On 22 May 2019, Advocate General BOBEK delivered its opinion in Case C‑329/18 (SIA Altic). The case deals with VAT fraud in the supply chain, and the deduction of input VAT.
SIA Altic bought rapeseed from two different companies and deducted the input VAT paid on those transactions. The rapeseed was duly received and kept in a store (silo) belonging to the company SIA Vendo.
An inspection carried out by the Latvian tax authorities revealed that those companies were fictitious. The tax authorities therefore considered that the transactions had not taken place and ordered SIA Altic to pay (back) the corresponding VAT. SIA Altic sought the annulment of that decision. Both the first- and the second‑instance national courts ruled in its favour.
The Latvian Supreme Court wondered if SIA Altic should have known about the involvement of its co-contractors in VAT fraud, because it was active in the food sector and it was therefore obliged to verify its business partners to the higher than normal standard applicable in that sector.
The present case gives the European Court of Justice the opportunity to refine its case-law on the criteria to determine whether an operator ‘knew or should have known’ that he was participating in an operation connected with VAT fraud for the purposes of refusing the right to deduct. In particular, the Court is asked to what extent, if at all, specific sectorial obligations applicable to operators active in certain fields, such as those pertaining to food law, are of relevance for the general tax assessment of whether or not an operator was or should have been aware that he was involved in a transaction connected with VAT fraud.
The Latvian Supreme Court asks the following questions to the European Court of Justice:
‘(1) Having regard to the aim of ensuring food safety (which is achieved, amongst other means, by ensuring food traceability), should the VAT Directive be interpreted as not precluding a refusal to allow deduction of input tax where the taxable person involved in the food chain, in choosing his co-contractor, has failed to demonstrate greater diligence (beyond normal commercial practice) entailing, in essence, a requirement to carry out checks on his co-contractor, but where he has at the same time verified the quality of the foodstuffs?’
It is not disputed that the SIA Altic’s co-contractors turned out to be fictitious undertakings. While it was not possible to ascertain the origin of the goods, the goods were nevertheless delivered and apparently of good quality.
There is no evidence in support of the SIA Altic’s claim that the seeds at issue were destined for fuel production. In the contracts concluded by SIA Altic with both of the co-contractors, there was a term stipulating that the goods be compliant with the requirements of the Food and Veterinary Safety Agency. Moreover, the undertakings identified by the SIA Altic as its business partners are not active in the field of fuel production. Therefore, the Food and Safety regulations were applicable to the deliveries..
The Court has clarified that tax authorities cannot, as a general rule, require the taxable person to ensure that the issuer of the invoice relating to the goods and services at issue also complied with his obligations as regards the declaration and payment of VAT and the possession of documents.
The diligence of taxable persons is the decisive factor. That is because ‘traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud, be it the fraudulent evasion of VAT or other fraud, must be able to rely on the legality of those transactions without the risk of losing their right to deduct the input VAT’.
The required level of diligence is context-sensitive. The case-law of the Court has consistently shown that the measures which may reasonably be required of a taxable person depend on the circumstances of the particular case. Indeed, the specific factual context may be such as to require a high degree of diligence on the part of the taxable person (for example, with reference to the value of the goods in the context of an acquisition). When there are indications pointing to an infringement or fraud, and depending on the specific circumstances, traders may be required to make enquiries about their business partners in order to ascertain their trustworthiness.
The Advocate General concludes as follows:
(1) The VAT Directive does not allow national authorities from refusing deduction of input VAT on the sole ground that a taxable person involved in the food chain has failed to carry out checks on his co-contractor in compliance with the traceability obligation laid down in sector specific regulations and food law.
Non-compliance with the obligations imposed by that provision may, however, ultimately be taken into account, together with other factors relevant to the circumstances of the case, in the framework of the overall assessment to be carried out by the referring court in order to assess the diligence of a taxable person.
From the editors:
It seems that the A-G looks at the VAT Directive as a separate set of rules and definitions, of which the interpretation may be influenced by requirements and registrations based on other laws and rules, but which are nevertheless separate. This does not seem strange to us, as the ECJ has said the same in many cases, i.e. the VAT rules and definitions are to be interpreted as such and by itself, and other regulations do not automatically change these VAT rules.
Or, applied to this case: the Latvian tax authorities should look if the tax payer knows or could/should have known about fraud in the supply chain, but it cannot simply deny the deduction of input VAT by pointing at obligations the tax payer may have based on food and safety laws. Especially it is not fair if this would make the requirements for tax payers different, end thus not neutral.