Flashback on ECJ cases C-271/12 (Petroma) – No Right to deduct VAT in case of incompliant invoices

On May 8, 2013, the ECJ issued its decision in the case C-271/12 (Petroma). This case relates to the Right to Deduct VAT in case of incompliant invoices.

Article in the EU VAT Directive

Articles 2(1), 10, 17, 18, 21(1)(a), 22 of the Sixth Directive,

Article 2(1) of the Sixth Directive makes ‘the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such’ subject to VAT.

Article 10 of the Sixth Directive, under the heading ‘Chargeable event and chargeability of tax’, provides as follows:

‘1. (a) “Chargeable event” shall mean the occurrence by virtue of which the legal conditions necessary for tax to become chargeable are fulfilled.

(b) The tax becomes “chargeable” when the tax authority becomes entitled under the law at a given moment to claim the tax from the person liable to pay, notwithstanding that the time of payment may be deferred.

2. The chargeable event shall occur and the tax shall become chargeable when the goods are delivered or the services are performed. …

Article 17 of the Sixth Directive, entitled ‘Origin and scope of the right to deduct’, provides:

‘1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;

Article 18 of the Sixth Directive, concerning rules governing the exercise of the right to deduct, provides:

‘1. To exercise his right to deduct, the taxable person must:

(a) in respect of deductions under Article 17(2)(a), hold an invoice drawn up in accordance with Article 22(3);

2. The taxable person shall effect the deduction by subtracting from the total amount of value added tax due for a given tax period the total amount of the tax in respect of which, during the same period, the right to deduct has arisen and can be exercised under the provisions of paragraph 1.

3. Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2.

Article 21(1)(a) and (c) of the Sixth Directive states:

‘The following shall be liable to pay value added tax:

1. under the internal system:

(a) taxable persons who carry out taxable transactions other than those referred to in Article 9(2)(e) and carried out by a taxable person resident abroad. …

Article 22 of the Sixth Directive, in the version resulting from Article 28h, provides:

‘Obligations under the internal system

1. (a) Every taxable person shall state when his activity as a taxable person commences, changes or ceases.

2. (a) Every taxable person shall keep accounts in sufficient detail for value added tax to be applied and inspected by the tax authority.

3. (a) Every taxable person shall issue an invoice, or other document serving as invoice, in respect of goods and services which he has supplied or rendered to another taxable person or to a non-taxable legal person. …

(b) The invoice shall state clearly the price exclusive of tax and the corresponding tax at each rate as well as any exemptions.

8. Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, subject to the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.

Facts

Petroma Transports SA was the main company in the Martens group in terms of staff and provided numerous services to other companies within that group. Contracts were concluded to regulate the use of such staff in the context of the intra‑group services. Those contracts provided for remuneration for those services on the basis of hours worked by staff.
Authorities denied the intercompany invoices and resulting deductions since the 1994 year of assessment, the main reason being that those invoices were incomplete and could not be shown to correspond to actual services. Most of those invoices included an overall amount, with no indication of the unit price or the number of hours worked by the staff of the service-providing companies, thereby making it impossible for the tax authority to determine the exact amount of tax collected.
After audit , additional information was provided by those companies but was not accepted by the tax authority as a sufficient basis to allow the deduction of the various VAT amounts. That authority took the view that that information concerned either private contracts for services submitted late, after completion of the tax audits and after communication of the adjustments that that authority intended to make, and therefore of no certain date and not binding on third parties, or invoices that were supplemented after they had been issued, at the stage of the administrative procedure, by handwritten references to the number of hours worked by staff, the hourly rate for work and the nature of the services provided and which, therefore, according to the tax authority, lacked any probative value.

Questions

Is a Member State entitled to refuse to allow a deduction in favour of taxable persons who are recipients of services and are in possession of invoices which are incomplete, but which have been supplemented by the provision of information seeking to prove the occurrence, the nature and the amount of the transactions invoiced (contracts, reconstitution of figures on the basis of declarations made to the national social security institution, information on the functioning of the group involved, …)?

Must a Member State which refuses, on the basis of inaccuracies in invoices, to allow a deduction in favour of taxable persons who are recipients of services not find that the invoices are then also too inaccurate to allow payment of the VAT? Consequently, is a Member State not required, in order to safeguard the principle of neutrality of VAT, to repay the VAT which has been paid to it to the companies which supplied the services thus disputed?

AG Opinion

None

Decision

1. The provisions of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment, as amended by Council Directive 94/5/EC of 14 February 1994, must be interpreted as not precluding national legislation, such as that at issue in the main proceedings, under which the right to deduct value added tax may be refused to taxable persons who are recipients of services and are in possession of invoices which are incomplete, even if those invoices are supplemented by the provision of information seeking to prove the occurrence, nature and amount of the transactions invoiced after such a refusal decision was adopted.

2. The principle of fiscal neutrality does not preclude the tax authority from refusing to refund the value added tax paid by a company providing services, in the case where the exercise of the right to deduct the value added tax levied on those services has been denied to the companies receiving those services by reason of the irregularities confirmed in the invoices issued by that service-providing company.

Summary

The right to deduct value added tax may be refused to taxable persons who are recipients of services and are in possession of invoices which are incomplete, even if those invoices are supplemented by the provision of information seeking to prove the occurrence, nature and amount of the transactions invoiced after such a refusal decision was adopted.
The ECJ has held that even where deduction of VAT is denied to a recipient of a supply, it does not follow that the VAT shown need be refunded to the supplier.

Source