ECJ C-610/19 (Vikingo Fővállalkozó Kft.) – Order – Right to deduct VAT even if invoices cannot be considered credible

On Sept 3, 2020, the ECJ issued an Order on case C-610/19.

Reference for a preliminary ruling – Article 99 of the Rules of Procedure of the Court of Justice – Value added tax (VAT) – Directive 2006/112/EC – Articles 168, 178, 220 and 226 – Principles of fiscal neutrality, of effectiveness and of proportionality – Right to deduct VAT – Refusal – Conditions for the existence of a supply of goods – Evasion – Proof – Penalty – Article 47 of the Charter of Fundamental Rights of the European Union – Right to an effective judicial remedy

Artciles in the EU VAT Directive

Right to deduct VAT: Articles 168(a) and 178(a) of Council Directive 2006/112/EC

Article 168 (Origin and scope of right of deduction)
In so far as the goods and services are used for the purposes of the taxed transactions of a taxable person, the taxable person shall be entitled, in the Member State in which he carries out these transactions, to deduct the following from the VAT which he is liable to pay:
(a) the VAT due or paid in that Member State in respect of supplies to him of goods or services, carried out or to be carried out by another taxable person;

Article 178 (Rules governing exercise of the right of deduction)
In order to exercise the right of deduction, a taxable person must meet the following conditions:
(a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Sections 3 to 6 of Chapter 3 of Title XI;

Facts

Vikingo is a wholesaler in sugar and confectionery.
On the same location as where Vikingo is based, another company is also based: Nikus Kft site.
The driver of these two companies is the same person.
Nikus Kft. produces the confectionery that Vikingo packs, stores and sells.
Vikingo has an agreement with Freest Kft. for the delivery of ten packaging machines and one loading machine and claimed input VAT.
Freest Kft. purchased these goods from SPDC Kft., which in turn had acquired them from Free-Gold Kft. Bee
During a tax audit, the VAT authorities imposed an assessment.
The authorities argue that Vikingo’s goal was to create an artificial input VAT claim for itself.
The questions focus on what proof is required to substantiate input VAT recovery.
There are also questions regarding chain transactions and proportionality of sanctions.

Questions

Is it compatible with Articles 168(a) and 178(a) of Council Directive 2006/112/EC ¹ of 28 November 2006 on the common system of value added tax in conjunction with Articles 220(a) and 226 of that directive, and with the principle of effectiveness, for a national legal interpretation and a national practice to operate (i) to the effect that the mere fact of being in possession of an invoice the content of which meets the requirements of Article 226 of that directive is not sufficient to fulfil the material conditions governing the right to deduct tax, the taxable person also being compelled, as a prerequisite of legitimately exercising the right to deduct tax on the basis of the invoice in question, to be in possession of additional documentary evidence that must not only comply with the provisions of Directive 2006/112 but also be consistent with the principles of the national legislation on accounting and the specific provisions concerning supporting documents, as well as (ii) to the effect that each member of the chain must recall and declare in the same way each detail of the economic transaction attested by those supporting documents?

Is it compatible with the provisions of Directive 2006/112 on [the deduction of VAT] and with the principles of fiscal neutrality and of effectiveness for a national legal interpretation and a national practice to operate (i) to the effect that, in the case of a chain transaction, the mere fact that the transaction forms part of a chain has the consequence, irrespective of any other circumstance, of imposing on each of the members of that chain an obligation to scrutinise the components of the economic transaction carried out by them and a duty to draw inferences from that scrutiny for the taxable person situated at the other end of the chain, as well as (ii) to the effect that the taxable person is refused the right to [deduct VAT] on the ground that the constitution of the chain, although not prohibited by national law, was not [reasonably] justified from an economic point of view? In that context, when it comes to examining the objective circumstances capable of justifying a refusal to grant the right [to deduct VAT] in the case of a chain transaction, is it possible, when determining and assessing the relevance and probative force of the evidential material on which the refusal of the right to deduct VAT is based, to apply only the provisions of Directive 2006/112 and national law relating to the deduction of tax, as material provisions specifying the facts relevant to the determination of the factual framework, or is there also a duty to apply, as special provisions, the accounting legislation of the Member State in question?

Is it compatible with the provisions of Directive 2006/112 on [the deduction of VAT] and with the principles of fiscal neutrality and of effectiveness for a national legal interpretation and a national practice to operate (i) to the effect that a taxable person who uses goods for the purposes of his taxed transactions in the Member State in which he carries out those transactions and who is in possession of an invoice consistent with Directive 2006/112 is denied the right [to deduct VAT] on the ground that he is not aware of all the components [of the transaction] carried out by the members of the chain or on the basis of circumstances associated with the members of the chain upstream of the issuer of the invoice and over which the taxable person was unable to bring to bear any influence for reasons beyond his control, as well as (ii) to the effect that the right to [deduct VAT] is made subject to the condition that, so far as concerns the measures reasonably incumbent upon him, the taxable person must comply with a general obligation of scrutiny that must be discharged not only before the contract is concluded but also during and even after its performance? In that context, is the taxable person obliged to refrain from exercising the right [to deduct VAT] in the case where, in connection with any component of the economic transaction indicated on the invoice and at any point subsequent to the conclusion of the contract or during or after its performance, he notices an irregularity or becomes aware of a circumstance the consequence of which would be the refusal of the right [to deduct VAT] pursuant to the practice of the tax authority?

Having regard to the provisions of Directive 2006/112 relating to [the deduction of VAT] and the principle of effectiveness, does the tax authority have an obligation to specify how tax evasion has been committed? Is it appropriate for the tax authority to proceed in such a way that omissions and irregularities on the part of members of the chain that exhibit no reasonable causal link with the right to [deduct tax] are regarded as proof of tax evasion on the ground that, since those omissions and irregularities rendered the content of the invoice implausible, the taxable person knew or should have known about the tax evasion? If tax evasion has been committed, does this justify the fact that the scrutiny required of the taxable person must exhibit the breadth, depth and scope indicated above or does that duty exceed the requirements of the principle of effectiveness?

5. Is a penalty involving refusal of the right [to deduct VAT] and consisting in the obligation to pay a tax penalty equal to 200% of the tax difference proportionate in the case where the tax authority has incurred no loss of revenue directly linked to the taxable person’s right [to deduct VAT]? May account be taken of the presence of any of the circumstances referred to in the third sentence of Article 170(1) of the az adózás rendjéről szóló 2003. évi XCII. törvény (Law XCII of 2003 on General Taxation Procedure; ‘the Law on General Taxation Procedure’) in the case where the taxable person has made available to the tax authority all the documents that were in his possession and has included in his tax return the invoices issued?

6. In the event that it is apparent from the answers given to the questions referred for a preliminary ruling that the interpretation of the rule of national law which has been followed since the case that gave rise to the order of 10 November 2016, Signum Alfa Sped (C-446/15, [not published,] EU:C:2016:869) and the practice adopted on the basis of that interpretation are not consistent with the provisions of Directive 2006/112 relating to [the deduction of VAT], and having regard to the fact that the first-instance court cannot make a request for a preliminary ruling to the Court of Justice in all cases, may the view be taken, on the basis of Article 47 of the Charter of Fundamental Rights of the European Union, that the right of taxable persons to bring a judicial action for damages guarantees them the right to an effective remedy and an impartial tribunal provided for in that article? Is it possible, in that context, to adopt an interpretation to the effect that the form of the decision given in Signum Alfa Sped means that the question had already been regulated by Community law and had been clarified by the case-law of the Court of Justice and that, consequently, the answer to it was obvious, or does it mean that, since new proceedings were instituted, the question had not been fully clarified and, consequently, there was still a need to seek a preliminary ruling from the Court of Justice?

AG Opinion

None

Decision/Order

Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with the principles of fiscal neutrality, of effectiveness and of proportionality, must be interpreted as precluding a national practice by which the tax authorities refuse a taxable person the right to deduct the value added tax paid on purchases of goods which were supplied to him or her, on the ground that credence cannot be given to the invoices relating to those purchases because, first, the manufacture of those goods and their supply could not, as the necessary material and human resources were lacking, have been effected by the issuer of those invoices and the goods were therefore, in fact, purchased from an unidentified person, secondly, the national accounting rules were not complied with, thirdly, the supply chain which led to those purchases was not economically justified and, fourthly, irregularities vitiated certain earlier transactions forming part of that supply chain. In order to provide a basis for such a refusal, it must be established to the requisite legal standard that the taxable person actively participated in fraud or that that taxable person knew or should have known that those transactions were connected with fraud committed by the issuer of the invoices or any other trader acting upstream in that supply chain, which it is for the referring court to ascertain.

Comments: The CJEU concluded that the tax authorities should not refuse the right to deduct VAT for acquisitions of goods supplied on the grounds that the invoices for these acquisitions cannot be considered credible since:
1.the production of these goods and their delivery not by the originator these bills can be carried out because it does not have the appropriate human and material resources, and thus the goods actually purchased from an unknown person,
2. have not been complied with national rules on accounting,
3. chain supplies that resulted in those acquisitions were not economically justified and,
4. irregularities have occurred in certain prior operations forming part of this supply chain.
For such a refusal, it must be demonstrated to the requisite legal standard that the taxable person actively participated in fraud or that he knew or should have known that those transactions were part of fraud by the originator of the invoices or any other economic operator involved at an earlier stage in that chain of supplies was active, which is at the discretion of the referring court.

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