Source Curia
On 8 May 2019 the European Court of Justice gave its judgment in case C-712/17 (EN.SA Srl). The case deals with the question if the deduction of input tax and application of the VAT zero-rate can be refused if through fictitious actions it is attempted to obtain other unlawful benefits besides VAT fraud.
Decision
1. In a situation, such as that at issue in the main proceedings, in which fictitious circular sales of electricity made between the same traders and for the same amounts did not cause tax losses, Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in the light of the principles of neutrality and proportionality, must be interpreted as not precluding national legislation which excludes the right to deduct value added tax (VAT) relating to fictitious transactions while requiring the persons who enter VAT on an invoice to pay that tax, including for a fictitious transaction, provided that national law allows the tax liability arising from that obligation to be adjusted when the issuer of that invoice, who was not acting in good faith, has, in sufficient time, wholly eliminated the risk of any loss of tax revenue, this being a matter for the referring court to ascertain.
2. The principles of proportionality and neutrality of value added tax (VAT) must be interpreted as precluding, in a situation such as that at issue in the main proceedings, a rule of national law under which the unlawful deduction of VAT is penalised by a fine equal to the amount of the deduction made.
Facts (simplified):
EN.SA. S.r.l operates in electricity trading and trades in electricity on the basis of forward contracts outside the Piattaforma dei Conti Energia (PCE).
EN.SA sold large quantities of electricity to companies of the “Green Network” group and, in a kind of circular movement, they were bought back from this group. The transactions were recorded in the accounting for the correct amount. The corresponding invoices for these transactions were also drawn up.
It is not certain whether EN.SA. is part of the “Green Network” group, or if it acted as an independent company. Nor is it certain whether EN.SA. bought back the same quantities of electricity for the same price. Furthermore, the question is what the purpose was of buying and selling by and to the same persons. The Italian tax authorities suspect that this was intended to include large amounts in the accounts of the companies involved, giving them (better) access to financing options at banks. EN.SA. however contradicts this.
It is clear that the VAT charged on the invoices for the electricity transactions was paid in time and in the correct manner and the recipient of the service deducted the input tax. It is also certain that the tax authorities were not at a disadvantage in the field of VAT. According to the referring court, in particular every possibility of a so-called ‘carousel fraud’ is excluded.
Having said that, it is apparent from its question that the referring court assumes that the electricity transactions must be regarded as non-existent in the years 2009 and 2010.
The tax administration refused EN.SA the deduction of input tax, arguing that EN.SA had performed non-existent actions (no real purchases). With respect to the non-existent transactions carried out at a later stage (ie to the extent that EN.SA has sold electricity), a corresponding tax debt was established because the VAT was separately charged on the invoices of EN.SA. The Italian tax authorities therefore raised a VAT assessment, to which EN.SA appealed.
The Italian court asked the following question to the European Court of Justice (simplified):
“In the case of acts considered fictitious which have not caused the tax authorities a disadvantage and the taxpayer did not derive a tax advantage, can a Member State deny the deduction of input tax and application of the VAT zero-rate, when this means that:
(a) the tax paid by the purchaser on the purchases is not deductible for any of the disputed transactions involving the same taxpayer and having the same tax base;
(b) the tax on corresponding parallel parallel sales, considered to be non-existent, is paid by the seller (and recovery of unduly paid tax is excluded);
(c) a penalty is imposed in the amount of the input tax which is not deductible? ‘
Judgment:
The European Court of Justice rules as follows:
1. In a situation in which fictitious circular sales of electricity made between the same traders and for the same amounts did not cause tax losses, the VAT Directive, read in the light of the principles of neutrality and proportionality, must be interpreted as not precluding national legislation which excludes the right to deduct value added tax (VAT) relating to fictitious transactions while requiring the persons who enter VAT on an invoice to pay that tax, including for a fictitious transaction, provided that national law allows the tax liability arising from that obligation to be adjusted when the issuer of that invoice, who was not acting in good faith, has, in sufficient time, wholly eliminated the risk of any loss of tax revenue, this being a matter for the referring court to ascertain.
2. The principles of proportionality and neutrality of value added tax (VAT) must be interpreted as precluding, in a situation such as that at issue in the main proceedings, a rule of national law under which the unlawful deduction of VAT is penalised by a fine equal to the amount of the deduction made.
Source: Curia
Newsletter
