VAT Newsletter 2/2013
The European Court of Justice („ECJ”) has ruled on the case LVK – 56 EOOD(C-643/11)
The dispute in this case refers to the refusal of the Bulgarian tax authorities to allow the right to deduct the VAT related to certain acquisitions, based on the fact that it cannot be established whether those acquisitions were actually performed.
The LVK Company, an agricultural producer, deducted in 2007 the VAT related to certain deliveries of goods performed by two of its suppliers, respectively REYA and SITI Grup.
The tax authorities carried out cross-checks on the two suppliers, requesting them documents revealing the origin of the goods delivered as well as evidence regarding the actual performance of the respective deliveries. The suppliers did not provide the required documents within the deadline.
A similar request was also submitted to LVK, the latter providing the tax authorities with the invoices received (paid in cash and properly accounted for by LVK) as well as delivery notes, weight certificates and consignments notes.
Considering the mistakes within the latter documents and the failure to submit the required documents at the suppliers’ level, the tax authorities concluded that it cannot be established that the deliveries of goods were actually performed. As such, the tax authorities denied the deduction of the VAT related to the acquisitions, but no tax adjustment notice was issued to LVK’s suppliers requesting for the correction of the taxable base, respectively of the VAT related to the operations considered as not being performed.
We reiterate hereunder certain aspects of importance based on which ECJ issued its decision.
When the provisions stipulating the correction of the VAT improperly invoiced are not applicable to the issuer of the invoice, the tax authorities are not obliged to determine during the tax audit of that person if the respective VAT invoiced and reported is related to an actual operation.
Moreover, the European Union legislation allows to the tax authorities to verify the existence of a transaction performed by a supplier and to rectify the VAT related to that transaction.
ECJ considers that the mere fact that the tax authorities did not issue a decision for the adjustment of the VAT related to an operation does not automatically mean that the respective operation was actually performed.
In addition, the issuer of an invoice is liable to pay VAT on that invoice even if there is no taxable transaction. On the other hand, the deduction right of the beneficiary is limited solely to the VAT amount afferent to the transaction subject to VAT.
Therefore, in order to comply with the principle of VAT neutrality, the Member States should provide for the possibility to correct the VAT improperly invoiced where the supplier proves that he acted in good faith and eliminated in full the risk of any loss of tax revenues.
ECJ concludes that the principles of neutrality, equal treatment and legal certainty must be interpreted as not precluding to the refusal of the right to deduct the input VAT related to an invoice received by a recipient because of the lack of the taxable transaction, even though in the tax adjustment notice addressed to the issuer of that invoice, the VAT declared by the latter was not adjusted. However, if, in the light of fraud or irregularities, committed by the issuer of the invoice or upstream of the transaction relied upon as the basis for the right of deduction, that transaction is considered not to have been actually carried out, it must be established, on the basis of objective factors and without requiring of the recipient of the invoice checks which are not his responsibility, that he knew or should have known that the transaction was connected with VAT fraud, a matter which it is for the referring court to determine.