On the 4th October 2017, the European Commission published a proposal that aims to transform the EU VAT System including the legislative phase to move towards the definitive VAT regime along with providing quick fixes to the existing system. One of the main aspects of the proposal is the introduction of the concept of the Certified Taxable Person (CTP) which applies to reliable taxable persons.
What is a CTP?
As of now, each Member State issues a VAT identification number to verify a taxable person. However, there is no system in place that distinguishes a reliable taxable person from a non-reliable one. The concept of CTP is to establish the good status of a reliable taxable person and it was introduced to facilitate trade and make life easier for companies operating cross-border trade in the EU.
Benefits of being a CTP
One of the main benefits of being a CTP is to enjoy the simplified processes for the declaration and payments of cross-border VAT. The CTP status will be identified and accepted mutually by all EU Member States and will be implemented by 1st January 2019.
With the status of CTP, an entrepreneur or a business will be able to reverse charge the VAT when acquiring goods from cross-border trade in the EU. This will result in a cashflow benefit for the buyer and will remove the burden on the supplier as he won’t have to charge a different EU VAT than that of his establishment and thus, save him the trouble of determining which rate is applicable.
To enjoy the benefits of the reverse charge rule, the supplier is not required to be a CTP, only the buyer.
Criteria to be identified as a CTP
A taxable person must fulfil the following criteria to meet the EU CTP status:
- It shall have its head office or an establishment in the EU.
- It shall be involved in an intra-community trade or should be a supplier/ customer in a call-off stock trade.
- It shall not be involved in any serious infringement of taxation rules or have any serious criminal offences related to their financial activities.
- It shall use a report management system providing a high level of control over its operations and transportation of goods, whilst also having appropriate records of these transactions. This system must allow for appropriate tax controls.
- It can provide evidence of financial solvency.
However, the bar set to determine different situations will vary in the different Member States. For example, there is no limit to define the seriousness of the infringement in the criteria stipulating no serious infringement of taxation rules. This might result in the 28 Member States applying different criteria to be awarded CTP status.
How to become a CTP?
The rules and process of applying and awarding the CTP status are also for the Member States to decide. The proposed amendment in the VAT Directive lays down a few rules, which are:
- If all of the conditions are met, the Member State must grant the CTP status to a taxable person.
- In case the application for CTP is denied, the Member State must provide the reason for the refusal and the taxable person has a right to appeal against it.
- The tax authorities have the right to revoke the CTP status from a taxable person.
As of now, there are no other process rules introduced for a taxable person to attain or lose the CTP status. Additionally, the tax authorities have not been provided with any deadline regarding the timeline to respond to the application.
The taxable person will have to apply for the CTP status in the Member State where the head office is located. In case, the head office is outside the EU, the application will have to be submitted to the Member State of the establishment that holds the main accounts of the taxable person within the EU.
CTP status is to be acknowledged by all the Member States hence if a taxable person obtains a CTP status in one state, it will apply to all the other Member States as well.
Who should become a CTP and why?
Obtaining a CTP status maybe beneficial if you are involved in cross-border trade in the EU and if any one of the following conditions are met:
- You supply call-off stock to a known buyer with a CTP status in another Member State.
- You are the middle party in a chain transaction arranging the transport of e goods.
- You are not sure you have all the documents needed to prove the right to exempt VAT on an intra-community supply.
- You are involved in cross-border trade and want to purchase goods without VAT.
- You are regularly purchasing goods from suppliers in another Member State, the VAT will be reverse charged providing cash flow advantages.
- Suppliers will prefer doing cross-border with CTPs as they will not have to charge, report or pay VAT of another Member State.
Can Non-EU taxable persons become CTP?
Since they are not easy to monitor, as of now the non-EU taxable person cannot become a CTP in the EU. As a result of Brexit, UK based companies will not be able to obtain the CTP status either.
The concept of AEO
An Authorized Economic Operator (AEO) can easily obtain CTP status as an AEO requires a similar testing and documentation process. However, it does not work vice-a-versa, as obtaining an AEO status has further requirements such as security and safety standards, professional qualifications and more.
Is horizontal monitoring more effective than CTP?
In the Netherlands, the Dutch tax authorities introduced a new way of auditing taxable person called horizontal monitoring which is based on mutual trust, understanding and transparency. The evaluation of the taxable person in horizontal monitoring is based on the extent to which the taxable person is ‘in control’ of its operations and must have a controlled structure of taxation. It is open for large companies on an individual basis and through industry associations for SMEs.
Some aspects of horizontal monitoring like one on one conversations between tax authorities and company representatives and periodic evaluation make it more secure when it comes to determining the reliability of a taxable person.
As of 2022, the concept of CTP for the reverse charge rule is an effective medium to battle against VAT fraud. On the other hand, even with all the verifications and monitoring, there is no guarantee that CTPs will not commit fraud after obtaining CTP status.
Due to the periodic evaluation of horizontal monitoring, it seems a more reliable source to reduce VAT fraud. The concept of CTP resembles that of AEO and may have derived from the success of AEO albeit with limited benefits. The AEO status is a global trademark of a reliable taxable person, it is not yet sure if CTP will hold a similar status or not.
During the ECOFIN Council meeting on 22 June 2018, the Member States did not reach an agreement regarding the introduction of the ‘quick fixes’ which includes the concept of CTP. However, businesses are recommended to start evaluating the impact of the EU Commission’s proposals and the CTP concepts.
Get next update straight to your inbox
My team is closely monitoring this section and will keep writing about it. If you are not already subscribed to our blog, you can do so by just entering your email address. All updates related to this and other related issues will come straight to your inbox.