On 11 April 2019, the European Court of Justice gave its judgment in Case C‑691/17 (PORR Építési Kft.). The case deals with the right to deduct value added tax (VAT) paid as input tax when a wrong invoice is used, i.e. where a supplier did not apply the reverse charge where it should have done so.
PORR Építési Kft. constructed a moterway. PORR had accepted, from at least three suppliers, invoices which mentioned VAT. PORR had paid those invoices, and deducted the amounts of VAT as input VAT.
However, the tax authorities did not accept the input VAT deduction, as they believed that the suppliers should have applied the reverse charge mechanism, as it concerned construction activities.
The tax authorities therefore concluded that PORR was entitled to the right to deduct the amounts of VAT entered on those invoices only under Paragraph 120(b) of the Law on VAT, and not under Paragraph 120(a) of that Law. It stated that there had been no double taxation and that the invoicing error committed did not exempt PORR from the sanctions imposed. It also maintained that the issuers of the invoices in question in the main proceedings could be requested to correct those invoices.
PORR argued that the tax authority erred in the classification of the facts in finding that the invoices at issue in the main proceedings were subject to the reverse charge procedure. PORR claimed that, even if those invoices were indeed subject to the reverse charge procedure, the tax authority had still deprived it of the right to deduct VAT. Indeed, the activities had taken place, the suppliers (probably) met their obligation to pay the VAT collected, that is to say, paid the VAT to the revenue authorities, thus there was no VAT loss for the tax authorities.
Furthermore, PORR observes that the tax authority failed to fulfil its obligation to ascertain whether the issuers of the invoices had paid the VAT and whether they could still correct those invoices. It further submits that, a fortiori, the authority concerned did not take into account the fact that such a correction was probably ruled out, given that self-corrections are not permitted following an inspection aimed at conducting a retrospective verification of tax returns. Consequently, that company has definitively lost the possibility of exercising the right to deduct.
In its defence, the tax authority submits that it granted PORR the right to deduct the VAT paid as input tax in relation to the invoices issued under the reverse charge regime, thereby ruling out the risk of double taxation.
The Hungarian court asked the following questions to the ECJ:
- ‘Must the provisions of the VAT Directive and, in particular, the principles of proportionality, fiscal neutrality and effectiveness, be interpreted as precluding a practice whereby, in circumstances not involving tax evasion, the tax authority of a Member State, when calculating the tax, refuses the right to deduct that may be exercised on the basis of an invoice in which the VAT was established in accordance with the ordinary taxation regime, because it considers that the invoice for the transaction concerned ought to have been issued in accordance with the reverse charge procedure, and fails, before refusing the right to deduct, to examine
- whether the issuer of the invoice can reimburse the recipient of the invoice the amount of VAT paid unduly, or
- whether the issuer of the invoice may lawfully (within the national legal framework) regularise that invoice by means of self-correction, and on that basis recover from the tax authority the tax it paid unduly?
- Must the provisions of the VAT Directive and, in particular, the principles of proportionality, fiscal neutrality and effectiveness, be interpreted as precluding a practice whereby the tax authority of a Member State, when calculating the tax, refuses the right to deduct that may be exercised on the basis of an invoice in which the VAT was established in accordance with the ordinary taxation regime, because it considers that the invoice for the transaction concerned ought to have been issued in accordance with the reverse charge procedure, and whereby that authority, when calculating the tax, did not order the recipient of the invoice to be reimbursed the tax paid unduly, even though the issuer of the invoice has moreover paid the amount of the VAT in those invoices to the revenue authorities?’
29 In the first place, it is necessary to ascertain whether the fact that the right to deduct VAT is refused to a recipient of services placed in a situation such as that of PORR is in accordance with those provisions and those principles.
30 It is important to recall in this connection that, under the reverse charge regime, no VAT payment takes place between the supplier and the recipient of services, the recipient being liable, in respect of the transactions carried out, for the input VAT, while being able, in principle, to deduct that tax so that no amount is payable to the tax authorities.
31 It must also be pointed out that the right of deduction forms an integral part of the VAT scheme and in principle may not be limited.
32 The deduction rules thus established are intended to free the taxable person completely of the burden of the VAT accruing or paid in all its economic activities. The common system of VAT therefore ensures that all economic activities, whatever their purpose or results, provided that they are, in principle, themselves subject to VAT, are taxed in a neutral way.
35 (…) besides the fact that those invoices did not satisfy the formal requirements, a substantive requirement of that regime was not met, namely the payment of the VAT to the tax authorities by the taxable person claiming deduction. Such a situation prevented the competent tax authority from investigating the application of the reverse charge regime and led to a risk of a loss of tax revenue for the Member State concerned.
36 Moreover, the VAT paid by PORR to the suppliers of services which issued the invoices was not due, whereas the right to deduct can be exercised only in respect of taxes actually due, that is to say, the taxes corresponding to a transaction subject to VAT or paid in so far as they were due.
37 Since PORR did not observe a substantive requirement of the reverse charge regime and the VAT which it paid to the suppliers of the services was not due, that company could not claim a right to deduct that VAT.
The European Court of Justice rules as follows:
The VAT Directive, and the principles of fiscal neutrality and effectiveness must be interpreted as not precluding a practice of the tax authority whereby, in the absence of any suspicion of tax evasion, that authority refuses an undertaking the right to deduct the value added tax which that undertaking, as the recipient of services, unduly paid to the supplier of those services on the basis of an invoice drawn up by that supplier in accordance with the rules on the ordinary value added tax (VAT) regime, whereas the relevant transaction fell under the reverse charge mechanism, and where the tax authority did not,
– examine, prior to refusing the right to deduct, whether the issuer of that incorrect invoice could reimburse the recipient of the invoice the amount of VAT unduly paid and could correct that invoice under a self-correction procedure, in accordance with the applicable national rules, in order to recover the tax which it unduly paid to the Treasury, or
– itself decide to reimburse the recipient of that invoice the tax which the recipient unduly paid to the issuer of the invoice and that the latter, subsequently, unduly paid to the Treasury.
Those principles require, however, in the situation where the reimbursement by the supplier of services to the recipient of those services of the VAT unduly invoiced would be impossible or excessively difficult, in particular in the case of the insolvency of the supplier, that the recipient of the services must be able to address its application for reimbursement to the tax authorities directly.