ECJ C-674/22 (Gemeente Dinkelland) – Judgment – No Interest on VAT Refund for Errors & Retroactive Changes

On February 22, 2024 the ECJ issued its judgment in the case C-674/22 (Gemeente Dinkelland).

Context: The request for a preliminary ruling pursuant to Article 267 TFEU concerns the question of whether default interest must be paid in respect of a refund of tax levied in breach of EU law if that refund results from administrative errors on the part of the taxable person or from recalculations arising from a change in the law.

Article in the EU VAT Directive

N/A

Facts

The applicant is a Netherlands municipality. As such, in addition to activities in its capacity as a public authority, it also carries out economic activities. The latter activities are subject to the ordinary tax regulations under Directive 2006/112 (‘the VAT Directive’) and the Law on Turnover Tax of 1968 in relation to the payment of turnover tax and the deduction of input tax (the VAT paid on the purchase of goods and services relating to economic activities). On activities other than economic activities, the municipality levies turnover tax or is charged such tax by companies in exactly the same way. In the latter case, however, the municipality can recover this tax under the Law on the VAT compensation Fund (‘the BCF’) subject to certain exceptions.
The applicant’s turnover tax returns for the years 2012 to 2016 apparently required retrospective adjustment. This resulted in a tax refund which the inspector approved and which was subsequently paid to the applicant. The dispute concerns whether default interest must also be paid on this amount.
Of relevance here is the cause of the adjustments to the turnover tax returns. In the first instance, these were the result of changes in the calculation of the contributions that the applicant received from the BCF in the event that the turnover tax did not relate to economic activities. Since it is not always easy to determine whether the activities concerned are economic or non-economic, the applicant applies an apportionment key indicating the portion of the input tax paid that is deductible and the part that entitles it to a contribution from the BCF. Due to certain legislative changes, the applicant’s administrative procedures had to be adjusted with effect from 2016. This also changed the method of calculating the apportionment key and, consequently, the calculation of the tax deduction. Only in 2020 did the tax authorities approve the new calculation method and the resulting deduction.
In the course of this adjustment of the municipal administrative procedures, the applicant also discovered several administrative errors that also affected the turnover tax refund. These errors are not in themselves in dispute. The tax inspector approved the corrected returns. However, the existence of administrative errors on the part of the applicant is relevant to the question of whether payment of default interest can be claimed.
When claiming payment of default interest, the Netherlands distinction between tax interest and recovery interest must be taken into account. Tax interest is charged by the tax authorities if, at the end of a tax period, too little tax has been paid. There is a right to its reimbursement if the processing of a refund request has taken more than eight weeks or if, broadly speaking, the refund is the result of the inspector’s actions. In principle, this tax interest is calculated for the period starting three months after the start of the year following the year in which the tax was paid.
The same rules apply to a contribution from the BCF. As a result, a municipality that has wrongly deducted input tax but is entitled to a higher contribution from the BCF must in principle pay tax interest, but will not be reimbursed the tax interest on the corresponding additional amount of BCF contribution. Conversely, tax interest must be paid on a repayment of funds received from the BCF, but a corresponding turnover tax refund is paid without tax interest.
Recovery interest is charged if an assessment is paid late. Conversely, this interest is reimbursed if a refund is not paid out to the taxable person quickly enough and, exceptionally, in the case of refunds following the revision of an assessment.
According to the Court of Justice of the European Union (‘the Court’), where tax has been levied in breach of EU law, interest must be paid, as is apparent from the judgment of 18 April 2013, Irimie, C-565/11, ECLI:EU:C:2013:250, paragraphs 20 to 23. Following this judgment, the Netherlands legislature stipulated in Article 28c of the Law on Tax Collection (‘the IW’) that recovery interest would be reimbursed if tax was levied in breach of EU law. It is the Ontvanger van de belastingdienst (the Receiver of the Customs and Tax Administration), the defendant in this case, who is responsible for doing so and not the tax inspector, who determines the assessments.
Such recovery interest is paid from the day on which the tax was remitted. Thus, it is only the reimbursement of recovery interest resulting from tax levied in breach of EU law that offers the applicant in the present case the possibility of receiving a full reimbursement of interest. Tax interest comes into play only in so far as it is attributable to the inspector’s actions and even then for a more limited period.
In the present case, on 31 July 2020, the applicant requested the reimbursement of recovery interest under Section 28c IW on the turnover tax refunds granted. After the defendant rejected that request, the applicant filed a notice of objection, which the defendant also rejected. The pplicant then lodged an appeal with the referring court.

Questions

1. Must the legal rule that default interest must be reimbursed because there is a right to a refund of taxes levied in breach of EU law be interpreted as meaning that, where a taxable person has been granted a refund of turnover tax, default interest must be reimbursed to that taxable person in a situation where:
a. the refund is the result of administrative errors on the part of the taxable person, as described in this ruling, and for which the inspector cannot be blamed in any way;
b. the refund is the result of a recalculation of the allocation key for the deduction of turnover tax on general costs, under the circumstances described in this ruling?
2. If question 1 is answered in the affirmative, from what day is there a right to the reimbursement of default interest?

AG Opinion

None

Decision

In the light of all the foregoing considerations, the answer to the questions referred is that EU law must be interpreted as not requiring the payment of interest to a taxable person as from the payment of an amount of value added tax (VAT) which is subsequently refunded by the tax authority, where that refund results, in part, from the finding that that taxable person, due to errors in its accounts, did not fully exercise its right to deduct input VAT for the years concerned and, in part, from an amendment, with retroactive effect, of the detailed rules for calculating the deductible VAT relating to the general costs of that taxable person where those rules are established under the sole responsibility of that taxable person.

Summary

EU law does not require the payment of interest to a taxable person upon the refund of value added tax (VAT) if the refund is partly due to the taxable person’s errors in deducting input VAT and partly due to retroactive changes in rules established by the taxable person for calculating deductible VAT related to general costs.

Source