The European Court of Justice (ECJ) has published its judgement in the case of Fast Bunkering Klaipeda (FBK – C-526/13).
The ECJ has surprisingly followed the Advocate General’s (AG) opinion which means the outcome might have considerable VAT implications for businesses in the marine fuel industry and beyond.
This Lithuanian case centres on the VAT treatment of supplies for fuelling and provisioning vessels. When these goods are supplied to the owners of vessels used for navigation on the high seas, it is possible to exempt them from VAT. However, the ECJ was asked whether this exemption can apply to both the final supply to the ship and also any prior intermediaries in the supply chain, so long as:
a) The ultimate use of the goods is well established before the supply takes place; and
b) Evidence is provided to the tax authority to support the exemption before the supply takes place.
FBK was not supplying the ship owner with fuel for their ship. Rather, it was a prior intermediary in the supply chain and it had contracted to sell the fuel to a final intermediary who then on-sold to the ship owner. However, FBK was responsible for undertaking the physical fuelling of the ship.
FBK exempted its supply of the fuel on the basis it was a supply to a vessel used for navigation on the high seas. The Lithuanian tax authority assessed FBK for under declared output tax on the basis its supply was not to the ship owner (and hence could not be exempted).
Existing VAT law
As it stands, Article 148(a) EU VAT Directive allows the final supply to the ship owner to be exempted. Under these VAT rules, the final supplier in such chains normally becomes registered for VAT so it can recover the VAT it is charged. This means that it will not incur a VAT cost but is subject to a cash flow disadvantage because of the time lag between having to pay VAT to its suppliers and being able to recover the VAT on its VAT return. There is also the administrative cost of being registered for VAT in each Member State where such supplies take place.
Case law history
It’s interesting that this case has come to court because the matter has previously been considered by the ECJ. The case of Velker International Oil Company (Velker – C-185/89) asked essentially the same question and the ECJ judged that only the final supply could be subject to exemption.
The judgement in Fast Bunkering confirmed that, in principle, even if conditions a) and b) above, were met the exemption could not apply. This follows the decision in Velker so was to be expected.
However, it held that the exemption may apply if the transfer to those final intermediaries of the ownership in the fuel took place at the earliest at the same time when the operators of the vessels were actually entitled to dispose of those goods as if they were the owners. Whether this happened or not was left as a matter for national courts to ascertain.
The ECJ held that in its view, the moment that the fuel is loaded into the tanks of a vessel is when the ship’s owner is entitled to dispose of the fuel. This means that any additional intermediary suppliers between FBK and the vessel owner never had the right to dispose of the fuel and hence were not making a supply of goods. This would mean that FBK was making a supply of goods to the owner of a qualifying vessel so the exemption can apply to this transaction. If FBK is making a supply of goods directly to the ship owner, this means that the final intermediary must be doing something else. The ECJ did not say what the intermediary is providing in this situation.
Implications for businesses in the marine and aviation fuel sectors
There are two key outcomes to consider from this case for businesses within the marine and aviation fuel industry.
The first is that the exemption is now potentially available to a different group of businesses – the original suppliers of the fuel rather than the final intermediaries. If tax authorities follow the ECJ’s decision, it should be possible for some intermediaries to benefit from a reduction in VAT compliance obligations.
The second implication is that intermediaries currently applying the exemption will need to consider if the judgement impacts the VAT treatment of their supplies. The ECJ did not comment on whether a re-characterisation of the supply might have to take place and to date, national tax authorities have not provided any comments. Because the case could have significant commercial implications (i.e. pricing, values, invoicing) which fundamentally change the relationships between the parties, it needs to be considered fully. However, the lack of certainty in the ECJ’s decision means that immediate action should not be taken until it is known how it will be interpreted by the different tax authorities.
The decision may also impact other businesses which take “flash” title to goods (i.e. chain transactions) in both their domestic and cross border supply chains. Given the lack of guidance from tax authorities, there are more questions raised than answers but it is clear that this case needs to be taken into consideration when reviewing complex cross border transactions and the resulting VAT obligations