ECJ Case C-8/17 (Biosafe) – Judgment – VAT Deduction Rights Not Limited by Expired Invoice Dates After Adjustments

On April 12, 2018, the ECJ issued its decision in the case C-8/17 (Biosafe).

Context: Reference for a preliminary ruling — Value added tax (VAT) — Directive 2006/112/EC — Articles 63, 167, 168, 178 to 180, 182 and 219 — Principle of fiscal neutrality — Right to deduct VAT — Period allowed by national law for exercising that right — Deduction of additional VAT paid to the State that was the subject of documents rectifying the initial invoices following a tax adjustment — The date from which the period starts to run

Summary

Facts of the Case: Biosafe sold rubber granules to Flexipiso, applying a reduced VAT rate of 5%. Following a tax inspection, Portuguese tax authorities determined that the standard rate of 21% should have been applied, resulting in an additional VAT payment of €100,906.50 by Biosafe. Flexipiso refused to reimburse this amount, arguing it could not deduct the VAT due to the expiration of the four-year limitation period for deduction as per Portuguese law.
Questions Referred: The Supreme Court of Portugal sought clarification on whether EU VAT Directive articles preclude national legislation that starts the deduction period from the date of the initial invoices rather than the date of the rectifying documents. It also inquired if Flexipiso could refuse to pay the additional VAT due to the impossibility of deduction.
Court’s Decision: The Court ruled that EU VAT principles, specifically Articles 63, 167, 168, 178 to 180, 182, and 219, preclude national laws that deny the right to deduct VAT based on the expiration of the deduction period starting from the initial invoices when the taxable person was objectively unable to exercise that right earlier.
Argumentation: The Court emphasized that the right to deduct VAT is fundamental to the VAT system and that limiting this right without considering the circumstances leading to the inability to deduct undermines the principle of fiscal neutrality. It affirmed that the right to deduct should be maintained even after the expiration of the typical period if the taxpayer was unable to act due to the lack of necessary documents or information.
Conclusion: The Court found that Flexipiso should not be denied the right to deduct the VAT simply because the limitation period was based on the initial invoices. It ruled that the deduction period should start from when the rectifying documents were issued, thus ensuring that the principles of neutrality and fairness in VAT taxation are upheld. The second question regarding Flexipiso’s ability to refuse payment was rendered unnecessary to address due to this conclusion.

Articles in the EU VAT Directive 2006/112/EC

Article 63

The chargeable event shall occur and VAT shall become chargeable when the goods or the services are supplied.

Article 167

A right of deduction shall arise at the time the deductible tax becomes chargeable.

Article 168

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;

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 Articles 220 to 236 and Articles 238, 239 and 240;

Article 179

The taxable person shall make the deduction by subtracting from the total amount of VAT due for a given tax period the total amount of VAT in respect of which, during the same period, the right of deduction has arisen and is exercised in accordance with Article 178.

Article 180

Member States may authorise a taxable person to make a deduction which he has not made in accordance with Articles 178 and 179.

Article 182

Member States shall determine the conditions and detailed rules for applying Articles 180 and 181

Article 219 of the VAT Directive is worded as follows:

Any document or message that amends and refers specifically and unambiguously to the initial invoice shall be treated as an invoice.

Facts

Sale and VAT Assessment: Between February 2008 and May 2010, Biosafe sold rubber granules to Flexipiso, applying a reduced VAT rate of 5% on a total sale amount of EUR 664,538.77. A tax inspection in 2011 determined that the standard VAT rate of 21% should have been applied, resulting in revised assessments totaling EUR 100,906.50.
Reimbursement Claim and Denial: After paying the additional VAT, Biosafe sought reimbursement from Flexipiso through debit notes. Flexipiso refused to pay, arguing it could not deduct the VAT due to the expiration of the four-year limitation period for deductions under Article 98(2) of the CIVA, asserting that the error in VAT application was solely Biosafe’s responsibility.
Legal Appeal and Doubts Raised: Biosafe’s subsequent appeal to the Supremo Tribunal de Justiça (Supreme Court of Portugal) questioned whether the VAT Directive precludes national laws that start the deduction period from the initial invoice date rather than the rectifying document date. The court expressed uncertainty about whether Flexipiso could refuse to pay the additional VAT due to the inability to deduct it.

Questions

(1) Does [the VAT Directive], and in particular Articles 63, 167, 168, 178 to 180, 182 and 219 thereof, and the principle of neutrality, preclude legislation the effect of which is that, when the seller of the goods, liable to VAT, was subject to a tax inspection which found that the VAT rate that he applied in a given situation was less than the due rate, paid to the State the additional tax and seeks to obtain the respective payment from the purchaser, also liable to VAT, the period in which the latter may deduct that additional tax starts to run from the date of issue of the initial invoices and not from the date of issue or receipt of the rectifying documents?

(2) If not, do the abovementioned articles of that directive and the principle of neutrality preclude legislation the effect of which is that, once documents rectifying the initial invoices are received, issued following the tax inspection and payment to the State of the additional tax, for the purpose of obtaining payment of that additional tax, at a time when the period for exercising the right of deduction has already elapsed, it is legitimate for the purchaser to refuse to pay, on the grounds that refusal of the passing on of tax is justified when it is impossible to deduct that additional tax?

AG Opinion

In accordance with Article 168(a) in conjunction with Article 178(a) and Article 226(10) of the VAT Directive, the right to deduct input VAT in the value of the VAT amount entered as being payable on an invoice arises only on receipt of such an invoice. A retrospective increase (correction) of the VAT amount payable on an amended invoice does not trigger the retroactive accrual of the right to deduct input VAT. Consequently, the provisions of the VAT Directive preclude legislation under which, in a situation such as that in the present case, the time limit for deducting the additional VAT starts to run as soon as the original invoice is issued.

Decision

Articles 63, 167, 168, 178 to 180, 182 and 219 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, and also the principle of fiscal neutrality, must be interpreted as precluding legislation of a Member State pursuant to which, in circumstances such as those at issue in the main proceedings in which, following a tax adjustment, additional value added tax (VAT) was paid to the State and was the subject of documents rectifying the initial invoices several years after the supply of the goods in question, the right to deduct VAT is to be refused on the ground that the period laid down by that legislation for the exercise of that right started to run from the date of issue of those initial invoices and had expired.

Source

Reference to other ECJ cases

Volkswagen AG (C-533/16): This case is referenced to establish the principles surrounding the right to deduct VAT and the conditions under which that right can be exercised. The ruling emphasized that the right to deduct is a fundamental principle of the VAT system and should not be unduly restricted.
Biosafe (C-8/17): While this case itself is the focus of the judgment, it is important to note that it serves as a key example in discussions about the application of VAT deductions in the context of adjustments following tax inspections.
Astone (C-332/15): This case is relevant for clarifying the burden of proof on tax authorities when denying a taxpayer’s right to deduct VAT. It reinforces the requirement for authorities to substantiate claims of fraud or abuse when refusing deductions.
Danske Svineproducenter (C-491/06): This case is cited to highlight the separation of functions between national courts and the CJEU, emphasizing that the latter can only rule on the interpretation of EU law based on the facts presented by the national court.

Reference to the case in the other EU Member States