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Flashback on ECJ Cases – C-564/15 (Farkas) – Undue payment of VAT. Purchaser must be able to adress his application for reimbursement to the tax authority directly in case of insolvency of the seller.

20 August 2021
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10 min read

On April 26, 2017, the ECJ issued its decision in the case C-564/15 (Farkas).

Reference for a preliminary ruling — Plea alleging infringement of EU law raised by the Court of its own motion — Principles of equivalence and effectiveness — Common system of value added tax — Directive 2006/112/EC — Right to deduct input tax — Reverse charge system — Article 199(1)(g) — Application only in the case of immovable property — Undue payment of the tax by the purchaser of property to the seller as a result of an incorrectly drawn up invoice — Tax authority’s decision holding that the property purchaser has an outstanding tax liability, refusing payment of the deduction sought by the purchaser, and imposing a penalty tax

Article in the EU VAT Directive

Article 199(1)(g) in the EU VAT Directive 2006/112/EU

Article 199 (Liability of VAT)
1. Member States may provide that the person liable for payment of VAT is the taxable person to whom any of the following supplies are made:

(g) the supply of immovable property sold by a judgment debtor in a compulsory sale
procedure.

Facts – Summary

  • Auction Purchase and VAT Issue: Mr. Farkas bought a mobile hangar via a tax authority auction, paying VAT included by the seller, who then paid it to the Hungarian tax authority.
  • Reverse Charge System: The tax authority found Mr. Farkas should have applied the reverse charge system, paying VAT directly to the Treasury, not through the seller.
  • Tax Authority’s Decision: Mr. Farkas was held liable for a tax difference of HUF 744,000 and penalized HUF 372,000, with his VAT refund request denied.
  • Legal Challenge: Mr. Farkas argues the denial of his VAT deduction right due to a formal defect infringes EU law, as the seller paid VAT to the Treasury.
  • Court’s View: The court sees the tax authority’s decision as disproportionate, noting no tax loss or evasion, and questions the compatibility of denying deduction rights with EU law.

Facts – Detailed

  • As part of an electronic auction organised by the tax authorities, Mr Farkas purchased a mobile hangar from a limited liability company with an outstanding tax liability. The seller in question issued the invoice, which included the VAT relating to that transaction, in accordance with the rules applicable to the ordinary tax system. When Mr Farkas paid the auction selling price, he included the VAT indicated by the seller, who paid that tax to the Hungarian tax authority.
  • Mr Farkas deducted the output VAT recorded in that invoice. The Nemzeti Adó- és Vámhivatal Bács-Kiskun Megyei Adóigazgatósága (the Bács-Kiskun Provincial Tax Directorate, part of the National Treasury and Customs Authority, Hungary) then carried out checks on the refunds requested by Mr Farkas in the VAT declarations for the fourth quarter of 2012. That tax authority found that the rules governing the reverse charge system, for the purposes of Paragraph 142(1)(g) of the Law on VAT, according to which it fell to Mr Farkas, as purchaser of the property, to pay the VAT directly to the Treasury, had not been complied with. By decision of 11 July 2014, confirmed by decision of 7 November 2014, the Hungarian tax authority consequently found that Mr Farkas was liable for the tax difference of HUF 744 000 (approximately EUR 2 400), rejected his request for a refund of the VAT paid to the vendor in question and imposed a tax penalty in the sum of HUF 372 000 (approximately EUR 1 200).
  • Mr Farkas claims that the Hungarian tax authority deprived him of his right to deduct VAT as a result of a formal defect, that is to say, the invoice in question had been issued in accordance with the ordinary tax system, rather than the reverse charge system, and thus infringed EU law. He submits that the decision making him liable for the tax difference is unjustified because the seller in question paid the VAT in question to the Treasury. Mr Farkas brought an action before the referring court in order to ask the Court of Justice whether the refusal of his right to make a deduction is compatible with EU law.
  • The referring court takes the view that the Hungarian tax authority did not deny Mr Farkas his right to deduct VAT, but required him to pay the VAT due in accordance with the rules of the reverse charge system, pursuant to Paragraph 142(1)(g) of the Law on VAT. The difference in tax for which he is liable corresponds to the VAT indicated on the invoice for the transaction in question. According to the referring court, following the decisions of the Hungarian tax authority, although Mr Farkas paid the VAT to the seller in question, he is treated as being liable to the Treasury. Thus, since the Hungarian tax authority does not dispute his right to deduct the VAT paid, it deducted from the amount which he is seeking to have refunded the tax difference which they consider him to be liable for. Since the two sums are equal, they cancel each other out. The referring court also states that the seller paid the VAT to the Treasury, so that the Treasury suffered no loss as a result of the fact that the invoice in question was wrongly issued under the ordinary tax system, instead of the reverse charge system. In addition, according to that court, there is no indication of any tax evasion or of an intention to obtain a tax advantage.
  • The referring court considers that, in practice, the decision of the Hungarian tax authority effectively prevents Mr Farkas from exercising his right to make a deduction. Bearing in mind that, in accordance with Directive 2006/112 and the Court’s case-law, the right to deduct VAT may be denied only where tax evasion has been proven, that decision does not appear to be proportionate to the aim which the reverse charge procedure seeks to achieve.

Questions

Is a practice of the tax authority, based on the provisions of the Law on VAT, compatible with the provisions of the VAT Directive, in particular the principle of proportionality with the objectives of tax neutrality and the prevention of tax fraud, if, by that practice, that authority declares that a purchaser of an item of property (or recipient of a service) is liable for a tax difference in a situation in which the seller of the property (or supplier of the service) issues an invoice in accordance with the ordinary tax system for a transaction to which the reverse charge procedure applies and declares and pays to the Treasury the tax relating to that invoice, and the purchaser of the item of property (or recipient of the service), for his part, deducts the VAT paid to the issuer of the invoice, even though he may not exercise his right to deduct the VAT declared as a tax difference?

Is the imposition of a penalty for selecting an incorrect method of taxation in the case of a declaration of a tax difference, which also entails the imposition of a tax fine of 50%, proportionate where the Treasury has not incurred any loss of revenue and there is no evidence of abuse?

AG Opinion

In the absence of a specific derogation granted on the basis of Article 395 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, the supply of movable property within a compulsory sale procedure pursuant to Article 199(1)(g) of that directive cannot be made subject to the reverse charge mechanism.

Decision

1. Article 199(1)(g) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2010/45/EU of 13 July 2010, must be interpreted to the effect that it applies to the supply of immovable property sold by a judgment debtor in a compulsory sale procedure.

2. The provisions of Directive 2006/112, as amended by Directive 2010/45, and the principles of fiscal neutrality, effectiveness and proportionality must be interpreted to the effect that, in a situation such as that in the main proceedings, they do not preclude the purchaser of an item of property from being deprived of the right to deduct the value added tax which he paid to the seller when that tax was not due, on the basis of an invoice drawn up in accordance with the rules of the ordinary value added tax regime, where the relevant transaction came under the reverse charge mechanism, and the seller paid that tax to the Treasury. However, to the extent that reimbursement of the unduly invoiced value added tax by the seller to the purchaser becomes impossible or excessively difficult, in particular in the case of the insolvency of the seller, those principles require that the purchaser be able to address his application for reimbursement to the tax authority directly.

3. The principle of proportionality must be interpreted to the effect that it precludes national tax authorities, in a situation such as that in the main proceedings, from imposing on a taxable person, who purchased an item of property the transfer of which comes under the reverse charge regime, a tax penalty of 50% of the amount of value added tax which he is required to pay to the tax authority, where those authorities suffered no loss of tax revenue and there is no evidence of tax evasion, this being a matter for the referring court to determine.

Summary

Reverse charge mechanism – Undue payment of VAT by the buyer of goods to the seller after an incorrect invoice – Decision of the tax authorities establishing the tax liability of the buyer of the goods and refusing payment of the deduction requested by him, as well as imposing a tax penalty on him

Article 199(1)(g) of the VAT Directive applies to the supply of immovable property that is sold by the enforcement debtor to another person in a public sale on the basis of an enforceable title.

The provisions of the VAT Directive, as well as the principles of fiscal neutrality, effectiveness and proportionality, must be interpreted as not precluding, in a situation such as that at issue in the main proceedings, the purchaser of goods from being deprived of the right to deduct the VAT which he has wrongly paid to the seller on the basis of an invoice issued under the ordinary VAT regime, while the relevant transaction was subject to the reverse charge mechanism, where the seller paid that tax to the Treasury. Insofar as the refund by the seller to the buyer of the incorrectly invoiced VAT becomes impossible or extremely difficult, in particular in the event of the seller’s insolvency,

The principle of proportionality must be interpreted as precluding, in a situation such as that at issue in the main proceedings, the national tax authorities from imposing a tax penalty amounting to 50% of the amount of VAT to be paid to the tax authorities, where that tax authorities have not lost any tax revenue and there is no indication of tax fraud, which is for the referring court to determine.

Source

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