Flashback on ECJ Cases – C-271/06 (Netto Supermarkt) – VAT exempt exports: innocent suppliers will not be penalised where they are victims of fraud

On February 21, 2008, the ECJ issued its decision in the case C-271/06 (Netto Supermarkt).

Context: Sixth VAT Directive – Article 15(2) – Exemption for supplies of goods for export to a destination outside the Community – Conditions for exemption not fulfilled – Proof of export falsified by the purchaser – Supplier acting with due commercial care

Article in the EU VAT Directive

Artcile 15(2) of the Sixth VAT Directive. Articles 146(1)(b) and 147 of the EU VAT Directive 2006/112/EC.

Article 146
1. Member States shall exempt the following transactions:
(b) the supply of goods dispatched or transported to a destination outside the Community by or on behalf of a customer not established within their respective territory, with the exception of goods transported by the customer himself for the equipping, fuelling and provisioning of pleasure boats and private aircraft or any other means of transport for private use;

Article 147
1. Where the supply of goods referred to in point (b) of Article 146(1) relates to goods to be carried in the personal luggage of travellers, the exemption shall apply only if the following conditions are met:
(a) the traveller is not established within the Community;
(b) the goods are transported out of the Community before the end of the third month following that in which the supply takes place;
(c) the total value of the supply, including VAT, is more than EUR 175 or the equivalent in national currency, fixed annually by applying the conversion rate obtaining on the first working day of October with effect from 1 January of the following year.
However, Member States may exempt a supply with a total value of less than the amount specified in point (c) of the first subparagraph.
2. For the purposes of paragraph 1, ‘a traveller who is not established within the Community’ shall mean a traveller whose permanent address or habitual residence is not located within the Community. In that case ‘permanent address or habitual residence’ means the place entered as such in a passport, identity card or other document recognised as an identity document by the Member State within whose territory the supply takes place.
Proof of exportation shall be furnished by means of the invoice or other document in lieu thereof, endorsed by the customs office of exit from the Community.
Each Member State shall send to the Commission specimens of the stamps it uses for the endorsement referred to in the second subparagraph. The Commission shall forward that information to the tax authorities of the other Member States.

Facts

From 1992 to 1998 Netto Supermarkt, which operates several discount supermarkets in the German Land of Mecklenburg-Western Pomerania, refunded to its customers several thousand German marks which they had paid in the form of VAT. It had decided to make those reimbursements to nationals of non-member countries if they were able to show proof of export outside the Community of goods bought on the occasion of non-commercial trips, with such proof consisting, first, of the impression of the customs stamp half on the voucher and half on the customs form and, second, of the foreign national presenting his passport.
In 1998 Netto Supermarkt asked the Hauptzollamt Neubrandenburg (Principal Customs Office, Neubrandenburg) to check whether the customs stamp No 73 and the customs forms on which it appeared were counterfeit. The Principal Customs Office initially gave a negative answer, but later informed Netto Supermarkt that the documents submitted to it by Netto Supermarkt had been examined again and been found to be falsified. Subsequently, the tax investigation office found that, between 1993 and 1998, a substantial proportion of the proofs of export of goods had been counterfeited by Polish nationals with the help of forged customs forms or that the alleged proofs of export had been marked with a forged customs stamp. By this means, Polish nationals claimed reimbursement of VAT from Netto Supermarkt, which the latter refunded to them.
In 1999 the Finanzamt assessed Netto Supermarkt to payment of the additional VAT due for the years 1993 to 1998, corresponding to the turnover actually generated during those years.
By decision of 14 February 2000, the Finanzamt refused Netto Supermarkt’s request for exemption from the VAT retrospectively demanded for those years. Netto Supermarkt objected to that refusal decision.
By decision of 3 May 2000, the Finanzamt upheld only part of the objection. It granted an exemption from VAT for the years 1993 and 1994, on the basis that the tax assessments for those years could no longer be amended, and remitted the interest for the years 1993 to 1997. The Finanzamt rejected the remainder of Netto Supermarkt’s objection by holding that the latter owed the tax because it had not been able to produce proper proof of the export which gave rise to the VAT exemption. According to the Finanzamt, Netto Supermarkt should have examined the genuineness of the proofs of export earlier and, by showing proper care, could have prevented a fraud lasting for years. In addition, the Finanzamt considered that the fact that Netto Supermarkt had contributed to elucidating the facts did not affect the amount of VAT payable by that company.
Netto Supermarkt subsequently challenged that decision to refuse in part of 3 May 2000 by application to the Finanzgericht (Finance Court), seeking an exemption from the VAT retrospectively demanded for the years 1995 to 1998. The Finanzgericht rejected the application.
Netto Supermarkt brought an appeal before the Bundesfinanzhof (Federal Finance Court), in which it submitted that the Finanzgericht should have considered the supplies of goods to Polish purchasers to be exempt, by applying – by analogy – the national rule on the protection of legitimate expectations referred to in Paragraph 6a(4) of the UStG, which is a rule that applies to intra-Community supplies. In its appeal, Netto Supermarkt also relies on the principle of fairness laid down in Paragraph 227 of the 1977 Tax Code.
Having regard to the principle of the protection of legitimate expectations, the Bundesfinanzhof considers that, in any event, it is in doubt whether – under Community law – export supplies from the Community can be exempt if the operator making the supply was unable – even by exercising due commercial care – to recognise that the export proofs provided by the purchaser had been falsified, even where the conditions of exemption of an export supply are objectively absent because, as in this case, the documents submitted as bearing proof of export had been forged.

Questions

Do the provisions of Community law on exemption from tax for exports to a third country preclude the granting of exemption from tax by the Member State on the grounds of fairness where the conditions for exemption are not satisfied but the taxable person was unable, even by exercising due commercial care, to recognise that they were not met?

AG Opinion

In a situation such as that at issue in the main proceedings, Article 15(2) 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 95/7/EC, must be interpreted as not precluding the granting of exemption from tax by the Member State on the grounds of fairness where the conditions for exemption are not satisfied but the taxable person was unable, even by exercising due commercial care, to recognise that they were not met.

Decision

Article 15(2) 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 95/7/EC of 10 April 1995, must be interpreted as not precluding a Member State from granting an exemption from value added tax on the supply of goods for export to a destination outside the European Community, where the conditions for such an exemption are not met, but the taxable person was not able to recognise – even by exercising due commercial care – that they were not met, because the export proofs provided by the purchaser had been forged.

Summary

the ECJ held that where a German company supplies goods to persons who purport to export them outside the EU, if the supplier acts in good faith and, in exercising due commercial care, could not know that export documents were forged, then the supplies will still qualify for VAT exemption.

The ECJ rejected the German tax authority’s attempt to disapply the fairness provisions in the German tax code, which implements the EU Sixth directive (now recast as the EC Directive 2006/112/EC). The German tax authority argued that the Sixth Directive, which states that any domestic legislation implementing those provisions must prevent any evasion, avoidance or abuse, must be applied restrictively to disapply the fairness provision where there is fraud.

This decision is in line with the ECJ decision in R (on the application of Teleos plc and Others) v Customs and Excise Commissioners, Case C-409/04 which concerned zero-rated dispatches from the UK to countries within the EU. For more information on the Teleos decision.

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