ECJ C-108/20 (Finanzamt Wilmersdorf) – Order – No VAT deduction on goods subject of input VAT fraud committed upstream in the supply chain

On April 14, 2021, the ECJ issued an Order in the case C-108/20 (Finanzamt Wilmersdorf). This case dealt with the question whether VAT is deductible on fraudulent transactions recoverable without participation, connection, encouragement and/or facilitation.

Context: Reference for a preliminary ruling – Article 99 of the Rules of Procedure of the Court of Justice – Taxation – Value added tax (VAT) – Directive 2006/112/EC – Articles 167 and 168 – Right to deduct input VAT – Refusal – Fraud – Supply chain – Refusal of the right to deduct where the taxable person knew or should have known that, by his or her purchase, he or she was participating in a transaction connected to VAT fraud

Article in the EU VAT Directive

Articles 167 and 168(a) of Council Directive 2006/112/EC (Right to deduct VAT)

Article 167
A right of deduction shall arise at the time the deductible tax becomes chargeable.

Article 168
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;

Facts

In 2009 and 2010, HR operated, together with her spouse, a wholesale drinks business. In her VAT returns for those years, she deducted the input VAT paid in respect of the invoices issued by P GmbH, amounting to EUR 993 164 for 2009 and EUR 108 417.87 for 2010 relating to supplies of drinks which had actually been made.
It is apparent from two judgments delivered by a criminal court, which have become final, that P acquired the drinks supplied to HR, committing several counts of VAT fraud. According to the findings of that court, HR’s husband provided P with significant quantities of spirit drinks, coffee and Red Bull, with a turnover of approximately EUR 80 million, without issuing invoices for those supplies. An employee of P issued sham invoices relating to the purchase of those goods on the basis of which P improperly asserted the right to deduct input VAT. HR’s husband also made price lists and potential customers for those goods available to P. Those goods were resold to various buyers, including HR.
After the discovery of those facts, the tax authorities refused P the right to deduct VAT and did the same with regard to HR, taking the view, in essence, that HR, together with her business, formed part of the supply chain in which the counts of fraud had been committed.
HR brought an action before the referring court, the Finanzgericht Berlin-Brandenburg (Finance Court, Berlin-Brandenburg, Germany), before which she claimed that she satisfied the statutory conditions for entitlement to a deduction of input VAT.
The tax authorities take the view, on the contrary, that, because of the involvement of HR’s spouse and the unusual nature of that commercial practice, HR should have realised that, together with her business, she was part of a supply chain in which VAT fraud had been committed.
The referring court harbours doubts as to how to interpret the concept of a ‘supply chain’ in the light of EU law and whether the business relations at issue in the case before it may fall within that concept, observing that neither HR, in asserting her right to deduct the input VAT paid on supplies of beverages made by P, nor the latter, as supplier of the goods, committed VAT fraud in connection with the transactions at issue.
In its view, it could be considered that the mere fact that a taxable person was, or should have been aware, of tax fraud committed at an earlier stage of the transaction at issue deprives him or her of the right to deduct input VAT. The concept of ‘supply chain’ is thus understood as meaning that it is sufficient for the goods supplied to be the subject of several successive transactions and connection to the fraud committed upstream would exist merely because the fraud relates to the same goods, without it being necessary for the taxable person to have facilitated or encouraged the fraud by the transaction at issue.
However, the referring court is of the view that such an interpretation of the concept of ‘supply chain’ is too broad, having regard to the principles of fiscal neutrality and proportionality. In its view, it follows from the case-law of the Court that to refuse the right to deduct in the event of fraud can be envisaged only where it is the specific combination of the transactions carried out successively that gives rise to the fraudulent nature of those transactions taken as a whole, as in the case, for example, where the successive supplies form part of an overall plan designed to make the traceability of the goods supplied more difficult and, therefore, the detection of fraud committed in the supply chain. Such an analysis is supported in the case-law making the refusal of the right to deduct subject to ‘participation’ or ‘involvement’ on the part of the taxable person. In its view, the mere fact that the taxable person knew or should have known of the fraud is not sufficient to establish participation in or connection to the fraud, participation or involvement presupposes personal contribution to fraud, at least in the form of encouragement or facilitation. Bad faith, as a purely subjective circumstance, cannot replace the active participation which is necessary in order to establish participation or connection.
Thus, in its view, in a case such as that in the case before it, where there has been no concealment of the supply relationship or of the suppliers, where the upstream fraud is fully completed and can no longer be facilitated or encouraged and where there is no overall plan providing for supplies to be part of fraud extending to several transactions, the right to deduct should not be refused. The transaction linking P and HR could, in such circumstances, be regarded as the continuation of the supply relationship, independent of the transaction involved in the fraud upstream, with the result that the supply chain concluded with P. The question of whether or not HR’s husband provided the customer list and the list of the goods at issue to P is irrelevant, since that fact does not call into question the fact that the supplies made by P to HR had no effect on the fraud previously committed by that company. Furthermore, the transactions at issue did not cause any loss in relation to VAT, since P was liable to pay the VAT invoiced, and did not give rise to a tax advantage liable to run counter to the objectives of Directive 2006/112.
The referring court is of the view that, in such circumstances, maintaining the effects of a fraud committed at an earlier stage on all subsequent transactions where the taxable person merely knew or should have known of the fraud constitutes a disproportionate restriction on the principle of fiscal neutrality, bearing in mind that the refusal of the right to deduct cannot have the nature of a penalty. That legal view could be supported, in its view, by the fact that, according to the case-law of the Court, the question of whether the VAT payable on previous or subsequent transactions concerning the goods concerned has or has not been paid to the public exchequer has no bearing on the taxable person’s right to deduct input VAT. In that context, the Court has always stated that the measures which the Member States may adopt under Article 273 of Directive 2006/112, in order to ensure the correct levying and collection of the tax and to prevent evasion, must not go further than is necessary to attain such objectives. It does not appear that a broad interpretation of the concept of ‘supply chain’ is capable of attaining those objectives. Finally, the erroneous nature of a refusal to grant the benefit of the right to deduct in those circumstances could also follow from the case-law of the Court according to which there is no need to draw a distinction, from the point of view of VAT, between lawful and unlawful transactions.

Questions

Are Articles 167 and 168(a) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ¹ to be interpreted as precluding the application of national law under which input tax deductions are not to be allowed where, when turnover tax fraud about which a taxable person knew or should have known was committed at a preceding stage, the taxable person, through the transaction carried out with him or her, did not participate in and was not connected to the turnover tax fraud and did not encourage or facilitate the turnover tax fraud committed?

AG Opinion

Decision

Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as not precluding a national practice whereby the right to deduct input value added tax (VAT) paid is refused to a taxable person who has acquired goods having been the subject of input VAT fraud committed upstream in the supply chain and who knew or should have known of it, even though he or she did not actively participate in that fraud.

Personal comments/VATupdate

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