Flashback on ECJ Cases C-409/04 (Teleos and others) – Exemption for intra-EU supplies can be applied in case of good faith

On Sept 27, 2007, the ECJ issued its decision inthe case C-409/04 (Teleos and others). The case involved the zero-rated supply of mobile phones from the UK to other EU countries for which the purchaser was responsible for arranging transportation. The purchaser provided the suppliers with false documentation stating that the mobile phones had left the UK when, in fact, they remained in the UK.

Article in the EU VAT Directive

First subparagraph of Article 28a(3) and first subparagraph of Article 28c(A)(a) of the Sixth VAT Directive (now art. 20 of EU VAT Directive 2006/112/EC)

Article 2 of the Sixth Directive provides that the supply of goods or services effected for consideration within the territory of the country by a taxable person acting as such and the importation of goods are to be subject to VAT.

The Sixth Directive contains Title XVIa, entitled ‘Transitional arrangements for the taxation of trade between Member States’, which was added to it by Council Directive 91/680/EEC of 16 December 1991 supplementing the common system of value added tax and amending Directive 77/388 (OJ 1991 L 376, p. 1) and which contains Articles 28a to 28m.

Article 28a of the Sixth Directive provides:

‘1. The following shall also be subject to value added tax:

(a) intra-Community acquisitions of goods for consideration within the territory of the country by a taxable person acting as such or by a non-taxable legal person where the vendor is a taxable person acting as such who is not eligible for the tax exemption provided for in Article 24 and who is not covered by the arrangements laid down in the second sentence of Article 8(1)(a) or in Article 28b(B)(1).

…

3. “Intra-Community acquisition of goods” shall mean acquisition of the right to dispose as owner of movable tangible property dispatched or transported to the person acquiring the goods by or on behalf of the vendor or the person acquiring the goods to a Member State other than that from which the goods are dispatched or transported.

Where goods acquired by a non-taxable legal person are dispatched or transported from a third territory and imported by that non-taxable legal person into a Member State other than the Member State of arrival of the goods dispatched or transported, the goods shall be deemed to have been dispatched or transported from the Member State of import. That Member State shall grant the importer as defined in Article 21(2) a refund of the value added tax paid in connection with the importation of the goods in so far as the importer establishes that his acquisition was subject to value added tax in the Member State of arrival of the goods dispatched or transported.

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5. The following shall be treated as supplies of goods effected for consideration:

(b) the transfer by a taxable person of goods from his undertaking to another Member State.

…’

Article 28b(A) of the Sixth Directive provides:

‘1. The place of the intra-Community acquisition of goods shall be deemed to be the place where the goods are at the time when dispatch or transport to the person acquiring them ends.

2 Without prejudice to paragraph 1, the place of the intra-Community acquisition of goods referred to in Article 28a(1)(a) shall, however, be deemed to be within the territory of the Member State which issued the value added tax identification number under which the person acquiring the goods made the acquisition, unless the person acquiring the goods establishes that that acquisition has been subject to tax in accordance with paragraph 1.

…’

The first subparagraph of Article 28c(A)(a) of the Sixth Directive is worded as follows:

‘Without prejudice to other Community provisions and subject to conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions provided for below and preventing any evasion, avoidance or abuse, Member States shall exempt:

(a) supplies of goods, as defined in Article 5, dispatched or transported by or on behalf of the vendor or the person acquiring the goods out of the territory referred to in Article 3 but within the Community, effected for another taxable person or a non-taxable legal person acting as such in a Member State other than that of the departure of the dispatch or transport of the goods.’

Article 28d(1) of the Sixth Directive provides:

‘The chargeable event shall occur when the intra-Community acquisition of goods is effected. The intra-Community acquisition of goods shall be regarded as being effected when the supply of similar goods is regarded as being effected within the territory of the country.’

Article 22 of the Sixth Directive, in the version resulting from Article 28h thereof, imposes several obligations on persons liable to payment concerning, in particular, account keeping, invoicing, VAT returns and recapitulative statements which they are required to lodge with the tax authorities. Paragraph 8 thereof is worded as follows:

‘Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, subject to the requirement of equal treatment for 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.’

Facts

In 2003, Teleos and 13 other United Kingdom companies supplied mobile phones to a Spanish company, Total Telecom España SA/ Ercosys Mobil SA, for delivery to a destination, in general, in France or sometimes in Spain.
The contracts were mainly concluded on the basis of the international trade term “ex works” (or “EXW”), Teleos was only required to make the goods available to the customer at a warehouse in the United Kingdom, the customer being responsible for the onward transport to the specified Member State. The warehouse was that of Euro-Cellars Ltd, a bonded warehouse and distribution company.
In respect of each transaction, the Teleos received from the purchaser a stamped and signed CMR note describing the goods and indicating the delivery address, the name of the driver, the registration number of the vehicle and, by TT’s signature, that the mobile phones had been received at the envisaged destination.
Initially, the Commissioners of Customs and Excise accepted these documents as proof that the goods had been removed from the United Kingdom, so that the claimants were not required to account for VAT on the supplies and were entitled to be reimbursed for the input tax paid.
However, on subsequent checks they discovered that, in certain cases, the destination stated on the CMR notes was false (either the carriers indicated did not exist or were not involved in transporting mobile phones) or the registration numbers given were for non-existent vehicles or corresponded to vehicles which were unsuitable for transporting such goods.
The Commissioners concluded that the mobile phones had never left the United Kingdom and therefore ordered the claimants to pay VAT on their supplies. The order for reference stated that there was evidence that the customers had made declarations to the Spanish tax authorities including these
purchases as intra-Community acquisitions.
The national court considers it proven that the claimants were not party to any fraud and were unaware that the goods had not left the United Kingdom. It also came to the conclusion that, after the claimants had made serious and thorough enquiries in relation to the customers and Euro-Cellars, they had no practical means of establishing that the statements in the CMR notes were incorrect. Moreover, no additional evidence, other than the CMR notes, could reasonably have been obtained, given the nature of the business.

Questions

1. In the relevant circumstances, is the term “despatched” in Article 28a(3)¹ (intra-Community acquisition of goods) to be understood as meaning that intra-Community acquisition takes place when:

a. the right to dispose of the goods as owner passes to the purchaser and the goods are supplied by the supplier by placing them at the disposal of the purchaser (who is registered for VAT in another Member State), on an ex works contract of sale whereby the purchaser assumes responsibility for removing the goods to a different Member State from that of supply, at a secure warehouse located in the supplier’s Member State, and where the contractual documents and/or other documentary evidence state that the intention is that the goods should then be transported onwards towards a destination in another Member State, but the goods have not yet physically left the territory of the Member State of Supply; or

b. the right to dispose of the goods as owner passes to the purchaser and the goods commence, but do not necessarily complete, their journey towards a different Member State (in particular, if the goods have not yet physically left the territory of the Member State of supply); or

c. the right to dispose of the goods as owner has passed to the purchaser and the goods have physically left the territory of the Member State of supply on their journey towards a different Member State?

2. Is Article 28cA(a) to be interpreted as meaning that supplies of goods are exempt from VAT where:

– the goods are supplied to a purchaser who is registered for VAT in another Member State; and

– the purchaser contracts to purchase the goods on the basis that, after he has acquired the right to dispose of the goods as owner in the supplier’s Member State, he will be responsible for transporting the goods from the supplier’s Member State to a second Member State; and:

a. the right to dispose of the goods as owner has passed to the purchaser and the goods have been supplied by the supplier by placing them at the disposal of the purchaser, on an ex works contract of sale whereby the purchaser assumes responsibility for removing the goods to a different Member State from that of supply, at a secure warehouse located in the supplier’s Member State, where the contractual documents and/or other documentary evidence state that the intention is that the goods should then be transported onwards towards a destination in another Member State, but the goods have not yet physically left the territory of the Member State of Supply; or

b. the right to dispose of the goods as owner has passed to the purchaser and the goods have commenced, but not necessarily completed, their journey towards a different Member State (in particular, the goods have not yet physically left the territory of the Member State of supply); or

c. the right to dispose of the goods as owner has passed to the purchaser and the goods have left the territory of the Member State of supply on their journey towards a second Member State; or

d. the right to dispose of the goods as owner has passed to the purchaser and the goods can also be shown to have actually arrived in the Member State of destination?

3. In the relevant circumstances, where a supplier acting in good faith has tendered to the competent authorities in his Member State, after submission of a repayment claim, objective evidence which at the time of its receipt apparently supported his right to exempt goods under Article 28cA(a) and the competent authorities initially accepted that evidence for the purpose of exemption, in what circumstances (if any) may the competent authorities in the Member State of supply nevertheless subsequently require the supplier to account for VAT on those goods where further evidence comes to their attention that either (a) casts doubt upon the validity of the earlier evidence or (b) demonstrates that the evidence submitted was materially false, but without the knowledge or the involvement of the supplier?

4. Is the answer to question 3 above affected by the fact that there was evidence that the purchaser made returns to the tax authorities in the Member State of destination, where those returns included as intra-Community acquisitions the purchases the subject matter of these claims, the purchaser entered an amount purporting to represent acquisition tax and also claimed the same amount as input tax in accordance with Article 17(2)(d) of the Sixth Directive?

AG Opinion

(1) An intra-Community acquisition of goods within the meaning of the first subparagraph of Article 28a(3) 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 requires the acquirer to have obtained the power to dispose as owner of the goods, which are dispatched or transported to another Member State and thus have physically left the State of origin.

(2) Exemption of an intra-Community supply for the purposes of Article 28c(A)(a) of the Sixth Directive requires the supplied goods to have been dispatched or transported to another Member State and thus to have physically left the State of origin.

(3) If the supplier, acting in good faith, presents objective proofs that the goods supplied by him have left the State of origin and the authorities of that State thereupon exempt the supply from tax in accordance with Article 28c(A)(a) of the Sixth Directive, payment of the tax cannot be retrospectively demanded from the supplier in the circumstances of the main dispute in this case if it turns out that the proofs presented contained false information but the supplier neither knew nor could have known anything of it. That does, however, apply only where the supplier has done everything in his power to ensure the proper application of the provisions on VAT.

(4) It is not of decisive significance in proving an exempt intra-Community supply that the acquirer has lodged a tax declaration on the intra-Community acquisition of the goods in question with the tax authorities of the State of destination.

Decision

1. The first subparagraph of Article 28a(3) and the first subparagraph of Article 28c(A)(a) 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 2000/65/EC of 17 October 2000, are, having regard to the term ‘dispatched’ in those two provisions, to be interpreted as meaning that the intra-Community acquisition of goods is effected and the exemption of the intra-Community supply of goods becomes applicable only when the right to dispose of the goods as owner has been transferred to the purchaser and the supplier establishes that those goods have been dispatched or transported to another Member State and that, as a result of that dispatch or that transport, they have physically left the territory of the Member State of supply.

2. The first subparagraph of Article 28c(A)(a) of Sixth Directive 77/388, as amended by Directive 2000/65, is to be interpreted as precluding the competent authorities of the Member State of supply from requiring a supplier, who acted in good faith and submitted evidence establishing, at first sight, his right to the exemption of an intra-Community supply of goods, subsequently to account for value added tax on those goods where that evidence is found to be false, without, however, the supplier’s involvement in the tax evasion being established, provided that the supplier took every reasonable measure in his power to ensure that the intra-Community supply he was effecting did not lead to his participation in such evasion.

3. The fact that the purchaser made a declaration concerning intra-Community acquisition, such as that in question in the main proceedings, to the tax authorities of the Member State of destination may constitute additional evidence tending to establish that the goods have actually left the territory of the Member State of supply, but it does not constitute conclusive proof for the purposes of the exemption from value added tax of an intra-Community supply.

Summary

The CJEU found that where a supplier had acted in good faith, took every reasonable measure to ensure it was not involved in fraud and fulfilled its obligations regarding the intra-Community supply for which the purchaser was contractually obliged to arrange for transportation, it was the purchaser who should be held liable for the VAT due – not the supplier.

The CJEU reiterated the position as set out in a body of other case-law that it is necessary for a legitimate business to be aware of its tax obligations before concluding a transaction. Furthermore, the CJEU stated that it would be contrary to the well-established principle of legal certainty and leave suppliers in an ‘uncertain situation’ if an EU Member State could ‘subsequently require’ a supplier to ‘account for the VAT on that supply, where it transpires that, because of the purchaser’s fraud, of which the supplier had and could have had no knowledge, the goods concerned did not actually leave the territory of the Member State of supply.’ The CJEU also held that the principle of fiscal neutrality – which precludes treating similar supplies in competition with each other from being treated differently for VAT purposes – would also be infringed.

The CJEU also reiterated its position with regard to the principle of proportionality. It held that while Member States can adopt measures to protect their public exchequers, such measures must go no further than necessary for that purpose and should not operate to the detriment of EU law. The CJEU confirmed that any distribution of risk between a supplier and the tax authorities, following the perpetration of fraud by a third party, must be compatible with the principle of proportionality i.e. there cannot be a disproportionate response to the risk of fraud which places an unjust burden on legitimate businesses.

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