On 16 October 2019, the European Court of Justice gave its judgment in case C-189/18 (Glencore Agriculture Hungary Kft.). The case deals with the question how much power national tax authorities have and what information they may obtain and withhold during a VAT audit.
Context: Reference for a preliminary ruling — Value added tax (VAT) — Directive 2006/112/EC– Articles 167 and 168 — Right to deduct VAT — Refusal — Fraud — Taking of evidence — Principle of respect for the rights of the defence — Right to be heard — Access to the file — Article 47 of the Charter of Fundamental Rights of the European Union — Effective judicial review — Principle of equality of arms — Inter partes principle — National legislation or practice according to which, when checking the right to deduct VAT exercised by a taxable person, the tax authorities are bound by the findings of fact and the legal classifications which they have made in the context of related administrative procedures to which that taxable person was not a party
Article in the EU VAT Directive
Articles 167 and 168 of the EU VAT Directive 2006/112/EC.
Article 167 (Right to deduct VAT)
A right of deduction shall arise at the time the deductible tax becomes chargeable.
Article 168
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;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.
Article in Charter of Fundamental Rights of the European Union
Article 47
Right to an effective remedy and to a fair trial
Everyone whose rights and freedoms guaranteed by the law of the Union are violated has the right to an effective remedy before a tribunal in compliance with the conditions laid down in this Article.
Everyone is entitled to a fair and public hearing within a reasonable time by an independent and impartial tribunal previously established by law. Everyone shall have the possibility of being advised, defended and represented.
Legal aid shall be made available to those who lack sufficient resources in so far as such aid is necessary to ensure effective access to justice.
Facts:
Glencore Agriculture Hungary is a wholeseller of wheat, oilseeds, animal feed and raw materials. The Hungarian tax authorities performed a VAT audit, resulting in a refusal to deduct input VAT.
This decision was (also) based on investigations with suppliers of Glencore. Based on these investigations, the transactions of Glencore’s suppliers were reclassified.
Glencore is of the opinion that there was not a fair procedure, because the tax authorities used evidence collected by the tax authorities, i.e. the information collected from third parties, which evidence Glencore could not obtain or interpret.
The tax authorities argued that the rights of defense had not have been infringed, since Glencore could have obtained access to the documentation and evidence via a legal procedure. According to the tax authorities taxpayers are informed of all facts, data and evidence that relate to their case, protected by the tax secrecy.
The ECJ is being asked if the recipient of an invoice, who is not actively involved in the re-qualification of the transactions performed by his supplier, is damaged in his right to a fair trial.
Considerations:
At the hearing, Glencore and the Hungarian Government made it clear that two criminal proceedings relating to the fraud in question were still pending when the tax authorities consulted the documents of those proceedings and took the two administrative decisions against which Glencore challenged the main proceedings. These proceedings were therefore not yet concluded with a decision on the merits of a criminal court. It follows that the present case does not raise questions concerning the authority of res judicata.
In the light of those clarifications, it must be held that, by its three questions, which must be examined together, the referring court is essentially asking whether the VAT Directive, the principle of respect for the rights of the defense and Article 47 of the Charter must be interpreted as precluding a scheme or practice of a Member State according to which the tax authorities, when checking the right to deduct VAT exercised by a taxable person, are bound by the factual findings and legal qualifications that they already have has established in the context of related administrative proceedings against suppliers of that taxable person, on which decisions have become final based on the existence of VAT fraud committed by those suppliers.
Questions
(1) Must the provisions of the VAT Directive and, in so far as they are concerned, the fundamental principle of respect for the rights of the defence and Article 47 of the [Charter], be interpreted as precluding the legislation of a Member State and national practice based on that legislation, under which the findings, in the context of an inspection carried out of the parties to a legal relationship (contract, transaction) to which the tax liability relates, made by the tax authorities at the conclusion of a procedure instigated in respect of one of the parties to the legal relationship (the issuer of the invoices in the main proceedings) and entailing a reclassification of that legal relationship, must be taken into account as a matter of course by the tax authorities when carrying out an inspection of another party to the legal relationship (the recipient of the invoices in the main proceedings), it being understood that the other party to the legal relationship has no rights, in particular rights attaching to the status of a party, in the original inspection procedure?
(2) If the Court of Justice answers the first question in the negative, do the provisions of the VAT Directive and, in so far as they are concerned, the fundamental principle of respect for the rights of the defence and Article 47 of the [Charter], preclude a national practice that allows a procedure such as that referred to in the first question whereby the other party to the legal relationship (the recipient of the invoices) does not have, in the original inspection procedure, rights attaching to the status of a party, and cannot therefore exercise any right of appeal with respect to an inspection procedure the findings of which must be taken into account as a matter of course by the tax authorities in the inspection procedure concerning the other party’s tax liability and may be adopted as evidence against that other party, it being understood that the tax authorities do not make available to the other party the relevant files concerning the inspection carried out in respect of the first party to the legal relationship (the issuer of the invoices), in particular documents underpinning the findings, the reports and administrative decisions, but discloses only part of them to that other party in the form of a summary, the tax authorities thus apprising the other party of the contents of the file only indirectly, making a selection according to their own criteria, over which the other party may not exercise any control?
(3) Must the provisions of the VAT Directive and, in so far as they are concerned, the fundamental principle of respect for the rights of the defence and Article 47 of the [Charter], be interpreted as precluding a national practice under which the findings, in the context of the inspection of the parties to a legal relationship to which the tax liability relates, made by the tax authorities at the conclusion of a procedure instigated in respect of the issuer of the invoices and including the finding that that issuer actively participated in tax evasion, must be taken into account as a matter of course by the tax authorities when carrying out an inspection in respect of the recipient of the invoices, it being understood that that recipient has no rights attaching to the status of a party in the inspection procedure carried out at the premises of the issuer of the invoices, and cannot therefore exercise any right of appeal in an inspection procedure the findings of which must be taken into account as a matter of course by the tax authorities in the inspection procedure concerning the tax liability of the recipient and may be adopted as evidence against that recipient, and that [the tax authorities] do not make available to the recipient the relevant files relating to the inspection carried out in respect of the issuer, in particular the documents underpinning the findings, the reports and administrative decisions, but disclose only part of them to the recipient in the form of a summary, the tax authorities thus apprising the recipient of the contents of the files only indirectly, making a selection according to their own criteria and over which the recipient may exercise no control?
AG Opinion
– The provisions of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, interpreted in the light of Article 47 and Article 48(2) of the Charter of Fundamental Rights of the European Union, do not preclude a provision or practice of a Member State according to which, when verifying the right of a taxable person to deduct value added tax (VAT), the tax administration is to take into account the findings that it has made in related decisions which have become final, provided that:
– such a provision or practice, while respecting the logic and structure of the VAT system, does not prevent the tax authorities, de jure or de facto, from reaching different conclusions, in the context of different procedures, when presented with new arguments or new evidence;
– the tax authorities are, in principle, required to grant access, before the adoption of their final decision, to all documents which are relevant for the exercise of the taxable person’s rights of defence, including those that have been collected in the context of related administrative or criminal procedures. A description of the evidence in the form of a summary report does not suffice, unless the taxable person is able to request an examination and, possibly, a copy of the specific documents;
– the national court hearing an action against a decision adopted by the tax authorities is able to review all elements of fact and of law in that decision, including the lawfulness of the manner in which the evidence was collected, irrespective of the origin of such evidence.
Decision
Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, the principle of respect for the rights of the defence and Article 47 of the Charter of Fundamental Rights of the European Union must be interpreted as not precluding, in principle, legislation or a practice of a Member State according to which, during a check of the right to deduct value added tax (VAT) exercised by a taxable person, the tax authorities are bound by the findings of fact and the legal classifications which they have already made in the context of related administrative procedures initiated against suppliers of that taxable person, on which decisions which have become final finding the existence of VAT fraud committed by those suppliers are based, on condition, first, that it does not relieve the tax authorities of the obligation to disclose to the taxable person the evidence, including that originating in those related administrative procedures, on the basis of which they intend to take a decision, and that that taxable person is not thus deprived of the right effectively to challenge those findings of fact and legal classifications during the procedure brought against him; second, that the taxable person may have access during that procedure to all the evidence obtained during those related administrative procedures or any other procedure on which those authorities intend to base their decision or which may assist the exercise of the rights of the defence, unless objectives of public interest justify restricting that access; and, third, that the court hearing an action challenging that decision may check the legality of the way in which that evidence was obtained and used and the findings made in the administrative decisions taken with respect to those suppliers that are decisive for the outcome of the action.
Source
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