On 6 December 2018, Advocate General SHARPSTON gave its opinion in case Case C‑566/17 (Związek Gmin Zagłębia Miedziowego w Polkowicach), regarding the dedution of input VAT on both economic and non-economic activities (outside the scope of VAT).
Facts (simplified):
Związek Gmin Zagłębia Miedziowego w Polkowicach (‘the Local Government Association’) is a public law entity to which several local authorities have conferred the task of carrying out their statutory duties regarding waste management in the geographical areas for which they are severally responsible. The Local Government Association receives a waste management fee for discharging those duties. Under national law the Local Government Association is not regarded as a taxable person in that respect and its activities are accordingly not subject to VAT.
The Local Government Association also provided additional services consisting of making available and transporting containers for various types of waste. The VAT exemption did not apply to all of those services, i.e. some of those services were subject to VAT (at different rates), whilst others were VAT-exempt.
The Local Government Association incurred capital and revenue expenditure. Some of that expenditure related to supplies made in relation to both its economic and non-economic activities. Therefore, the Local Government Association requested the Head of Fiscal Administration in Poland to give a ruling on its position under the VAT rules.
The Head of Administration ruled that to determine the deductible share of input tax, the Local Government Association should, first, determine the share of input tax connected with its economic activity, that is to say transactions liable to VAT or exempted from that tax and second since some of its activities were exempt from VAT, apply to the amount thus obtained a pro rata. The Head of Administration also held that it was the sole responsibility of the taxable person to select the method for calculation. In short, the Local Government Association should first check if the incurred costs were directly linked to either economic or non-economic activities, the VAT relating to the latter being not deductible.
The Local Government Association contested the decision, arguing that the non-economic activities should be taken into account as well, as the Polish VAT Law (at that moment) did not foresee in a ‘pre pro rata’, i.e. an allocation or coefficient between economic and non-economic activities.
The Polish Court asks the following questions to the European Court of Justice:
- Does the VAT Directive and the principle of VAT neutrality preclude a national practice where the right is granted to a full deduction of input VAT in connection with the purchase of goods and services used both for the purposes of a taxable person’s transactions falling within the scope of VAT (taxed and exempted) and falling outside the scope of VAT, owing to the absence in national law of methods and criteria for apportioning the input tax in relation to those types of transaction?
Assessment of the question referred
The referring court seeks guidance on the compatibility with EU law of the administrative practice of granting taxable persons exercising simultaneously a statutory public interest activity and an economic activity, such as the Local Government Association, the right to full deduction of input VAT in respect of supplies used indissociably both for the purpose of the taxable person’s economic and non-economic activities. In other words: Does Directive 2006/112 or the principle of fiscal neutrality preclude the right to full deduction?
The Court has consistently explained that the ‘essential characteristics’ of VAT are the following:
(i) VAT applies generally to transactions (supply) relating to goods or services (principle of universality);
(ii) it is proportional to the price charged by the taxable person in return for the goods and services which he has supplied;
(iii) it is charged at each stage of the production and distribution process, including that of retail sale, irrespective of the number of transactions which have previously taken place; and
(iv) the amounts paid during the preceding stages of the production and distribution process are deducted from the VAT payable by a taxable person, with the result that that tax effectively applies, at any given stage, only to the value added at that stage and the final burden of that tax rests ultimately with the consumer, who has no right to deduct input VAT.
In economic terms, VAT is thus a general, multiple-stage, non-cumulative turnover tax.
The Court has consistently held that the right to deduct input VAT is an integral part of the VAT scheme and constitutes a fundamental principle underlying the common system of VAT. However, that right is not autonomous and thus should not be analysed in isolation.
First, the central feature of the VAT scheme is that each taxable person collects VAT on behalf of the State from its customers by charging it on the price of the goods and services supplied. That output VAT is not the taxable person’s property: by definition, it has to be handed over to the public exchequer within specified time limits. Second, the taxable person has the right to limit the scope of that liability only if and in so far as he has previously paid input VAT to his suppliers, which they have included in the price of their supplies and which they have collected, likewise on behalf of the State.
That summarises the very essence of the right to deduct input VAT. It could be said that whilst the principle of imposition is primary, the right to deduct is ancillary in nature.
It follows ineluctably that the right to deduct is meant only to relieve the taxable person, as tax collector on behalf of the State, of the burden of the VAT payable or paid in the course of all his economic activities. The common system of VAT thus ensures that all such activities, whatever their purpose or results, provided that they are themselves subject to VAT, are taxed in a wholly neutral way (principle of fiscal neutrality).
Furthermore, that right is subject to a number of conditions, e.g. the very structure of the common VAT scheme implies that the deduction of input taxes is linked to the collection of output taxes. It is thus entirely clear to me that the Local Government Association cannot rely on the VAT Directive in order to obtain the right to full deduction of input VAT levied on the supplies made indissociably both for the purpose of its non-economic activities and its economic activities.
Although such supplies do present a link with the economic activity of the Local Government Association, only a small fraction of each of those supplies has actually been used for the purpose of activity on which the Local Government Association levied output VAT.
Clearly, the Local Government Association should be allowed to deduct the corresponding fraction of input VAT. However, it would run counter to the principle of symmetry referred to above if the Local Government Association could also deduct the remainder of the input VAT, which does not correspond to any output VAT.
Opinion of the Advocate General:
The A-G is of the opinion that:
- The VAT Directive must be interpreted as requiring a national court to interpret its national law to the greatest extent possible in a way that ensures that deductions are made only in respect of the share of input VAT that objectively reflects the extent to which the input expenditure has been used for the purpose of that taxable person’s economic activity.
- In the absence in the applicable rules of any method for calculation of the amount of tax due, the competent tax authorities should allow the taxable person in question to rely on a method of his choice provided that, having regard to the nature of the economic activity exercised, that method is apt to reflect objectively the extent to which the input expenditure has been used for the purpose of economic activity, is based on objective criteria and credible data and that it enables the competent authority to verify the accuracy of its application.
- A national court may be relieved from the obligation to interpret its national law in conformity with EU law only if that interpretation would entail a breach of the principle that tax should be defined in legally binding rules, accessible to taxable persons in advance, in a manner that is sufficiently clear, precise and exhaustive so as to allow the taxable person in question to foresee and determine the amount of tax due at a given point in time on the basis of texts and data available or accessible to him. Such would be the case if those rules resulted in uncertainty as to the amount of the tax due or if they retroactively imposed or aggravated that amount.
Source: Curia
