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.
Context: Reference for a preliminary ruling — Taxation — Common system of value added tax — Directive 2006/112/EC — Right to deduct value added tax (VAT) paid as input tax — Article 199(1)(a) — Reverse charge procedure — Undue payment of the tax by the recipient of services to the suppliers on the basis of an invoice drawn up incorrectly according to the rules on ordinary taxation — Tax authority’s decision holding that the recipient of services has an outstanding tax liability and refusing a claim for deduction — No examination by the tax authority of the possibility of reimbursement of the tax
Article in EU VAT Directive 2006/112/EC
Articles 167, 168(a), 178,(f), 199(1)(a), 226(11a) of the EU VAT Directive 2006/112/EC
Article 167(Deduction of VAT)
A right of deduction shall arise at the time the deductible tax becomes chargeable.
Article 168(a) (Deduction of VAT)
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(f) (Deduction of VAT)
‘In order to exercise the right of deduction, a taxable person must meet the following conditions:
(f) when required to pay VAT as a customer where Articles 194 to 197 or Article 199 apply, he must comply with the formalities as laid down by each Member State.’
Article 199(1)(a) (Liability to pay VAT)
1. Member States may provide that the person liable for payment of VAT is the taxable person to whom any of the following supplies are made:
(a) the supply of construction work, including repair, cleaning, maintenance, alteration and demolition services in relation to immovable property, as well as the handing
Article 226(11) (Invoice requirements)
Without prejudice to the particular provisions laid down in this Directive, only the following details are required for VAT purposes on invoices issued pursuant to Articles 220 and 221:
(11a) where the customer is liable for the payment of the VAT, the mention “Reverse charge”;
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.
(1) Must the provisions of Directive 2006/112/EC, in particular the principles of proportionality, fiscal neutrality and effectiveness, be interpreted as precluding a practice whereby, in circumstances not involving tax fraud, the national tax authorities, when calculating the tax, refuse the right to deduct that may be exercised on the basis of a VAT invoice issued in accordance with the ordinary taxation regime, because they consider that the invoice for the transaction ought to have been issued in accordance with the reverse charge procedure, and fail, 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 in error, or
– whether the issuer of the invoice may lawfully (within the national legal framework) correct and regularise that invoice, and in this way obtain from the tax authorities reimbursement of the tax paid by him in error?
(2) Must the provisions of Directive 2006/112/EC, in particular the provisions of proportionality, fiscal neutrality and effectiveness, be interpreted as precluding a practice whereby the national tax authorities, when calculating the tax, refuses the right to deduct that may be exercised on the basis of a VAT invoice issued in accordance with the ordinary taxation regime, because they consider that the invoice for the transaction ought to have been issued in accordance with the reverse charge procedure, and whereby those authorities, when charging the tax, do not order the recipient of the invoice to be reimbursed the tax paid in error, even though the issuer of the invoice has paid the amount of the VAT in those invoices to the revenue authorities?
Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, as amended by Council Directive 2010/45/EU of 13 July 2010, 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.
The Hungarian tax authorities checked PORR and issued an additional assessment with a fine. PORR had in fact accepted invoices bearing VAT in the context of the construction of a motorway. PORR had paid these invoices and deducted the VAT. However, the tax authorities considered that the invoices related to a main construction activity and that they should have been subject to the reverse charge mechanism for VAT. The issuers of the invoices should therefore have drawn up the invoices either without stating the VAT or stating that they were subject to the reverse charge mechanism.
PORR points out that the tax authorities did not dispute the existence of the transactions with the companies issuing the invoices and that those companies paid the VAT to the national treasury. PORR therefore argues that the tax authorities failed to fulfill their obligation to verify whether the issuers of the invoices had paid VAT and whether they still had the possibility to correct the invoices. The Hungarian tax authorities certainly did not take into account the fact that such a correction was probably excluded, since an own-initiative correction is prohibited in the case of checking previous returns. As a result, the exercise of the right to deduct for PORR is definitively impeded.
The ECJ rules that the tax authorities (without suspicion of fraud) may refuse a company the right to deduct VAT that has been unduly paid on the basis of an invoice according to the normal rules (with VAT), while the reverse charge mechanism had applied must become. The tax authorities do not first have to:
– investigate whether the issuer of the incorrect invoice could refund the incorrectly paid VAT to the recipient and rectify the invoice on its own initiative in order to recover the incorrectly paid VAT, or
– recover the VAT itself which the recipient of the incorrect invoice has wrongly paid to the issuer and which that issuer subsequently wrongly paid to the Treasury.
However, if reimbursement by the service provider to the recipient of the wrongly invoiced VAT proves impossible or extremely difficult, in particular in the event of the provider’s insolvency, the recipient of the service should be able to address his request for reimbursement directly to the tax authorities.