		NL	The base country is NL. The From/To country is UK. The transaction is regarded as an EU sale with EU VAT applied. (EU VAT is used in trade between two EU member states. The supplier creates no VAT transactions; the customer creates both VAT payable and VAT receivable transactions when recording the invoice.)

  • Example 4

    A division in Norway sells goods to a customer in the U.S.A. (US) with a ship-via address in the Netherlands (NL) on the delivery address. This is the setup in (TXS030):

    Fiscal Repr. Country	Delivering Warehouse Country	Via Country	VAT Decision
    		NL	The base country is NL. The From/To country is US. The transaction is regarded as a non-domestic/non-EU sale.

Sales scenarios

These scenarios summarize the impact of fiscal representation depending on whether goods are delivered:

• From a warehouse belonging to the sales division, in the same country, or another EU member state, see section Scenario one division involved
• From a warehouse belonging to another division, in the same country, or another EU member state, see section Scenario two divisions involved

Scenario setup

These scenarios include three divisions of a company located in different EU member states. Their respective warehouses are not necessarily in the same country as the division itself.

The Swedish division 100 has four fiscal representatives defined in (TXS030):

• DE – DE: A fiscal representative in Germany (DE) with delivery from a warehouse in Germany
• DE – SE: A fiscal representative in Germany with delivery from a warehouse in Sweden (SE)
• FR – FR: A fiscal representative in France (FR) with delivery from a warehouse in France
• NO – NO: A fiscal representative in Norway (NO) with delivery from a warehouse in Norway.

The British division 200 has one fiscal representative defined: DE – DE, that is, a fiscal representative in Germany with delivery from a warehouse in Germany results in domestic VAT. The German division 300 has no fiscal representatives defined.

It is assumed that the sales division invoices the external customer in these scenarios.

Outline

Scenario one division involved

Example for one division involved

The Swedish division AAA has a warehouse in Sweden, a warehouse in Germany, and a warehouse in France. An external VAT registered customer in Germany places an order.

• Setup in TXS030

  Line 1

  • Country of fiscal representative: DE (Germany)
  • State: (blank)
  • Country of delivering warehouse: DE

  Line 2

  • Country of fiscal representative: DE (Germany)
  • State: (blank)
  • Country of delivering warehouse: SE (Sweden)

  A sales or distribution order case matching one of these lines results in domestic VAT being calculated instead of EU VAT.

• Results
  • Delivery from the German warehouse to the external German customer: Domestic VAT is calculated, as controlled by line 1. Intra-division invoice transactions are created in the CMUFTR table.
  • Delivery from a Swedish warehouse to the German customer: Domestic VAT is calculated, as controlled by line 2. (As mentioned above, customers might require domestic VAT even if the goods are sent from another EU country. If this line did not exist, EU VAT would be calculated in this scenario, provided that the customer had a VAT registration number.) Intra-division invoice transactions are created.
  • Delivery from the French warehouse to the German customer: EU VAT is calculated. (If the customer had not been VAT registered, the VAT of the delivering country would be applied instead.)
  • Distribution of goods from the French warehouse to the German warehouse, based on a distribution order, for later delivery to the German customer: German domestic VAT is calculated. Intra-division invoice transactions are created – even though the warehouses belong to the same warehouse and facility – since the division has a fiscal representative in Germany.
  • Delivery from a country outside the EU to the German customer: No VAT is calculated and no internal invoice transactions are created.
  • If you are manually creating an invoice in (ARS120), (FAS130) or (ARS660) for the German customer: Domestic VAT is calculated, since the customer is in the same country as the fiscal representative, Germany.

Scenario two divisions involved