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In this News Flash, we would like to introduce you an interesting case decided by the European Court of Justice (ECJ) that concerns the right of the Slovak customer to claim the reimbursement of the VAT improperly invoiced by the foreign supplier and subsequently paid by those suppliers to the tax authorities. The case arises, because the customer cannot claim that reimbursement from those suppliers due to the limitation period set by national law.
The ECJ in its judgment C‑ 453/22 of September 7, 2023, addressed of whether the EU VAT Directive, along with the principle of VAT neutrality and effectiveness, must be interpreted as requiring that a receiver of goods has a direct right to claim from the tax authorities the reimbursement of improperly invoiced VAT paid to those suppliers and paid by those suppliers to the public purse, together with related interest, in circumstances where that receiver cannot be criticised for fraud, abuse or negligence, but is unable to claim that reimbursement from those suppliers due to the limitation period provided for by national law.
The judgment concerns the farmer and forester, Mr. Michael Schutte Who purchased timber from various suppliers and subsequently resold and delivered it to his customers as firewood. Although the VAT stated in the invoices of his suppliers was the standard rate of 19%, the VAT stated on the invoices issued by Mr. Schutte to his customers was the reduced rate of 7%. According to the conclusion of the tax authorities, also the purchases made by Mr. Schutte were also subject to the reduced rate of 7% and therefore the amount of input VAT was reduced accordingly and the tax authority required to pay the difference in originaly deducted VAT.
Mr. Schutte contacted his suppliers to correct the invoices issued to him and pay him the difference. All the suppliers invoked the defence of limitation provided for under German civil law. Accordingly, the invoices in question were not corrected and no payments refunded by his suppliers. Mr. Schutte applied to the tax office for discharge from the additional VAT recovery and the interest, however the application was rejected by the tax authorities.
The deduction system is intended to relieve the taxable person entirely of the burden of the VAT payable or paid in the course of all of that person’s economic activities. The common system of VAT consequently ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that those activities are themselves subject in principle to VAT.
In the absence of EU rules on applications for the repayment of taxes, it is for the domestic legal system of each Member State to lay down the conditions under which such applications may be made. Those conditions must observe the principles of equivalence and effectiveness, that is to say, they must not be less favourable than those relating to similar claims founded on provisions of domestic law or framed so as to render virtually impossible the exercise of rights conferred by the EU legal order.
Then, if reimbursement of the VAT becomes impossible or excessively difficult, in particular in the case of the insolvency of the supplier, the principle of effectiveness may require that the purchaser of the property concerned be able to address his application for reimbursement to the tax authorities directly. Thus, the Member States must provide for the instruments and the detailed procedural rules necessary to enable the purchaser to recover the improperly invoiced tax in order to respect the principle of effectiveness.
In this specific case, the ECJ decided that EU VAT Directive along with the principle of VAT neutrality and the principle of effectiveness must be interpreted as requiring that a receiver of supplies of goods has a direct right to claim from the tax authorities the reimbursement of improperly invoiced VAT paid to their suppliers and paid by those suppliers to the public purse, together with related interest, in circumstances where that receiver cannot be criticised for fraud, abuse or negligence but cannot claim that reimbursement from those suppliers due to the limitation period provided for by national law.
We would like to draw your attention this year to the incoming obligation to submit a motor vehicle tax return in Slovakia that must be submitted by January 31, 2024. In this context, we would like to offer you our services related to filling motor vehicle tax return and comprehensive advisory in this area.
The obligation to submit tax return for calendar year 2023 arises for every vehicle belonging to the M, N, O or L category, which is used for business purposes, even if only for a part of the year.
The information about the vehicle category can be found in the Certificate of registration – part 1 or part 2 in line J – Category.
The taxpayer is:
In the case of an organizational unit registered as a holder in the registration book, the taxpayer is a legal person – the founder of this organizational unit.
When calculating the tax obligation, it is necessary to adjust the annual tax rate, which is bindingly determined and divided for personal and commercial vehicles in relation to the tax base, first, according to the number of months that have elapsed since the month of the vehicle´s first registration in Slovakia. The exceptions are commercial vehicles of category O4 for which the annual tax rate will flatrate decrease by 60% regardless of the age of the vehicle. Subsequently, this adjusted (reduced of increased) tax rate can be further reduced by 50% depending on the type of the vehicle actuation. This additional reduction applies to the hybrid motor and hybrid electric vehicles, compressed or liquefied natural gas (CNG or LNG) vehicles and hydrogen-powered vehicles.
The taxpayers are also entitled to a further reduction of the tax rate by 50% in the case of using a vehicle in combined transportation at least 60-times in a given tax period.
The ecological aspect of the motor vehicle tax is reflected in electric cars, for which the legislator has set an annual tax rate of EUR 0.
The annual tax rates for the personal and commercial vehicles can be found in Annex no. 1 and Annex no. 1a of Act no. 361/2014 Coll. on motor vehicle tax as amended.
The tax obligation to the motor vehicle tax arises from the first month, in which the vehicle was used for the business purposes. Use of the vehicle for the business purposes means:
The tax obligation ceases to exist on the last day of the month in which:
The chargeability and termination of the tax obligation shall be included in the tax return.
A taxpayer is obliged to pay a proportionate part of the tax within a time limit for submitting a tax return in case of chargeability and termination of the tax obligation during the tax period. The proportionate part of the tax shall be calculated as a product of 1/12 of annual tax rate or adjusted annual tax rate and based on the number of calendar months for which the motor vehicle has been used. If the tax exemption for legally defined vehicles ceases during the tax period, the taxpayer will pay a proportionate part of the tax.
The tax period is a calendar year. The exception occurs only in the following cases – when the tax period is determined separately:
The tax obligation is determined based on the number of months the vehicle is used for business purposes in the given tax period.
The tax advances are determined based on the estimated tax for the next tax period, but as a sum of the annual tax rate adjusted by the number of months from the date of the first vehicle registration and the type of the vehicle actuation for each vehicle that is a subject to the tax of January 1 of the next tax period.
The limits for determining the quarterly and monthly advances are adjusted as follows:
The payment of advances is not affected by the change in the subject of the tax, the creation and termination of the tax exemption, the reduction and increase of the annual tax are during the tax period and submitting of an additional tax return.
The notification obligation arises only in a case when the taxpayer didn’t use the vehicle for business purposes, didn’t account it, didn’t register the vehicle in the tax register or didn’t claim the expenses related to the use of the vehicle during the given period.
The tax obligation for such a vehicle terminates on December 31 of the previous tax period and it is required to notify the tax administrator of this fact by January 31 after the end of the given tax period.
Can you bear the burden of proof in the tax audit process? A tax audit on VAT can affect any entrepreneur, regardless of whether they are large multinational corporations with various local and cross-border transactions or small and medium-sized enterprises that supply only one type of goods or provide standard services.
A tax audit can make “life” difficult even for honest entrepreneurs whose business is fully compliant with the law. And that’s simply because they can’t sufficiently prove the transactions they’ve made, or they’ve chosen the wrong business partner. The burden of proof is on the side of the taxpayer, therefore the entrepreneur should remember in every transaction that the evidence of its real execution must be kept, as they may be needed in the future. The standard period for the tax audit on VAT, during which a taxpayer may be investigated, is almost 6 years. This represents a relatively long period when considering employees fluctuation, changes in internal operations, physical storage of documents, etc.
Small and medium-sized enterprises that do not have implemented such detailed internal and control processes can often find themselves in problematic situations, e.g.:
related to the insufficient verification of the business partner
or insufficient supporting documentation.
As the Court of Justice of the EU has emphasized several times in its case-law, the right of taxable persons to deduct input VAT already paid on goods they have acquired or services they have received from output VAT is a basic principle of the common VAT system and the right to deduct tax is inseparable part of the VAT mechanism, and in principle cannot be limited.
This principle of neutrality requires that VAT deduction is granted if the substantive requirements are met. In practice, this means demonstrating that:
the delivery of the goods or service occurred as declared on the invoice that the taxpayer has at the disposal,
a tax liability really arose by this delivery,
and also, that the taxpayer, as a buyer, used the purchased goods and services for his own taxable transactions.
The sanction in the form of an absolute denial of the right to deduct VAT is disproportionate if there was no tax evasion.
The ideal tax audit scenario is as follows:
As a result, the doubts of the tax administrator are eliminated, and the tax audit ends without a finding.
The problem arises when transactions in which suppliers did not fulfill their obligations become the subject of tax control. For example, a supplier does not submit a tax return and control statement or does not pay the tax, and then becomes non-contactable.
These are situations where the supplier:
In such cases, which in practice are increasing more and more, the tax administrator tries not to recognize the right to VAT deduction to the customer, instead of recovering the unpaid tax from the supplier. Most often, the tax administrator argues that the actual supply of goods or services did not take place at all, or that it was not carried out in the manner declared by the supplier on the invoice.
In order for the taxpayer to avoid the refusing of the right to VAT deduction, the taxpayer must bear the burden of proof and sufficiently demonstrate that he actually received the goods or services as declared on the invoice and used them for his taxable output. However, this is usually problematic due to the lack of evidence at the side of the customer. Customers often provide only invoices, which does not satisfy the tax administrator, and they do not have other evidence proving the respective delivery.
It is therefore important that every customer should approaches this issue with proper attention and makes sure that they also have other evidence at their disposal, such as:
signed delivery notes and acceptance protocols,
transport documents, work schedule, orders, contracts,
email communication with the supplier,
record from the attendance system if the service is delivered at the customer’s premises, etc.
Often, VAT evasion actually occurred at the side of this non-contactable supplier or at an earlier stage of the business chain, but this fact itself, or other doubts about the supplier and subcontractors at an earlier stage cannot lead to the rejection of the right to VAT deduction.
However, the tax administrator, in his decisions refusing the right to VAT deduction, is often questioning the credibility of the supplier resulting from his:
However, if it is proven that goods or services were actually delivered between the customer and his supplier, the right for VAT deduction cannot be rejected only on the basis that the tax administrator considers this transaction to be irrational from an economic point of view, or that the supplier or some of the subcontractors did not fulfill his tax obligations at an earlier stage of the chain. In such a case, the tax administration is obliged to prove, based on all the circumstances and findings, that the given customer knew or could have known that he was participating in a transaction infected by tax evasion. Only when this is properly proven, the tax deduction should not be granted.
The task of the entrepreneur claiming the VAT deduction, is in the case of tax audit to demonstrate that he approaches the selection of his suppliers with appropriate care and prudence.
This may mean, for example, that:
Verifying your business partners, as well as obtaining and keeping evidence of the actual delivery is undoubtedly time-consuming and administratively demanding, but entrepreneurs should definitely not underestimate these facts. They can thus avoid time-consuming proving process during the tax audit and, last but not least, the financial consequences, which can even be liquidating for small entrepreneurs.
If you are interested in setting up control processes tailored to your company, so that a possible future tax audit does not catch you off guard, we would be glad to offer you our consulting services. Our experience in the field of tax audits will help you identify and reveal weak spots in your processes, and our specific measures will help you reduce the risk of a negative findings in the tax audit process. If you find this interesting, do not hesitate to contact us at .
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About Accace Circle
Accace operates internationally as Accace Circle, a co-created business community of like-minded BPO providers and advisors who deliver outstanding services with elevated customer experience and erase the borders of service delivery. Covering over 50 jurisdictions with nearly 2,500 professionals, we support more than 15,000 customers, mostly mid-size and international Fortune 500 companies from various sectors, and process at least 200,000 pay slips globally.
