Flashback on ECJ Cases C-18/13 (Maks Pen EOOD) – No right to deduct VAT if a claim is made in case of fraud or abuse

On February 13, 2014, the ECJ issued its decision in the case C-18/13 (Maks Pen EOOD).

Context: Taxation – Common system of value added tax – Directive 2006/112/EC – Deduction of input tax – Supplies made – Tax inspection – Supplier not having the necessary resources – Concept of tax evasion – Obligation to make a finding of tax evasion of the court’s own motion – Requirement that the service actually be supplied – Requirement to keep accounts in sufficient detail – Legal proceedings – National court prohibited from classifying the tax evasion as a criminal offence and adversely affecting the applicant’s situation

Article in the EU VAT Directive

Article 63, Article 178(a), subparagraph (6) of Article 226, and Articles 242 and 273 of Council Directive 2006/112/EC

Article 63 (Chargeable event)

The chargeable event shall occur and VAT shall become chargeable when the goods or the services are supplied.

Article 226, subparagraph 6 (Content of invoices)

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:

(6) the quantity and nature of the goods supplied or the extent and nature of the services rendered;

Article 242 (Accounting – General requirements)

Every taxable person shall keep accounts in sufficient detail for VAT to be applied and its application checked by the tax authorities.

Article 273 (Accounting – Miscellaneous provisions)

Member States may impose other obligations which they deem necessary to ensure the correct collection of VAT and to prevent evasion, subject to the requirement of equal treatment as between domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.
The option under the first paragraph may not be relied upon in order to impose additional invoicing obligations over and above those laid down in Chapter 3.

Facts

Maks Pen is a company registered under Bulgarian law which operates as a wholesaler of office supplies and advertising material.
The tax inspection to which it was subject in respect of the tax period from 1 January 2007 to 30 April 2009 inclusive led the tax authorities to contest the validity of the VAT deduction made on the basis of the tax included in the invoices of seven of its suppliers.
In respect of some of the suppliers themselves, or their sub‑contractors, it was not possible to establish from the information requested of them during that inspection that they had the necessary resources to have made the supplies invoiced. Taking the view that either it was not proven, in respect of some of the sub‑contractors, that the transactions in question had actually been carried out, or that those transactions were not carried out by the service providers referred to on the invoices, the tax authorities drew up an amended tax assessment notice contesting the deductibility of the VAT included in the invoices of those seven undertakings.
Maks Pen challenged that amended notice before the Direktor na Direktsia ‘Obzhalvane i upravlenie na izpalnenieto’ Sofia, then before the referring court, submitting that it possessed invoices and contractual documents in due form, that those invoices had been paid by bank transfer, that they were registered in the accounting records of the suppliers, that those suppliers had declared the VAT relating to those invoices, that there was therefore evidence that the supplies at issue had actually taken place and that, further, it was not disputed that Maks Pen itself had made supplies subsequent to the provision of those services.
The tax authorities submitted that it was not sufficient to hold invoices in due form to qualify for a right to deduct, where, in particular, the private documents presented in support of the invoices by the suppliers concerned were not reliably dated and had no probative value, and the sub‑contractors had not declared the workers whose services they had used or the services supplied. Before the referring court, the tax authorities relied on new evidence, first, by challenging the validity of the signature of representatives of two of the suppliers and, secondly, by pointing out that one of them had not included in its accounting records or in its tax returns the invoices of one of the sub‑contractors whose services it had used. While the tax authorities conceded that the services invoiced had been supplied to Maks Pen, they submitted that those services were not however provided by the suppliers mentioned in those invoices.

Questions

Are circumstances of fact in which the service provider named on the invoice or its subcontractor do not have the personnel, equipment or assets that would be required to provide the service, the costs of actually providing the service are not documented and no such costs are entered in its accounts, and documents submitted as evidence of the reciprocal performance owed and of provision of the service in respect of which a VAT invoice was issued and the right to deduct input tax was exercised, in the form of a contract and a record of acceptance and delivery, were false in so far as concerns the status as issuer of the persons which signed them in the name of the service provider, to be treated as relating to ‘tax evasion’ for the purposes of the right of deduction under European Union law?

Does it follow from the obligation incumbent on a court under European Union law and the case-law of the Court of Justice of the European Union to refuse the right to deduct input tax in the case of tax evasion that a national court also has a duty to establish the existence of tax evasion of its own motion, on the basis of the facts of the main proceedings, to the extent that, taking into account its obligation under national law to give a ruling on the substance of the dispute, to comply with the prohibition on less favourable treatment of the claimant, to observe the principles of the right to an effective legal remedy and legal certainty and to apply the relevant legal provisions of its own motion, it must assess new arguments of fact put before it for the first time, as well as all evidence, including that relating to fictitious transactions, false documents and documents the contents of which are inaccurate?

In the context of the obligation of the court to refuse the right to deduct input tax in the event of tax evasion, does it follow from point (a) of the first paragraph of Article 178 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax that the service must actually have been provided by the service provider named on the invoice or its subcontractor in order for the right of deduction to be exercised?

Does the requirement under Article 242 of Directive 2006/112 to keep detailed accounts for the purposes of verification of the right to deduct input tax mean that the corresponding national accounting legislation of the Member State in question, which provides for consistency with the international accounting standards applicable under European Union law, must also be observed, or does it refer only to the requirement to keep the VAT accounting documents prescribed in that directive: invoices, VAT returns and recapitulative statements?

In the event that the second alternative is correct, an answer to the following question will also be required:

Does it follow from the requirement in point (6) of the first paragraph of Article 226(6) of Directive 2006/112 that invoices must state the ‘extent and nature of the services rendered’ that, in the case of services, invoices or a document issued in connection with them must contain details of the actual provision of the service, that is to say objective, verifiable facts that serve as proof both that the service was in fact provided and that it was rendered by the service provider named on the invoice?

Is Article 242 of Directive 2006/112, which lays down the requirement to keep detailed accounts for the purposes of verifying the right to deduct input tax, in conjunction with Article 63 and Article 273 of that directive, to be interpreted as meaning that it does not preclude a national provision under which a service is deemed to have been provided at the time when the conditions governing recognition of the revenue from that service are satisfied in accordance with the relevant accounting legislation, which provides for consistency with the international accounting standards applicable under European Union law and the principles of accounting evidence for business transactions, the precedence of substance over form and the comparability of revenue and costs?

AG Opinion

None

Decision

1. Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as precluding a taxable person from deducting the value added tax included in the invoices issued by a supplier where, although the supply was made, it is apparent that it was not actually made by that supplier or by its sub‑contractor, inter alia because they did not have the personnel, equipment or assets required, there was no record of the costs of making the supply in their accounts and the identification of persons signing certain documents as the suppliers was shown to be inaccurate, subject to the twofold condition that such facts constitute fraudulent conduct and that it is established, in the light of the objective evidence provided by the tax authorities, that the taxable person knew or should have known that the transaction relied on to give entitlement to the right to deduct was connected with that fraud, which it is for the referring court to determine.

2. Where the national courts must or may raise of their own motion points of law based on binding rules of national law, they must do so in relation to a binding rule of European Union law such as that which requires that the national courts and authorities refuse entitlement to the right to deduct value added tax where it is established, in the light of objective evidence, that that right is being relied on for fraudulent or abusive ends. It is incumbent on those courts, in the assessment of whether that right to deduct was relied on for fraudulent or abusive ends, to interpret the national law, so far as possible, in the light of the wording and the purpose of Directive 2006/112, in order to achieve the result sought by that directive, which requires that they do whatever lies within their jurisdiction, taking the whole body of domestic law into consideration and applying the interpretative methods recognised by that law.

3. Directive 2006/112, by requiring in particular, pursuant to Article 242 thereof, that any taxable person keep accounts in sufficient detail to allow the value added tax to be applied and its application checked by the tax authorities, must be interpreted as not precluding the Member State concerned, within the limits provided for in Article 273 of that directive, from requiring that any taxable person observe in that regard all the national accounting rules consistent with international accounting standards, provided that the measures adopted to that effect do not go beyond what is necessary to attain the objectives of ensuring the correct levying and collection of the tax and preventing tax evasion. In that regard, Directive 2006/112 precludes a national provision according to which a service is deemed to have been supplied at the time when the conditions governing recognition of the revenue arising from that service are satisfied.

Summary

A taxable person may not deduct the VAT indicated on invoices issued by a supplier when the service has been supplied but not actually supplied by that supplier or its subcontractor, in particular because the latter did not have the staff, material resources and assets necessary for this purpose, the costs of providing their services have not been justified in their accounts or the identity of the persons who have signed certain documents as a service provider has been found to be incorrect, on the twofold condition that those facts constitute fraudulent behavior and on the basis of the objective information provided to the tax authorities it is established that the taxable person knew or should have known that the transaction for which the right to deduct is claimed,was part of that fraud, which must be ascertained by the referring court.

Where the national court has the obligation or the possibility to bring into question of its own motion the legal bases derived from a mandatory rule of national law, it must do so with regard to a mandatory rule of EU law such as the rule according to which national authorities and courts should refuse the right to deduct VAT if it is established on the basis of objective data that this right is claimed in the event of fraud or abuse. It is for the national court, when assessing the fraudulent or unfair nature of the exercise of that right to deduct, to interpret national law as far as possible in the light of the wording and purpose of Directive 2006/112 to to achieve the result intended by this Directive, which requires that he,

Directive 2006/112, by requiring, in particular, under Article 242 thereof, of every taxable person to keep accounts containing sufficient information to permit the application of VAT and its control by the tax authorities, it must be interpreted as meaning that it does not oppose, within the limits laid down in Article 273 of that Directive, the Member State concerned requiring any taxable person to comply in this regard with all national accounting rules in accordance with international accounting standards, provided that the measures adopted to that effect do not go beyond what is necessary to achieve the objective, to ensure proper taxation and to prevent fraud.In that regard, Directive 2006/112 precludes a national provision according to which a service is regarded as supplied when the conditions for recognition of the revenues resulting from the transaction in question are fulfilled.

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