Flashback on ECJ Cases – C-285/11 (Bonik) – Suspicion of fraud no reason to refuse VAT deduction

On December 6, 2021, the ECJ issued its decision in C-285/11 (Bonik).

Context: VAT – Directive 2006/112/EC – Right of deduction – Refusal

Article in the EU VAT Directive

Articles 2, 9, 14, 62, 63, 167, 168 and 178 of the EU VAT Directive 2006/112/EC

Article 2 (Taxable transactions)
1. The following transactions shall be subject to VAT:
(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;
(b) the intra-Community acquisition of goods for consideration within the territory of a Member State by:
(i) a taxable person acting as such, or a non-taxable legal person, where the vendor is a taxable person acting as such who is not eligible for the exemption
for small enterprises provided for in Articles 282 to 292 and who is not covered by Articles 33 or 36;
(ii) in the case of new means of transport, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1), or any other non-taxable person;
(iii) in the case of products subject to excise duty, where the excise duty on the intra-Community acquisition is chargeable, pursuant to Directive 92/12/EEC,
within the territory of the Member State, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1);
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such;
(d) the importation of goods.

Article 14 (Taxable transaction – Supply of goods)

1. “Supply of goods” shall mean the transfer of the right to dispose of tangible property as owner.
2. In addition to the transaction referred to in paragraph 1, each of the following shall be regarded as a supply of goods:
(a) the transfer, by order made by or in the name of a public authority or in pursuance of the law, of the ownership of property against payment of compensation;
(b) the actual handing over of goods pursuant to a contract for the hire of goods for a certain period, or for the sale of goods on deferred terms, which provides that in the normal course of events ownership is to pass at the latest upon payment of the final instalment;

(c) the transfer of goods pursuant to a contract under which commission is payable on purchase or sale.
3. Member States may regard the handing over of certain works of construction as a supply of goods.

Article 62 (Chargeable event)
For the purposes of this Directive:
(1) “chargeable event” shall mean the occurrence by virtue of which the legal conditions necessary for VAT to become chargeable are fulfilled;
(2) VAT shall become “chargeable” when the tax authority becomes entitled under the law, at a given moment, to claim the tax from the person liable to pay, even though the time of payment may be deferred.

Article 63 (Chargeable event)
The chargeable event shall occur and VAT shall become chargeable when the goods or the services are supplied.

Article 167 (Right to deduct VAT)
A right of deduction shall arise at the time the deductible tax becomes chargeable

Article 168 ((Right to deduct VAT)
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:
(a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Sections 3 to 6 of Chapter 3 of Title XI;
(b) for the purposes of deductions pursuant to Article 168(b), in respect of transactions treated as the supply of goods or services, he must comply with the formalities as laid down by each Member State;
(c) for the purposes of deductions pursuant to Article 168(c), in respect of the intra-Community acquisition of goods, he must set out in the VAT return provided for in Article 250 all the information needed for the amount of VAT due on his intra-Community acquisitions of goods to be calculated and he must hold an invoice drawn up in accordance with Sections 3 to 5 of Chapter 3 of Title XI;
(d) for the purposes of deductions pursuant to Article 168(d), in respect of transactions treated as intra-Community acquisitions of goods, he must complete the formalities as laid down by each Member State;
(e) for the purposes of deductions pursuant to Article 168(e), in respect of the importation of goods, he must hold an import document specifying him as
consignee or importer, and stating the amount of VAT due or enabling that amount to be calculated;
(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.

Facts

Bonik is a company which was the subject of a tax investigation relating to the months of February and March 2009.
Following that investigation, the Bulgarian tax authorities found that there was no evidence of the intra-Community supplies of wheat and sunflower declared by Bonik as having been carried out for Agrisco Srl, a company governed by Romanian law, and that, in view of the fact that, according to Bonik’s accounts, the quantities of wheat and sunflower quoted on the invoices issued by Bonik had been taken out of its stock and were not there at the time of the investigation, taxable supplies of those quantities of wheat and sunflower had been made on Bulgarian territory. The tax authorities also carried out checks in connection with wheat purchases which, according to Bonik’s tax return, it had made from Favorit stroy Varna EOOD (‘Favorit stroy’) and Agro treyd BG Varna EOOD (‘Agro treyd’), in relation to which VAT had been deducted.
Bonik had in its possession invoices relating to those purchases, issued by Favorit stroy and by Agro treyd.
However, in order to check that those purchases had been genuine, the Bulgarian tax authorities carried out additional checks with Bonik’s suppliers (Favorit stroy and Agro treyd) and with their suppliers (Lyusi treyd EOOD, Eksim plyus EOOD and Riva agro stil EOOD).
As it was not possible through those checks to establish that Lyusi treyd EOOD, Eksim plyus EOOD and Riva agro stil EOOD had actually supplied goods to Favorit stroy and to Agro treyd, the Bulgarian tax authorities concluded that Favorit stroy and Agro treyd did not have a sufficient quantity of goods to make the supplies to Bonik and that no actual supplies had been made from those companies to Bonik.
By tax adjustment notice of 10 March 2010, the Bulgarian tax authorities accordingly refused Bonik the right to deduct, in the form of a ‘tax credit’, the VAT relating to the supplies of wheat carried out by Favorit stroy and Agro treyd.
Bonik brought an administrative appeal against that tax assessment before the Direktor na Direktsia ‘Obzhalvane i upravlenie na izpalnenieto’ – Varna pri Tsentralno upravlenie na Natsionalnata agentsia za prihodite, which, by decision of 21 June 2010, confirmed the assessment.
Bonik contested the tax assessment before the Administrativen sad – Varna (Varna Administrative Court).
In the order for reference, the Administrativen sad – Varna states that the Bulgarian tax authorities do not dispute that Bonik subsequently carried out supplies of goods of the same type and in the same quantity; nor do they maintain that Bonik acquired those goods from suppliers other than Favorit stroy and Agro treyd.
The referring court adds that there is some evidence that direct supplies were carried out and states that the lack of evidence of the preceding supplies cannot support the conclusion that those direct supplies were not carried out.
In that regard, the referring court specifies that the national legislation does not make the right of deduction of VAT, in the form of a tax credit, conditional upon proof of the origin of the goods.
The referring court relates that certain Bulgarian courts – and the tax authorities, through their practice – require proof that the preceding supplies have been carried out before they will recognise that a taxable person has a right of deduction in respect of VAT.

Questions

1. Can the concept ‘absence of actual supply’ be inferred by interpretation from the provisions of Articles 178(a) and (b), 14, 62, 63, 167 and 168 of Directive 2006/112 and, if so, is ‘absence of actual supply’ coextensive, as regards its definition, with the concept ‘tax evasion’ or is it included in that concept? What does the concept ‘tax evasion’ cover within the meaning of the Directive?

2. In the light of the definition of ‘tax evasion’ and of recitals 26 and 59 in the preamble in conjunction with Article 178(b) of the Directive, does the Directive require that the formalities be expressly laid down by means of legislation in the form of an act of the Member State’s highest legislative body or does it allow those formalities not to be laid down by means of legislation, but to constitute an administrative (and tax investigation) practice and case-law? May formalities be introduced by legislative acts of the administrative authorities and/or by instructions of the administration?

3. If it is a concept which differs from ‘tax evasion’ and is not covered by the definition of the latter, does ‘absence of actual supply’ constitute a formality as referred to in Article 178(b) or a measure as referred to in recital 59 in the preamble to the Directive, the introduction of which results in refusal of the right of deduction and jeopardises the neutrality of VAT, a fundamental principle of the common system of value added tax which was introduced by the relevant Community legislation?

4. Is it permissible to lay down formalities for taxable persons according to which they must provide evidence of supplies which preceded the supply between them (that is, the final customer and his supplier) in order for the supply to be deemed to have been actually carried out, if the authority does not dispute that the persons concerned (the final suppliers) have carried out downstream supplies of the same goods in the same quantities to downstream customers?

5. Under the common system of value added tax and the provisions of Articles 168 and 178 of Directive 2006/112, is the right of the trader to recognition of VAT payments in respect of a given transaction

(a) to be assessed solely in relation to the specific transaction to which the trader is party, having regard to the trader’s intention to be a party to the transaction, and/or

(b) to be assessed taking account of all transactions, including upstream and downstream transactions, which form a supply chain of which the transaction in question is part, having regard to the intentions of the other parties in the chain, which the trader does not know and/or about which he cannot find out, or to the acts and/or omissions of the issuer of the invoice and of the other parties in the chain, namely his upstream suppliers, whom the person to whom the supply is made cannot control and of whom he cannot demand particular conduct, and/or

(c) to be assessed taking account of fraudulent acts and intentions of other parties in the chain, of whose participation the trader did not know and about whose acts or intentions it cannot be established whether he was able to find out, regardless of whether those acts or intentions date from before or after a given transaction?

6. Depending on the answer to question 5: Are transactions such as those at issue in the main proceedings to be regarded as supplies for consideration as referred to in Article 2 of Directive 2006/112 or as part of the taxable person’s economic activity within the meaning of Article 9(1) of the Directive?

7. Is it permissible for transactions such as those at issue in the main proceedings, which were properly documented and declared for VAT purposes by the supplier, in respect of which the customer has in fact acquired the right of ownership of the goods invoiced and there are no indications as to whether he actually received the goods from a person who was not the issuer of the invoice, not to be regarded as supplies for consideration as referred to in Article 2 of Directive 2006/112 merely because the supplier was not found at the address indicated and did not produce the documents requested during the tax investigation or did not provide evidence to the tax authorities for all the circumstances under which the supplies were carried out, including the origin of the goods sold?

8. Does it constitute a permissible measure for the purpose of ensuring the collection of tax and preventing tax evasion that the right of deduction is made dependent on the conduct of the supplier and/or his upstream suppliers?

9. Depending on the answers to questions 2, 3 and [4]: Do measures of the tax authorities such as those at issue in the main proceedings, which lead to exclusion of the VAT arrangements in relation to the transactions concluded by a bona fide trader, infringe the principles of Community law of proportionality, equal treatment and legal certainty?

10. Depending on the answers to the above questions: In circumstances such as those of the main proceedings, does the person to whom the supplies are made have a right to deduct the tax invoiced to him by the suppliers?

AG Opinion

None

Decision

Articles 2, 9, 14, 62, 63, 167, 168 and 178 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that, in circumstances such as those of the case before the referring court, a taxable person may not be refused the right to deduct VAT in relation to a supply of goods on the ground that, in view of fraud or irregularities committed upstream or downstream of that supply, the supply is considered not to have actually taken place, where it has not been established on the basis of objective evidence that the taxable person knew, or should have known, that the transaction relied on as a basis for the right of deduction was connected with VAT fraud committed upstream or downstream in the chain of supply – a matter which it is for the referring court to determine.

Summary

A taxable person may not be refused the right to deduct VAT on a supply of goods on the ground that, in the light of fraud or irregularities at an earlier or later stage in that supply, that supply is deemed not to have actually been made, without the objective evidence has shown that that taxable person knew or should have known that the transaction for which the right of deduction is claimed was part of VAT fraud committed at an earlier or later stage in the supply chain, which the referring court should check.

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