NNDKP CELF Alert no. 3/2020 – Deductibility of VAT – Recent Decisions (Ordinances) of the European Court of Justice (“ECJ”) in Contradiction with the Tax Practices in Romania
16.11.2020 –ECJ confirms that the deductibility of VAT cannot be refused due to reasons related to the necessity of the acquisition or fiscal fraud committed by other taxable persons in the supply chain
Although it constitutes an amount owed by the State to taxpayers, deductible VAT represents a highly important element for the tax authorities due to the fact that it can ensure for them significant additional revenues if the process of deductibility of the tax is hindered. Thus, the fundamental principle according to which VAT is neutral for the economic operators and is intended as a tax on final consumption is many times applied, in the actual practice, at the discretion of the tax authorities.
The practice revealed two main methods used by the tax authorities in order to refuse the deductibility of VAT:
- Imposing a penalty against good faith purchasers for an inadequate fiscal conduct (tax evasion, abuse, etc.) of the supplier or of a supplier thereof. The principle is very simple: an amount not paid by Y is recovered from X given that X is easier to identify and be subjected to a control, and in many cases, it has greater solvability.
- The refusal to deduct VAT due to the fact that is it not possible to prove that the goods and especially the services purchased are for the benefit of a taxable operation, in the sense that: these goods/services were not necessary, the taxable person could have obtained them internally, using its own resources, or several suppliers participated in the operation (the same acquisition was made from two entities), the suppliers did not have the necessary resources to make the delivery, there are differences between the legal nature of the contract and the economic reality, etc.
ECJ established – as of the date of issuance of the decisions rendered in Cases C-439/04 Axel Kittel and C-440/04 Recolta Recycling – that the deductibility of VAT may be rejected only if the authorities prove that the economic operator was aware or should have been aware of the fact that it participated in fiscal fraud, principle that is also reiterated in the Fiscal Code. Nevertheless, in the actual practice, the tax authorities reject the deductibility of VAT even if they do not prove that the taxable person participated in committing fiscal fraud or that a tax advantage was obtained, invoking the reasons indicated above.
The ECJ unquestionably confirms the principle described above by the recent decisions issued in Cases C-611/19 Crewprint and C-610/19 Vikingo, which were the result of a series of tax disputes in Hungary.
Firstly, we note the procedure whereby ECJ issued the decisions in the two cases, namely by a (substantiated) ordinance. ECJ choses to provide an answer to the requests for a preliminary question in cases where the questions addressed are identical with questions already asked in the past or where the answer to the questions is clear or may be easily deducted from the jurisprudence.
Consequently, ECJ considers that the situations indicated above are clear from a legal perspective in the sense that the deductibility of VAT may be rejected only after it is confirmed that the taxable person participated in a fiscal fraud operation of which this was or should have been aware.
The relevant confirmation should be made based on evidence that must meet certain legal requirements.
On the other hand, our practical experience has revealed that the tax control bodies reject the right to deduct VAT based on mere suspicion or an artificial reasoning, establishing additional amounts to be paid and sometimes accessory obligations and notify, at the same time, the criminal investigation bodies.
This is also due to the fact that the existing tax procedure does not allow to suspend the tax control until the criminal issues are clarified, and the current legislation allows to initiate two procedures – both administrative and criminal.
Unfortunately, a proposal to modify the Tax Procedure Code (PL-x no. 477/2019) that would solve this problem in the sense of suspending the tax control in favor of resolving the criminal complaint has already been submitted with the Chamber of Deputies already in October 2019, although the existing procedure contradicts the aspects stated in ECHR Case Lungu (Request no. 25129/06).
Secondly, ECJ clearly confirms that reasons such as the necessity/economic reasons justifying certain acquisitions or the use of certain suppliers that did not have the necessary resources to carry out the operation or the fact that the suppliers have not paid certain tax obligations or the legal nature of the contract between the parties do not justify the rejection of the deductibility of VAT. The only decisive element in this respect is that the delivery/service was actually performed.
In this respect, ECJ confirms that economic operators are free to choose the organizational structures or operational methods they deem as being the most adequate for their economic activities also as a measure to limit the amount of their tax duties.
The principle prohibiting the abuse of right bans only purely artificial arrangements that are not supported by an economic reality being exclusively intended to ensure a tax advantage.
From a practical perspective, we expect these decisions to consolidate the defenses taxpayers may raise in the context of administrative challenges and especially before court. We do not anticipate short-term significant changes in the context of tax controls; however, it is possible that, as the principles set forth by ECJ in the relevant ordinances continue to be reiterated in the various decisions issued to resolve the challenges filed or decisions rendered by the court, the practice of the tax authorities be modified accordingly.
The Romanian version of this newsletter is available here.