On February 6, 2014, the ECJ issued its decision in the case C-424/12 (Fatorie).
Context: Request for a preliminary ruling – VAT – Directive 2006/112/EC – Reverse charge procedure – Right to deduct – Payment of the tax to the service supplier – Omission of mandatory particulars – Payment of VAT not due – Loss of the right to deduct – Principle of fiscal neutrality – Principle of legal certainty
Article in the EU VAT Directive
Article 178(a) and (f) of the VAT Directive provides as follows:
- In order to exercise the right of deduction, a taxable person must meet the following conditions:
- (a) for the purposes of deductions pursuant to Article 168(a), in respect of the supply of goods or services, he must hold an invoice drawn up in accordance with Articles 220 to 236 and Articles 238, 239 and 240;
- (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) of that directive provides that,
- in respect of certain supplies of services, Member States may provide that the person liable for payment of VAT is the taxable person to whom those supplies are made. That regime, known usually as the ‘reverse charge’ procedure, may in particular be applied, pursuant to Article 199(1)(a), to ‘the supply of construction work, including repair, cleaning, maintenance, alteration and demolition services in relation to immovable property, as well as the handing over of construction works …’.
Article 226(11) of that directive is worded as follows:
- 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:
- (11) in the case of an exemption or where the customer is liable for payment of VAT, reference to the applicable provision of this Directive, or to the corresponding national provision, or any other reference indicating that the supply of goods or services is exempt or subject to the reverse charge procedure.’
- On 3 January 2007, Fatorie concluded a framework contract with SC Megasal Construcţii SRL (‘Megasal’) relating to works for the building and fitting out of pig-pens and for the modernisation of a pig‑rearing farm. The works were completed in February 2008.
- In the course of 2007, Megasal, as the services provider, issued several invoices for the payment of advances, under the reverse charge scheme, applying the simplification measures laid down in point 82 of Government Decision No 44/2004 on the procedure for the application of the Tax Code. The total amount of the invoices issued and drawn up excluding VAT was 1 017 834.37 Romanian lei (RON).
- On 3 March 2008, Megasal issued an invoice restating the total value of the work carried out, which came to RON 1 052 840.10, RON 168 101 of which constituted VAT and RON 884 740 of which constituted the price of the work. Fatorie paid the VAT stated to Megasal.
- Following the application by Fatorie to the Romanian State for repayment of VAT, the Direcţia authorised, by a decision adopted on 2 July 2008, repayment of VAT in the amount of RON 173 057, that sum including VAT of RON 168 101 relating to the invoice of 3 March 2008, in accordance with the tax investigation report of 13 June 2008 concerning the period from 1 July 2007 to 31 March 2008.
- In 2009, following a second tax investigation on the VAT paid by Fatorie in respect of the period from 1 January 2007 to 31 March 2008, the Direcţia decided that the VAT attaching to the invoice of 3 March 2008 should be recovered since the simplification measures governing the reverse charge system had not been observed. By a tax assessment of 18 May 2009, the Direcţia thus ordered Fatorie to pay into the State budget the sum of RON 221 221, that is to say VAT in the sum of RON 168 101 and default interest in the sum of RON 53 120.
- According to the information in the case file, Megasal was declared insolvent and did not pay to the Romanian tax authorities the VAT entered on the invoice of 3 March 2008 which had been paid to it by Fatorie.
- On 15 July 2009, Fatorie brought proceedings against the Direcţia seeking the annulment of the decision to recover the tax and of the tax assessment of 18 May 2009.
- the invoice produced by the taxable person for the purpose of exercising his right to deduct was incorrectly drawn up by a third party, failing to apply the simplification measures;
- the taxable person has paid the VAT indicated in the invoice?
Does the European law principle of legal certainty militate against the administrative practice of the Romanian tax authorities that have:
- first, by irrevocable administrative decision, acknowledged the right to deduct VAT;
- then reversed that decision, and made the taxable person liable to pay into the State budget the VAT for which the right to deduct was originally exercised, and to pay interest and default interest?
- the taxable person has paid the VAT incorrectly indicated in the invoice by a third party;
- the tax authorities have taken no active steps to request the third party to put right the incorrectly worded invoice;
- at present, as a result of the third party’s insolvency, it is impossible for the invoice to be corrected?
1. In a transaction subject to the reverse charge regime, in circumstances such as those in the main proceedings, Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax and the principle of fiscal neutrality do not preclude the recipient of the services from being deprived of the right to deduct the value added tax which he paid when that tax was not due to the service supplier on the basis of an incorrectly drawn up invoice, even where the correction of that error is impossible because that supplier is insolvent.
2. The principle of legal certainty does not preclude an administrative practice of the national tax authorities whereby, within a limitation period, they revoke a decision by which they granted the taxable person the right to deduct value added tax and then, following a fresh investigation, order him to pay that tax together with default interest.
Reverse charge mechanism — Payment of undue VAT to the service provider — Loss of the right to deduct — Principle of fiscal neutrality — Principle of legal certainty
In the context of a transaction subject to the reverse charge mechanism, the VAT Directive and the principle of neutrality do not preclude the recipient of the service from being deprived of the right to deduct the VAT which he has unduly paid to the service provider on the basis of an incorrect invoice, even if that error cannot be remedied due to the bankruptcy of that service provider.
The principle of legal certainty does not preclude an administrative practice of the national tax authorities which consists in revoking, within a limitation period, a decision granting the taxable person a right to deduct VAT by charging, after a new inspection, that tax and default interest from him. progress.
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