On 30 April 2020, the European Court of Justice gave its judgment in case C–661/18 (CTT — Correios de Portugal). This case deals with the question how a pro-rate must be calculated and if a taxpayer can choose which method it wants to use.
Source: Curia
Decision
1. Article 173(2)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in the light of the EU law principles of fiscal neutrality, legal certainty and proportionality, must be interpreted as not precluding a Member State, when authorising a taxable person to deduct value added tax (VAT) on the basis of the use made of all or part of the goods and services used both for transactions in respect of which VAT is deductible and for transactions in respect of which VAT is not deductible pursuant to that provision, from prohibiting such a taxable person from changing the deduction method once the final proportion has been fixed.
2. Articles 184 to 186 of Directive 2006/112, read in the light of the EU law principles of fiscal neutrality, effectiveness and proportionality, must be interpreted as precluding national legislation under which a taxable person who deducted VAT charged on the acquisition of goods and services used both for transactions in respect of which VAT is deductible and for transactions in respect of which VAT is not deductible, using the turnover-based method, is denied the opportunity, once the final proportion has been fixed pursuant to Article 175(3) of that directive, to correct those deductions, by using the actual use method in a situation where:
– the Member State concerned authorises taxable persons to deduct VAT on the basis of the use made of all or part of the goods and services used both for transactions in respect of which VAT is deductible and for transactions in respect of which VAT is not deductible, pursuant to Article 173(2)(c) of that directive;
– the taxable person was unaware, and acting in good faith, when choosing the deduction method, that a transaction which it regarded as exempt was in fact taxable,
– the general limitation period fixed by the national law for the purposes of adjusting the deductions has not yet expired, and
– the change in the deduction method makes it possible to establish more precisely the proportion of VAT relating to transactions in respect of which VAT is deductible.
Facts (simplified)
Correios de Portugal (the Portuguese postal services) is mainly engaged in the provision of postal services. Its activities consist of both taxable and exempt supplies of goods and services (mixed supplies). As such, it uses a pro-rate for the calculation of the input VAT recovery.
During 2015, Correios de Portugal used used a provisional pro rata percentage of 16%. At the end of 2015, Correios de Portugal recalculated this pro rata, which resulted in a pro rata of 19%.
Correios de Portugal than applied this newly calculated pro rata on all its transactions, back to 2013, effectively making a correction of its own VAT Return for 2013, 2014 and 2015. These corrections were submitted in 2015.
After this VAT payment with retroactive effect, Correios de Portugal applied a different criterion, namely that of the actual use of each category of transactions at an earlier stage.
The Portuguese tax authorities did not agree with these corrections.
In this case, the Portuguese court wanted to know whether the principles of neutrality, effectiveness, equivalence and proportionality conflict with the denial of a correction to a pro rata calculation, if this calculation was already reported and applied in previous periods.
See our previous post about this case here.
Judgment
The ECJ rules as follows:
Member States are allowed to prohibit taxable persons from changing the method of deduction of the VAT after fixing the final pro rata.
However, Member States are not allowed to prohibit taxable persons from making corrections in the deductions by applying the allocation method, in a situation where:
- the Member State concerned authorises taxable persons to make VAT deductions following the allocation of all or part of the goods and services used for carry out both operations giving entitlement to deduction and operations not giving entitlement to deduction;
- the taxable person was unaware in good faith, when he made the choice of the method of deduction, that a transaction which he considered exempt was not in reality;
- the general time limit for foreclosure set by national law for the purpose of adjusting deductions has not yet expired, and
- the change in deduction method makes it possible to establish with greater precision the part of the VAT which relates to transactions giving entitlement to deduction.
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See also
- ECJ case C-661/18 (CTT) – Comments – Options on VAT recognised to taxable persons
- ECJ Case C-661/18 (CTT – Correios de Portugal) – Questions – VAT deduction on mixed supplies
