Flashback on ECJ Cases C-454/98 (Schmeink & Cofreth and Strobel) – Member States’ obligation to allow revision of incorrectly invoiced VAT – Conditions – Good faith drafter of invoice

On Spet 19. 2000, the ECJ issued its decision in the case C-454/98 (Schmeink & Cofreth and Strobel).

Context: Sixth VAT Directive – Obligation of Member States to provide for the possibility of adjusting tax improperly mentioned on an invoice – Conditions – Good faith of issuer of invoice

Article in the EU VAT Directive

Article 21 of the Sixth Directive provides:

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

1. under the internal system:

Facts

Schmeink

Schmeink acquired 50% of the shares in a GmbH (a German-law limited liability company, ‘the GmbH) for which it paid DEM 3 781 220. On 31 December 1991 it issued to the GmbH a statement of account including an invoice mentioning that sum in respect of advisory services which it had, however, never provided. Schmeinkexpressly included on that statement of account a sum of DEM 529 370.80 in respect of VAT.
The pro forma invoice was one of the matters used by the GmbH in support of an application for an investment grant.
Following a special VAT investigation in March 1993, the Finanzamt, Borken, by a revised notice of 14 April 1993, assessed the VAT payable by Schmeink at the amount shown separately in the statement of account.
The GmbH did not claim any right to a deduction by virtue of the statement of account and returned it to Schmeink on 19 July 1993.
On 1 July 1994, Schmeink sent an application to the Finanzamt, Borken, seeking a waiver of the VAT on grounds of equity under Paragraph 227 of the AO.
By decision of 12 September 1994, the Finanzamt, Borken, dismissed the application.
Schmeink appealed against the decision of the Finanzamt, Borken, to the Finanzgericht (Finance Court), Münster, which, by judgment of 23 November 1995, confirmed the Finanzamt’s decision.
On 24 March 1997 Schmeink appealed on a point of law (‘Revision) to the Bundesfinanzhof (Federal Finance Court) against the judgment of the Finanzgericht.

Strobel

During 1992 and 1993, when he was running an office-appliances business, Mr Strobel issued several leasing undertakings with invoices relating to deliveries which had never taken place.
Mr Strobel was using these bogus invoices to try to disguise losses in one of his subsidiaries and make profitability appear better than it was. The invoices were paid by the leasing undertakings. Subsequently, Mr Strobel repaid the undertakings concerned the amounts which they had paid him.
Mr Strobel made the sums in question subject to VAT. For their part, the leasing undertakings deducted the amount of VAT shown on the relevant invoices on account of input tax.
In 1994 Mr Strobel voluntarily filed a declaration setting out the true position with the Public Prosecutor’s Office and with the Finanzamt, Esslingen, informing them of the bogus invoices and their addressees. The Finanzamt, Esslingen, passed this information to the tax offices responsible for the addressees of the invoices so that they could proceed to regularise the position regarding the deduction of input tax.
Following Mr Strobel’s declaration, an investigation was carried out by the tax authorities and the Finanzamt, Esslingen, assessed Mr Strobel for VAT in an amount equal to the amounts mentioned separately on the invoices, namely DEM 519 346.36 for 1992 and DEM 653 156.51 for 1993.
On 24 August 1995, Mr Strobel applied to the Finanzamt, Esslingen, for waiver of the VAT on grounds of equity under Paragraph 227 of the AO.
By decision of 15 November 1995, the Finanzamt, Esslingen, dismissed the application.

Questions

1. Does Community law require that provision be made to allow adjustment of an improperly invoiced tax as part of the procedure for determining the tax or is it sufficient for the Member States to permit adjustment only in a later procedure for determining whether payment of the tax is equitable (on objective grounds)?
2. Is it an imperative prerequisite for adjusting an improperly invoiced tax that the issuer of the invoice should demonstrate good faith or are there other circumstances in which an invoice may be adjusted (and, if so, what are those circumstances)?
3. What conditions must be satisfied for the issuer of an invoice to be acting in good faith?

AG Opinion

(1) Community law does not require that national law allow rectification of an improperly invoiced tax as part of the procedure during which the initial tax liability of a taxable person who has issued erroneous or fictitious invoices is determined, provided that it is effectively possible for that person later to seek
rectification of the sum thereby levied and that the availability of such relief, where the appropriate conditions are satisfied, is not discretionary;
(2) The only condition imposed by Community law in respect of claims for the rectification of VAT mentioned erroneously or fictitiously on invoices is that the issuer of the invoice in question must be able to establish, to the satisfaction of the relevant national-tax authorities, that no loss of VAT revenue will occur. Community law precludes national VAT laws from rendering such claims subject to an additional requirement of good faith on the part of the issuer at the moment when the invoice was issued.

Decision

1. Where the issuer of the invoice has in sufficient time wholly eliminated the risk of any loss in tax revenues, the principle of the neutrality of VAT requires that VAT which has been improperly invoiced can be adjusted without such adjustment being made conditional upon the issuer of the relevant invoice having acted in good faith.

2. It is for the Member States to lay down the procedures to apply as regards the adjustment of improperly invoiced VAT, provided that such adjustment is not dependent on the discretion of the tax authorities.

Personal comments/VATupdate

Member States’ obligation to allow revision of incorrectly invoiced VAT – Conditions – Good faith drafter of invoice

Where the issuer of the invoice has eliminated the risk of loss of tax revenue in good time and completely, the principle of VAT neutrality requires that the incorrectly invoiced VAT can be revised without this revision being subject to the good faith of the issuer of the invoice.

It is for the Member States to determine the procedure to be followed for the adjustment of the incorrectly invoiced VAT, it being understood that such adjustment should not depend on the discretionary discretion of the tax authorities.

Source