On May 8, 2008, the ECJ issued its decision in the joined cases C-95/07 & C-96/07 (Ecotrade).
Context: Sixth VAT Directive – Reverse charge procedure – Right to deduct – Time-bar – Irregularity in accounts and tax returns affecting transactions subject to the reverse charge procedure
Article in the EU VAT Directive
Articles 17, 18(1)(d), 18(2) and (3), 21(1)(b), 22 of the Sixth VAT Directive (Articles 167, 168, 178(f), 179, 180, 196, 207, 256, 267, 273 of the EU VAT Directive 2006/112/EC)
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;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.
Article 178
In order to exercise the right of deduction, a taxable person must meet the following conditions:
(f) when required to pay VAT as a customer where Articles 194 to 197 or Article 199 apply, he must comply with the formalities as laid down by each Member State.
Article 179
The taxable person shall make the deduction by subtracting from the total amount of VAT due for a given tax period the total amount of VAT in respect of which, during the same period, the right of deduction has arisen and is exercised in accordance with Article 178.
However, Member States may require that taxable persons who carry out occasional transactions, as defined in Article 12, exercise their right of deduction only at the time of supply.
Article 180
Member States may authorise a taxable person to make a deduction which he has not made in accordance with Articles 178 and 179.
Article 196
VAT shall be payable by any taxable person, or non-taxable legal person identified for VAT purposes, to whom the services referred to in Article 44 are supplied, if the services are supplied by a taxable person not established within the territory of the Member State.
Article 207
Member States shall take the measures necessary to ensure that persons who are regarded as liable for payment of VAT in the stead of a taxable person not established in their respective territory, in accordance with Articles 194 to 197 and Articles 199 and 204, comply with the payment obligations set out in this Section.
Member States shall also take the measures necessary to ensure that those persons who, in accordance with Article 205, are held to be jointly and severally liable for payment of the VAT comply with these payment obligations.
Article 256
Member States shall take the measures necessary to ensure that persons who are regarded as liable for payment of VAT in the stead of a taxable person not established within their territory, in accordance with Articles 194 to 197 and Article 204, comply with the obligations relating to submission of a VAT return, as laid down in this Chapter.
Article 273
Member States may impose other obligations which they deem necessary to ensure the correct collection of VAT and to prevent evasion, subject to the requirement of equal treatment as between 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.
The option under the first paragraph may not be relied upon in order to impose additional invoicing obligations over and above those laid down in Chapter 3. ▼B
Facts
- Ecotrade is an Italian limited company specialising in granulated blast furnace slag and other ingredients, in particular synthetic gypsum and ashes used for the manufacture of cement.
- In the tax years 2000 and 2001 Ecotrade entrusted to operators established outside Italy the transport of those materials from Italy to other Member States of the European Community. In the invoices issued by those operators for services supplied to Ecotrade, those services are described either as ‘chartering of the vessel’ or ‘shipping’ (‘the transactions in question’). However, the invoices did not indicate the amount of VAT, and some of them stated that the transactions were exempt.
- Ecotrade therefore regarded the relevant transactions as being exempt from VAT. Accordingly, it recorded the invoices relating to those transactions only in the register of purchases and not in the register of invoices issued, and did so on the basis of VAT exemption. The VAT relating to those transactions was therefore not mentioned in the returns drawn up by Ecotrade for the tax years 2000 and 2001.
- After an inspection in 2004, the Agenzia took the view that the transactions in question were services in the intra-Community transport of goods subject to VAT, and that the reverse charge procedure was applicable to them, which, with the exception of one invoice, was not disputed by Ecotrade. The Agenzia also found that Ecotrade had not complied with the accounting requirements relating to the reverse charge procedure because the invoices concerned had been recorded only in the register of purchases and not in the register of invoices issued.
- Therefore, the Agenzia, by a number of tax recovery notices, reassessed for VAT purposes the tax returns submitted by Ecotrade for the tax years 2000 and 2001, claimed payment of undeclared taxes amounting to a total of approximately EUR 321 000 and imposed penalties in respect of those taxes of approximately EUR 361 000.
- Subsequently, the Agenzia took the view that Ecotrade had lost its right to deduct VAT because it had not exercised that right within a period of two years from the time the VAT becomes chargeable, as provided in the second sentence of Article 19(1) of the DPR No 633/72, whereas the tax authorities were still within the time-limits for recovering the VAT relating to the services concerned since, under the first sentence of Article 57 of the DPR No 633/72, notices of reassessment and recovery may be served within a period of four years calculated from the date on which the tax returns relating to disputed taxes were submitted.
- By various appeals lodged on 13 February 2005 before the Commissione tributaria provinciale di Genova, Ecotrade challenged the recovery notices concerned and sought to have them annulled. In order to justify its accounting practice Ecotrade submitted that the invoices relating to the transactions in question had been duly recorded in the register of purchases, but that, because those transactions had been mistakenly regarded as exempt from VAT, they had not been recorded in the register of invoices issued. That irregularity should not however have compromised the exercise of the right to deduct, since no debt to the tax authority was generated. Therefore, any temporal limit on the right to deduct was inapplicable in this case.
- Before the national court the Agenzia replied that Ecotrade should have invoiced itself for the transactions in question, calculated the VAT payable, and recorded the invoice in the register of invoices issued and the register of purchases so that it would have had a VAT credit for the purposes of deducting the input tax calculated. In accordance with that method, the VAT payable is not actually paid by the purchaser in so far as it is offset by the corresponding VAT credit. The right to deduct must be exercised in the period prescribed or it will lapse. Consequently, Ecotrade, which did not comply with the accounting procedure provided for under the national legislation, is required to pay the VAT due, while it has lost the right to deduct VAT on account of the time-bar.
Questions
AG Opinion
(1) The provisions of the Community VAT directives do not preclude the imposition in national law of a limitation period for the exercise of a taxable person’s right to deduct input tax on goods and services which he uses for the purpose of his taxable transactions, provided that the period in question is not less favourable than those applicable to similar domestic situations and that it does not render the exercise of the right virtually impossible or excessively difficult.
(2) The provisions of the Community VAT directives do not preclude a tax authority from verifying taxable persons’ VAT returns, even after the expiry of any such limitation period imposed, and claiming tax due but not paid.
(3) However, in a situation where such verification reveals an undeclared liability to VAT which, had it been declared, would have entailed a concomitant right to deduct, the liability may not be enforced without taking account of the right to deduct.
Decision
1. Articles 17, 18(2) and (3) and 21(1)(b) 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 2000/17/EC of 30 March 2000, do not preclude national legislation which lays down a limitation period for the exercise of the right to deduct, such as that at issue in the main proceedings, provided that the principles of equivalence and effectiveness are respected. The principle of effectiveness is not infringed merely because the tax authority has a longer period in which to recover unpaid value added tax than the period granted to taxable persons for the exercise of their right to deduct.
2. However, Articles 18(1)(d) and 22 of Sixth Directive 77/388, as amended by Directive 2000/17, do preclude a practice whereby tax returns are reassessed and value added tax recovered which penalises a failure to comply, first, with obligations arising from formalities laid down in national legislation pursuant to Article 18(1)(d), and, second, with the obligations relating to accounts and tax returns under Article 22(2) and (4) respectively, such as that in the main proceedings, by denying the right to deduct in the case of a reverse charge procedure.
Summary
A limitation period for the exercise of the right to deduct is allowed, provided that the principles of equivalence and effectiveness are respected. The mere fact that the tax authorities have a longer period for recovering the unpaid VAT than the period which the taxable person has to exercise his right to deduct does not infringe the principle of effectiveness.
Not permitted is a practice of rectification of returns and recovery of VAT whereby failure to comply with the obligations arising from formalities prescribed by the national legislation and with the obligations relating to the keeping of accounts and the submission of returns is punishable by the forfeiture of the right to deduct when applying the reverse charge mechanism.
Source:
Similar ECJ cases
Newsletters
