When goods are manufactured under contract for a customer using inputs from the customer, a business analysis of the manufacturing processes will be necessary. It will help determine the nature of the transaction and its fiscal implications.

When you manufacture a product under contract using materials furnished by the customer (and your own materials), is this a supply of goods or of services? The answer will affect the VAT treatment of the manufacturer’s operations, especially if the customer is a foreign party.

For VAT purposes, a supply of goods is defined as a transfer of the right to dispose of them as owner. Such transactions are subject to VAT. If the goods are purchased by a foreign taxable person, the supply may be zero-rated, subject to conditions (cross-border removal of the goods and availability of documentary evidence). And a supply of services is any transaction that is not a supply of goods. Where a toll manufacturer’s supply is actually a supply of services to a foreign taxable person, the transaction will likely be outside the scope of Polish VAT and will be taxed by the customer in its home country.

So what needs to be considered to define the nature of toll manufacturer’s supply?

Until a while ago tax authorities claimed that what matters is the value of materials from the customer versus own materials (see, e.g., ruling by Director of Bydgoszcz Tax Chamber of 7 November 2016, ref. ITPP3/4512-480/16/APR). The authorities argued that where own materials:

– account for less than 50% of the manufactured goods in terms of value, the transaction is a supply of services,

– account for more than 50% of the manufactured goods in terms of value, we are dealing with a supply of goods.

However, courts held that the value threshold should not be the only aspect taken into consideration here. What decides is the transaction’s economic sense discovered on the basis of the totality of circumstances (see, e.g., judgment of Provincial Administrative Court in Opole dated 6 April 2011, I SA/Op 30/11).

Recently the tax authorities have started to follow suit, holding that it is not correct to limit the test to only one criterion, being the ratio between manufacturer’s own materials and customer’s materials in terms of value. They now argue that the issue essentially hinges on the purpose for which the supply is purchased as a whole. What matters is the economic sense of the operation, which should be determined on the basis of all the circumstances of the given supply (see, e.g., ruling of 17 May 2019 by Director of National Revenue Information, ref. 0114-KDIP1-1.4012.121.2019.2.KOM).

In summary, toll manufacturing that is based on customer’s materials and manufacturer’s own materials should properly be analysed by reference to all the attendant circumstances. Such an analysis will help determine the nature of the transaction and its VAT implications. The value of materials furnished by the customer will not always be conclusive.

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