On Jan 12, 2006, the ECJ issued its decision in the joined cases C-354/03 (Optigen), C-355/03 (Fulcrum Electronics Ltd) and C-484/03 (Bond House Systems Ltd).
Context: Sixth VAT Directive – Article 2(1), Article 4(1) and (2) and Article 5(1) – Deduction of input tax – Economic activity – Taxable person acting as such – Supply of goods – Transaction forming part of a chain of supply involving a defaulting trader or a trader using an unauthorised VAT number – Carousel fraud
Article in the EU VAT Directive
Article 2(1), Article 4(1) and (2) and Article 5(1) in the Sixth VAT Directive
Under Article 2(1) of the Sixth Directive, a supply of goods or services effected for consideration by a taxable person acting as such is subject to VAT.
Under Article 4(1) of the Sixth Directive, ‘taxable person’ means any person who independently carries out any economic activity specified in Article 4(2). The term ‘economic activities’ is defined in Article 4(2) as comprising all activities of producers, traders and persons supplying services, including the exploitation of tangible or intangible property for the purpose of obtaining income therefrom on a continuing basis.
Under Article 5(1) of that directive, ‘“supply of goods” shall mean the transfer of the right to dispose of tangible property as owner’.
Facts
- According to the orders for reference, at the material time Optigen, Fulcrum and Bond House essentially carried on the business of buying CPUs from companies established in the United Kingdom and selling them to purchasers established in another Member State.
- Optigen claimed a net balance of refundable VAT in excess of GBP 7 million in its VAT return in respect of June 2002. By decisions of 16 and 31 October 2002, the Commissioners declined to allow an amount of just over GBP 7 million of that claim. Similarly, by a decision of 30 October 2002, the Commissioners disallowed the refund of just over GBP 13 million in respect of July of that year.
- Fulcrum claimed a net balance of input VAT of nearly GBP 7.2 million in its VAT return in respect of June 2002. By a decision of 11 November 2002, the Commissioners disallowed nearly GBP 2 million of the sum claimed. Similarly, in respect of July 2002 they disallowed about GBP 1.1 million out of a total claim of nearly GBP 4 million. In addition, in February 2003 the Commissioners issued an assessment against Fulcrum for nearly GBP 160 000 for input VAT which they claimed to have wrongly refunded to them in respect of May 2002.
- Bond House claimed a refund of approximately GBP 16.3 million for input VAT paid in its VAT return in respect of May 2002. That claim was refused by the Commissioners. In September 2002, the Commissioners informed the company that they accepted that, of the total sum claimed, just over GBP 2.7 million was allowable.
- According to the orders for reference, the transactions in question formed part of a chain of supply which, without the applicants in the main proceedings being aware of it, involved a defaulting trader, that is to say, a trader who incurs liability to VAT but goes missing without discharging that liability with the tax authorities, or a trader using a ‘hijacked’ VAT number, that is to say, a trader using a VAT number belonging to someone else, and thus, according to the Commissioners, constituted a carousel fraud.
- According to the orders for reference in Cases C‑354/03 and C‑355/03, and, according to the Commissioners in Case C‑484/03, a carousel fraud generally operates as follows:
- A company (A) in one European Union Member State sells taxable goods to a company (B) in another Member State.
- Company B, which is the defaulting trader or the trader using the hijacked VAT number, sells the goods at a discount to another company (C), a buffer company, in the other Member State. Further sales can thereby be made at a profit. Company B incurs liability to VAT on the purchase of the goods, but, having used the goods for taxable transactions, it is also entitled to deduct that VAT as input VAT. On the other hand, it incurs liability for the output VAT it has charged to company C, but goes missing before discharging that liability to the tax authorities.
- In turn, company C sells the goods to another buffer company (D) in the other Member State, paying the tax authorities the output VAT charged after having deducted the input VAT paid, and so on until a company in the other Member State exports the goods to another Member State. Exports are exempt from VAT, but the exporting company is entitled to claim a refund of the input VAT paid on the purchase of the goods. When the purchaser in the last Member State is company A, there is a true carousel fraud.
- The process can be repeated.
- In Cases C-354/03 and C-355/03, the referring court states that the Commissioners based their decisions on the contention that, first, as regards the purchases in question in the main proceedings, Optigen and Fulcrum received no supplies used or to be used for VAT purposes, so that the amounts of VAT purportedly paid in respect of those purchases were not input tax within the meaning of the Value Added Tax Act 1994. Further, for the purposes of VAT, the relevant sales were not supplies made in the course of a business and do not therefore give any entitlement to a refund. Finally, the purchases and the sales, judged objectively, were devoid of economic substance and were not part of any economic activity. Accordingly, the purchases were not supplies used or to be used for the purposes of any economic activity and the sales were not supplies made in the course of an economic activity for the purposes of VAT.
Questions
Case C-354/03 (Optigen)
A. Under the common system of VAT, and in the light of Council Directives 67/227/EEC1 and 77/388/EEC2, is the entitlement of a trader to credit for a payment in respect of VAT under a transaction to be judged by reference to:
(1)only the particular transaction to which the trader was a party including the trader’s purposes in entering into it, or
(2)the totality of transactions, including subsequent transactions, making up a circular chain of supply of which the particular transaction forms part including the purposes of other participants in the chain of which the trader has no knowledge and/or means of knowledge, and/or
(3)the fraudulent acts and intention, whether arising prior or subsequent to the particular transaction, of other participants in the circular chain of whose involvement the trader is unaware and of whose acts and intentions the trader has no knowledge and/or means of knowledge, or
AG Opinion
Joined Cases C-354/03, C-355/03 and C-484/03
In order to determine whether a transaction in a supply chain qualifies as an economic activity within the meaning of Article 4(2) of the 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, the transaction must be considered individually and per se. Transactions forming part of a circular supply chain in which a trader misappropriates the amounts paid to it as VAT instead of accounting for those amounts to the tax authorities do not on that account cease to constitute an economic activity within the meaning of Article 4(2) of the Sixth Directive.
Decision
Joined Cases C-354/03, C-355/03 and C-484/03
Transactions such as those at issue in the main proceedings, which are not themselves vitiated by value added tax fraud, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of Articles 2(1), 4 and 5(1) 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 95/7/EC of 10 April 1995, where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge. The right to deduct input value added tax of a taxable person who carries out such transactions cannot be affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by value added tax fraud, without that taxable person knowing or having any means of knowing.
Summary
Supply of goods forming part of VAT fraud chain – Economic activity – Deduction of input tax
Transactions which are not themselves the subject of VAT fraud constitute supplies of goods by a taxable person acting as such and an economic activity, in so far as they meet the objective criteria on which the above concepts are based, irrespective of the intention of a trader other than the taxpayer concerned who is part of the same supply chain and / or any fraudulent nature, of which this taxpayer was unaware and could not have been aware, of another transaction in this chain, which precedes or follows the transaction performed by the aforementioned tax .
The right of a taxable person who carries out such transactions to deduct input tax cannot be affected by the fact that there are in the supply chain of which those transactions form part, without that taxable person knowing or being able to know, in relation to another transaction that precedes or follows the transaction carried out by the latter, VAT fraud has been or will be committed.
Source
Newsletters
- BTW jurisprudentie
- ecer.minbuza.nl
- EFS – VAT chain fraud and legal protection anchoring in law?
- University Ghent – Fraudulent VAT practices
