The CJEU confirms the right to deduct VAT even if the transactions took place years before : Volkswagen judgment (C-533/16) of 21/03/2018
Between 2004 and 2010, three companies of the Hella-group, based in Germany and Austria, supplied Volkswagen AG with moulds for the manufacturing of car lights.
The Hella companies did not include VAT in their invoices since they did not regard the transactions as a supply of goods, but simply as financial compensation.
In 2010, the companies became aware of their mistake and charged VAT to Volkswagen under separate invoices. They also filed a supplementary VAT return and paid the relevant VAT to the Treasury.
As a result, Volkswagen claimed a refund of the input VAT. A VAT refund is the means by which a Member State repays to taxable persons not established in that Member State, the amount of input VAT that they have been charged in respect of goods and services supplied or provided by other taxable persons in that Member State.
The tax authorities partially allowed the claim of Volkswagen and refunded the VAT which related to the five years preceding the date of application. By the same decision, the tax authorities rejected the refund of the remainder of the VAT given the fact that the refund period provided by Slovak law (five years from the date of supply of goods) had expired.
Volkswagen challenged this Decision with the Regional Court and later with the Supreme Court. Finally, the Supreme Court brought the case to the ECJ for a preliminary ruling.
- Legal question
The Supreme Court wants to know whether it is permissible under EU law (particularly Articles 167, 168 and 178 of the VAT Directive and the principles of proportionality and fiscal neutrality) to refuse to grant a taxable person a refund of input VAT on the grounds that the time limit for exercising that right has expired, in a situation where: (a) it was thought, wrongly, that the supply of goods was not subject to VAT; and (b) the subsequent adjustment took place several years later, with the taxable person paying the VAT at that time and then claiming it back later.
- Opinion of Advocate General Campos Sanchez-Bordona
The Advocate General begins by pointing out that although the main proceedings involve the taxable person claiming a VAT refund from the Slovak tax authorities, in reality, the refund is simply a consequence of the differential, or balance, of the amount of VAT that Volkswagen is liable to pay and the VAT payable or paid by it in a Member State other than the Member State in which it is established. The dispute must therefore be resolved through an interpretation of the rules governing the right of deduction, which would be the basis for any VAT refund. The CJEU has frequently ruled on the substantive and formal requirements for the right to deduct.
In this case, it is not disputed that both requirements are met. Thus Volkswagen in principle is entitled to exercise its right to deduct the input VAT. Evidence of this is provided by the fact that the tax authorities recognised this right, albeit only for some of the tax periods in respect of which it was exercised.
The VAT Directive does not expressly refer to a time limit for exercising the right to deduct. However, Member States are allowed to set a time limit for reasons associated with legal certainty, as long as the limitation period applies in the same way to analogous right in tax matters (founded on domestic law and Community law) (principle of equivalence) and does not render virtually impossible or excessively difficult to exercise the right to deduct (principle of effectiveness).
The right to deduct is linked to two VAT payments. First, the payment made by the taxable person in respect of the supply of goods from his supplier (VAT on input transactions) and, second, the payment made to the taxable person by his customer when the taxable person supplies his own products to the customer (VAT on output transactions). Thus, the payment of VAT and the right to deduct are inseparable. Invoices are evidencing documents stating that the transactions and corresponding VAT payments took place. If the taxable person has not paid the tax, there is no legal or financial basis for the right to deduct.
This reasoning only applies in normal circumstances. By contrast, the situation in the case at hand is exceptional or unusual. What took place was in fact an example of late payment of VAT. Only with the issuing of the (corrective) invoices the substantive and formal conditions for the right to deduct were met. At that time only the calculation of the time limit should have started. Especially since Volkswagen was acting in good faith.
Consequently, articles 167, 168 and 178 of the VAT Directive, together with the principles of fiscal neutrality and proportionality, preclude a refusal of the right to deduct VAT in the case of a taxable person who has acted in good faith in circumstances such as those in the main proceedings where it was thought, wrongly, that a supply of goods was not taxable but some years later the necessary adjustment was made and the VAT paid. In other words, the principles of proportionality and VAT fiscal neutrality require that the taxable person is entitled to deduct the input VAT paid, even after an adjustment was made to the tax paid and that the period for exercising the right has, in principle, expired.
- CJEU judgment
The CJEU follows the Advocate General’s opinion and rules that ‘EU law must be interpreted as meaning that it precludes legislation of a Member State under which, in circumstances such as those at issue in the main proceedings in which the value added tax (VAT) was charged to the taxable person and paid by it several years after delivery of the goods in question, the benefit of the right to claim a refund of VAT is denied on the grounds that the limitation period provided for by that legislation for the exercise of that right began to run from the date of supply and expired before the application for a refund was submitted’.
Both the opinion and the judgment of the CJEU are in favour of a taxable person acting in good faith.
The Advocate General and the CJEU confirm that the right to deduct input VAT in principle cannot be limited and arises at the time of issuance of the (corrective) invoices. It is only from that moment onwards that the limitation period starts (and not from the date the transactions took place).
In this respect, reference can also be made to the opinion of Advocate General Kokott in the Biosafe case (C-8/17) of 30 November 2017 (judgment to be expected on 12 April 2018). In this case, Advocate General Kokott has considered it necessary to make a distinction between, on the one hand, the emergence of the right to deduct in its principle and, on the other hand, the right to deduct in its amount. Careful examination shows that this is in line with the Court’s case law on the retroactive correction of invoices with formal errors. It also follows from the principle of tax neutrality – and the Commission agrees on this point – that the right to deduct in terms of its scope arises only to the extent of the ‘amount of VAT payable’ to be shown on the invoice under Article 226 (10) of the VAT Directive. The wording and purpose of Article 178 (a) read in conjunction with Article 226 (10) of the VAT Directive, taking into account the principle of neutrality, prohibit that the right to deduct the (objectively correct) amount of input VAT arises when the transaction takes place. A corrective invoice on which the correct VAT rate is stated is not merely a formal condition, but rather a substantive requirement to deduct the input VAT. Therefore, the starting point of the limitation period of the right to deduct must be the same moment as the issuance of a corrective invoice and not the time when the transaction took place.
Based on this case law, we suggest to business to review if – and in which cases – the tax authorities have refused the right to refund or the right to deduct input VAT. According to our analysis, it is still possible to claim those rights now (if not yet time barred under the Court’s ruling) even if the transactions took place years before.
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