In current issue of our News Flash, we would like to inform you about two interesting cases that were recently decided by the European Court of Justice (ECJ).
Deduction of VAT relating to payments on account
In the judgement in joined cases C-660/16 and C-661/16 of 31 May 2018, the ECJ deals with the question if the requirements as to the certainty that a supply will take place, as a condition of the deduction of input tax on a payment on account, are to be determined purely objectively or from the point of view of the taxable person having made the payment on account in the light of the circumstances apparent to him. The ECJ also deals with the question if in the case that supply does not ultimately take place, there is an obligation to adjust the VAT deduction.
German self-employed persons ordered a combined heat and power unit from two companies. The orders were confirmed, requests for payments were issued, the advance payments were paid and self-employed persons received the invoice. The unit was however never delivered because Insolvency proceedings were instituted in respect of companies and were then closed on the ground of a lack of assets and the persons acting for companies were convicted of defraud the buyers. Self-employed persons requested that the input tax relating to the payment they had made on account be deducted, which were refused by Tax Office.
The ECJ states that the right to deduct the VAT from payment made on account before the goods or services are supplied, must be interpreted strictly as an exception to the general rule. Thus, all the relevant information concerning the chargeable event, namely the future supply of goods or services, must already be known and therefore, in particular, when the payment on account is made, the goods or services must be precisely identified. In these cases self-employed persons identified the goods when the payments on account were made except for the specific date of delivery. It appears from the orders for reference that acts about defraud were known of only after the payments on account. Therefore, the ECJ decided that in these cases a potential buyer may not be refused the right to deduct the VAT.
According to the ECJ, taxable person must be refused that right only if at the time the payment on account was made, that person knew or should reasonably have known that it was likely that that supply would not take place.
In addition, the ECJ stated that in this case suppliers paid the VAT relating to the payments on account to the State Treasury. In so far as those suppliers, in view of their insolvency, will not repay those payments on account, the VAT payable by those suppliers to the Treasury in respect of the receipt of those payments on account will not have to be adjusted. Tax neutrality has remained unchanged. It would be manifestly unreasonable to require those buyers to adjust those deductions in case advance payments are not refunded to them.
The ECJ states that adjusting the deduction of VAT is possible in case of refunding of advance payments to buyers and this in this case could be held to be impossible or excessively difficult.
Intra-community chain transaction
In the judgement of the court C-628/16 of 21 February 2018, the ECJ deals with the question if the company Kreuzmayr as a second customer can, under the principle of the protection of legitimate expectations, rely solely on the elements contained in the invoice provided by its supplier (the intermediary operator), indicating that the supply is an internal supply, in order to claim a right to deduct VAT. In this case, a German company BP identified for VAT purposes in Germany sold petroleum products to BIDI, a company identified for VAT purposes in Austria, while BIDI undertook towards BP that it would deal with the transport of those products from Germany to Austria. BP regarded its supplies to BIDI as constituting exempt intra-Community supplies and therefore issued to BIDI invoices without VAT.
Without informing BP, BIDI resold those goods to an Austrian company Kreuzmayr, agreeing that Kreuzmayer would arrange for or carry out the transport of the petroleum products from Germany to Austria instead of BIDI. When BP learned that BIDI had entrusted Kreuzmayr with the transport of the goods in question, the applied VAT regime was corrected and output VAT was paid in Germany.
In the meantime, BIDI had issued invoices to Kreuzmayr with Austrian VAT, which the latter paid. Kreuzmayr then used the goods in question for its taxed transactions and deducted the corresponding input VAT. However, In Austria, the Tax Office refused the deduction of the input VAT from reason that, BIDI had neither declared nor paid over the invoiced amounts of VAT for Kreuzmayr. Later, BIDI sent amended invoices to Kreuzmayr without VAT but did not repay the amounts wrongly received to Kreuzmayr, according to it simply by reason of a mistake. BIDI having become insolvent, Kreuzmayr never recovered the amounts of VAT, which it had paid.
In this judgement, the ECJ repeats that where two successive supplies of the same goods, effected for consideration between taxable persons acting as such, give rise to a single intra-Community transport of those goods, that transport can be ascribed to only one of the two supplies. In order to determine which of the two supplies the intra-Community transport should be ascribed to, it is necessary to determine, in particular, when the second transfer of the right to dispose of the goods as owner, to the person finally acquiring the goods, has taken place. In this case the intra-Community transport must be ascribed to the supply which took place between the intermediary operator (BIDI) and the person ultimately acquiring the goods (Kreuzmayr).
BIDI and Kreuzmayr were aware of the fact that the right to dispose of the goods as owner had been transferred to Kreuzmayr in Germany before the intra-Community transport. The ECJ states that, in such circumstances, the place of the second supply in a chain of transactions cannot be determined without taking account of the relevant objective evidence of which the intermediary operator and the person finally acquiring the goods are aware and cannot depend solely on the classification made by the first supplier for the first supply on the sole basis of the information which had been incorrectly provided to it by the intermediary operator.
The ECJ states that the principle of the protection of legitimate expectations must be interpreted as meaning that the person ultimately acquiring the goods, who wrongly claimed a right to deduct input VAT, may not deduct, as input VAT, the VAT paid to the supplier solely on the basis of the invoices provided by the intermediary operator which incorrectly classified its supply.
The judgment in question is a reminder that it is important for all parties concerned to examine the correctness of the VAT scheme applied in the light of all known facts. Due to incorrectly issued invoices, VAT deduction is not possible.