ECJ C-512/21 (Aquila Part Prod Com) – Questions – Denial of input VAT due to fraud, without carrying out checks

On August 17, 2021, the Referring court (Fővárosi Törvényszék (Hungary)) referred case C-512/21 to the ECJ.

Article in the EU VAT Directive

Articles 9(1), 10, 167, 168(a), 178(a), 220 and 226 of the EU VAT Directive 2006/112/EC.

Article 9 (Taxable person)
1. ‘Taxable person’ shall mean any person who, independently, carries out in any place any economic activity, whatever the purpose or results of that activity.
Any activity of producers, traders or persons supplying services, including mining and agricultural activities and activities of the professions, shall be regarded as ‘economic activity’. The exploitation of tangible or intangible property for the purposes of obtaining income therefrom on a continuing basis shall in particular be regarded as an economic activity.

Article 10
The condition in Article 9(1) that the economic activity be conducted ‘independently’ shall exclude employed and other persons from VAT in so far as they are bound to an employer by a contract of employment or by any other legal ties creating the relationship of employer and employee as regards working conditions, remuneration and the employer’s liability.

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;

Article 178
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 Sections 3 to 6 of Chapter 3 of Title XI;

Article 220 (Issuance of invoices)
1. Every taxable person shall ensure that, in respect of the following, an invoice is issued, either by himself or by his customer or, in his name and on his behalf, by a third party:
(1) supplies of goods or services which he has made to another taxable person or to a non-taxable legal person;
(2) supplies of goods as referred to in point (a) of Article 33 except where a taxable person is making use of the special scheme in Section 3 of Chapter 6 of Title XII;
(3) supplies of goods carried out in accordance with the conditions specified in Article 138;
(4) any payment on account made to him before one of the supplies of goods referred to in points (1) and (2) was carried out;
(5) any payment on account made to him by another taxable person or non-taxable legal person before the provision of services was completed.
2. By way of derogation from paragraph 1, and without prejudice to Article 221(2), the issue of an invoice shall not be required in respect of supplies of services exempted under points (a) to (g) of Article 135(1).

Article 226
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:
(1) the date of issue;
(2) a sequential number, based on one or more series, which uniquely identifies the invoice;
(3) the VAT identification number referred to in Article 214 under which the taxable person supplied the goods or services;
(4) the customer’s VAT identification number, as referred to in Article 214, under which the customer received a supply of goods or services in respect of which he is liable for payment of VAT, or received a supply of goods as referred to in Article 138;
(5) the full name and address of the taxable person and of the customer;
(6) the quantity and nature of the goods supplied or the extent and nature of the services rendered;
(7) the date on which the supply of goods or services was made or completed or the date on which the payment on account referred to in points (4) and (5) of Article 220 was made, in so far as that date can be determined and differs from the date of issue of the invoice;
(7a) where the VAT becomes chargeable at the time when the payment is received in accordance with Article 66(b) and the right of deduction arises at the time the deductible tax becomes chargeable, the mention ‘Cash accounting’;
(8) the taxable amount per rate or exemption, the unit price exclusive of VAT and any discounts or rebates if they are not included in the unit price;
(9) the VAT rate applied;
(10) the VAT amount payable, except where a special arrangement is applied under which, in accordance with this Directive, such a detail is excluded;
(10a) where the customer receiving a supply issues the invoice instead of the supplier, the mention ‘Self-billing’;
(11) in the case of an exemption, 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;
(11a) where the customer is liable for the payment of the VAT, the mention ‘Reverse charge’;
(12) in the case of the supply of a new means of transport made in accordance with the conditions specified in Article 138(1) and (2)(a), the characteristics as identified in point (b) of Article 2(2);
(13) where the margin scheme for travel agents is applied, the mention ‘Margin scheme — Travel agents’;
(14) where one of the special arrangements applicable to second-hand goods, works of art, collectors’ items and antiques is applied, the mention ‘Margin scheme — Second-hand goods’; ‘Margin scheme — Works of art’ or ‘Margin scheme — Collector’s items and antiques’ respectively;
(15) where the person liable for payment of VAT is a tax representative for the purposes of Article 204, the VAT identification number, referred to in Article 214, of that tax representative, together with his full name and address.

Facts

Administrative action brought by Aquila Part Prod Com S.A. (Romania) against four rulings of the Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága
(Appeals Directorate of the National Tax and Customs Authority, Hungary), in which the tax authority found that there was a discrepancy in the value added tax
payable by the applicant, categorised, for the most part, as an improper refund and, as regards a lesser part, as unpaid tax, and as a result of which the tax
authority imposed a fine and issued a demand for a late-payment penalty.

The request for a preliminary ruling concerns the interpretation of Articles 9(1), 10, 167, 168(a), 178(a), 220 and 226 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, in the light of the principles of fiscal neutrality and reasonableness and the right to a fair trial enshrined in Article 47 of the Charter of Fundamental Rights of the European Union. According to the case-law of the Court of Justice, the national court must decide, based on that interpretation, whether the circumstances on which the defendant relies in relation to the applicant can be regarded as objective circumstances such that they justify the defendant’s refusal of the right to deduct VAT, and whether, as a consequence, the applicant was lawfully denied the right to deduct VAT on the grounds that it had participated in a tax fraud and had not
displayed due diligence.

The applicant’s predecessor in law, Agrirom Srl, is a company incorporated under Romanian law which, since 2 June 2010, has been registered in Hungary for VAT purposes. The main business declared by the applicant is wholesale intermediation services for food, beverages and tobacco, in the course of which it carries out intra-Community supplies of goods and internal purchases, while, in Hungary, it is involved in the wholesale of food.
With a view to conducting its trading activity in Hungary, on 1 April 2011, the applicant concluded a brokerage contract with Corpinvest Srl, whose representative is KG.
In the course of its wholesale business, the applicant would purchase from Rilax Kft cooking oil which it would resell to Strongfood Sro.
The first-tier tax authority made the applicant subject to inspection in order to conduct retrospective checks on its tax returns for the period from August to November 2012. On 16 June 2017, at the end of the nspections, the first-tier tax authority adopted four decisions in which it declared that there was a tax difference of nearly HUF 300 000 000, for the most part in respect of an improper refund and, as regards a lesser part, in respect of unpaid tax. The tax authority imposed a fine and issued a demand for a late-payment penalty in relation to that tax difference. During the almost five years that the inspection lasted (2012-2017), the tax authority conducted extensive checks. It found that the applicant had participated in a classic ‘carousel’ type fraud and that each month it would purchase cooking oil from Rilax Kft and then resell that oil to Strongfood Sro. The chain included a ‘missing trader’ and ‘buffer or front companies’, while the applicant was the ‘broker company’ and Strongrood Sro. was the ‘conduit company’ which would resell the product back to missing traders in Hungary.
The tax authority also examined the origin of the products sold. KG did not provide any certificates of quality until the adoption of the first-tier decision and therefore the tax authority stated that, in accordance with the requirements laid down in the food safety legislation, each participant in the supply chain should have known the place of origin of the food product purchased by it and subsequently resold, and also whether that product was quality compliant. The tax authority found that the cooking oil was re-invoiced for through a number of Hungarian companies, which showed that the aim was to ‘have the product travel’ between Hungary and Slovakia. The tiny margin applied by the companies in the invoicing chain indicates that they were not taking market conditions into consideration and that the traders in the chain were acting in concert.
According to the tax authority, the companies participating in the chain committed a deliberate and intentional tax fraud and therefore those companies, including the
applicant, have incurred strict liability.
As evidence of the fact that applicant knew that it was actively participating in a tax fraud, the tax authority referred to the following:
– the applicant itself entered into the contracts;
– the applicant’s Slovak customer would resell the goods back to Hungary on the same day as it purchased those goods from Hungary;
– a person with the same surname featured in the company information of the supplier and of the applicant’s customer;
– personal relationships can be observed in the financial transactions;
– the invoices which the ‘missing traders’ at the bottom of the supply chain issued as suppliers do not constitute credible documentary evidence because those companies did not carry on an independent business.
According to the tax authority, a number of facts show the applicant’s lack of due diligence; inter alia, the fact that KG and the applicant had previously been involved in fraudulent VAT transactions; that verification of the sources of supply would have made it possible to establish that the cooking oil sold to Slovakia had ultimately come from Slovakia, which KG would have realised if KG had used due diligence; that KG would have been able to observe that KG’s supplier was unable to attach certificates of origin to the invoices; and that the applicant did not even need to ask for a Hungarian tax identification number.
In the light of the foregoing, the tax authority found that the applicant’s conduct breached certain provisions of the Law on General Taxation Procedure and the Law on VAT.
By its rulings of 8 December 2017, the defendant confirmed the first-tier decisions in all respects. The documents showing that checks were carried out on suppliers, together with the label for the cooking oil and its certificate of conformity, which were annexed to the administrative appeal, were ruled inadmissible on the ground that they did not contain any new information and because the cooking oil label provided had no probative value as regards the origin of the product.
The applicant appealed against those rulings by an application lodged with the referring court. The essential arguments of the parties in the main proceedings
In its application, the applicant complained that the defendant conducted the procedure on the basis of a preconceived idea, that the defendant committed substantive errors when it found that the applicant had acted knowingly, and that, due to those contradictions and in the absence of facts and of evidence, the rulings are unlawful. As regards due diligence, the applicant principally criticised the fact that it is not clear from the ruling whether the role it played was active or passive, which presupposes different conduct and requires a determination of the facts that were relevant for the inspection.
As regards the due diligence displayed by the applicant, the latter claimed that its company has supply standards which require pre-contract checks on suppliers, which the tax authority did not even mention in its ruling. In accordance with those standards, the validity of the extract of the companies register and of the tax identification number, the areas of business and the persons empowered to act as representatives were always verified. The goods purchased had certificates of quality. KG would personally inspect a supplier’s premises, warehouse and the like, and also whether there were sufficient machinery and staff for loading and labelling the goods, as shown by the witness statements.
The tax authority deliberately ignored those statements. The applicant criticised the scope and the depth of the checks required of it in relation to its method of selecting trading partners, pointing out that it is unreasonable, impracticable and contrary to the case-law of the Court of Justice for the defendant to require the applicant, prior to taking a commercial decision, to uncover an arrangement that it took the tax authority over five years to get to the bottom of.
The applicant disputed the defendant’s findings concerning the deliberate nature of its actions and criticised the lack of evidence in that regard, since the tax authority concluded directly from the deliberate nature of KG’s actions that the applicant’s actions were deliberate, while, in the ruling, the deliberateness of KG’s actions was only examined in relation to due diligence.
The applicant also pointed out that, pursuant to the brokerage contract, the relationship between it and the broker company was one of horizontal cooperation and that the parties’ autonomy was the principal characteristic of the contract, which was not considered by the tax authority. Therefore, the applicant argued that, in that context, it displayed due diligence, which was ignored by the defendant.
As regards the origin of the goods, the applicant claimed that that is covered by trade secrecy which is of no relevance for tax purposes, but that in the course of trade it constitutes information the protection of which is vitally important for any economic operator. The applicant added that it is not subject to the Hungarian provisions on food safety and that the tax authority did not indicate the provision under which the applicant should have obtained and kept the certificates of quality which it was alleged not to have.
In the light of the foregoing considerations, the applicant requested that preliminary-ruling proceedings be commenced before the Court of Justice.
Without altering its position, the defendant pointed out that the inspection report relating to the period February to July 2012 describes in detail the invoicing chain discovered in relation to the period in question and the role that the applicant played in that chain.
In relation to the defendant’s finding of an infringement of the provisions governing food safety, the defendant refers to paragraph 41 of the judgment in Altic (C-329/18), in which, it claims, the Court previously addressed that issue. 21 In order to show that the findings contained in its rulings are well-founded, the defendant annexed a judgment given by the Kúria (Supreme Court, Hungary) in a case in which the facts were identical to those of the present case and in which the Kúria confirmed the objective ircumstances discovered by the defendant and, on the basis of these, the refusal of the right of deduction. Succinct presentation of the reasoning in the request for a preliminary ruling
According to the referring court, an interpretation of EU law in the light of the acte clair doctrine is necessary for the resolution of the dispute.
Citing paragraph 57 of the order in Vikingo (C-610/19) and paragraph 27 of the judgment in Hardimpex (C-444/12), the referring court argues that the contradiction concerning the essence of the interpretation and application of EU law with regard to the allocation of the burden of proof between a taxable person and the tax authority has also remained after those judgments. Therefore, in the interests of the correct performance of the judicial scrutiny that falls to it, the referring court considers that it is necessary for the Court of Justice to provide guidance on whether the circumstances relied on by the defendant can be regarded as objective factors to which the judgment in Mahagében (C-80/11) is applicable, since the referring court is not aware that the Court of Justice has ruled on those objective conditions to date, while, for the purpose of resolving the dispute, it is also necessary to determine whether, in the light of the nature of the supply chain identified in the present case, the extent of the checks that the tax authority requires a taxable person to carry out in connection with his obligation to act with due diligence is compatible with the evidentiary framework established by the Court of Justice in its interpretation of the relevant articles of the VAT Directive, and with the fundamental principles applicable to the exercise of the right to deduction of VAT

Questions

1) Is a practice of a tax authority pursuant to which that authority, automatically and without carrying out any checks, concludes from the fact that a natural person has acted knowingly, where that natural person has a legal relationship with a legal person which acts as a broker, is independent of the taxable person, which is the principal, and has its own legal personality, but that natural person does not have a relationship with the taxable person, that the taxable person has also acted knowingly, thereby ignoring the provisions of the contract concluded between the principal and the broker and also the provisions of foreign law governing the brokerage relationship, compatible with EU law, in particular Articles 9(1) and 10 of the VAT Directive, and with the principle of fiscal neutrality?

2) Are Articles 167, 168(a) and 178(a) of the VAT Directive to be interpreted as meaning that, where a tax authority identifies the existence of a circular invoicing chain, that fact alone suffices as objective evidence of tax fraud or in such a case is the tax authority also required to indicate which member(s) of the chain committed the tax fraud and what their modus operandi was?

3) Are Articles 167, 168(a) and 178(a) of the VAT Directive, in the light of the principles of proportionality and reasonableness, to be interpreted as meaning that even if the tax authority considers, based on the specific circumstances of the case, that the taxable person should have been more diligent, that person cannot be required to verify facts which the tax authority was only able to discover after an inspection lasting approximately five years which necessitated numerous additional checks using instruments of public law, such that the protection of taxable persons’ trade secrets was not an impediment to the checks? In the event that greater diligence is required, is it sufficient proof of due diligence that the taxable person’s scrutiny extends to matters beyond those indicated in the Mahagében judgment in relation to possible trading partners, such that the taxable person has internal supply rules for the purpose of conducting checks on those trading partners, does not accept cash payments, includes clauses concerning the
possible risks in the contracts it concludes, and also examines other matters during the transaction?

4) Are Articles 167, 168(a) and 178(a) of the VAT Directive to be interpreted as meaning that, if the tax authority finds that the taxable person actively participated in the tax fraud, is it sufficient in that regard that the evidence discovered by the tax authority shows that, using due diligence, the taxable person could have become aware of the fact that it was participating in a tax fraud, without that evidence showing that the taxable person knew that it was participating in a tax fraud because of its active conduct in that fraud? If active participation in a tax fraud, in other words, awareness of that participation, is proven, is the tax authority required to establish the fraudulent actions of the
taxable person materialising in its concerted conduct with the members preceding it in the chain or is it sufficient for the tax authority to rely on objective evidence that the members of the chain knew one another?

5) Is a practice of a tax authority pursuant to which that authority bases its ruling on an alleged infringement of provisions governing the safety of the food supply chain which have no bearing on compliance by the taxable person with his tax obligations or on the circulation of his invoices, which the tax legislation does not provide for in any way in relation to the taxable person and which have no effect on the actual facts of the transactions inspected by the tax authority and on the taxable person’s awareness examined in the tax proceedings, compatible with Articles 167, 168(a) and 178(a) of the VAT Directive, with the right to a fair trial recognised as a general principle in Article 47 of the Charter of Fundamental Rights of the European Union, and with the principle of legal certainty?

In the event the previous question is answered in the affirmative:
6) Is a practice of a tax authority whereby that authority, without the involvement of the official body responsible for the safety of the food supply chain, which has material and territorial competence, sets out in its ruling findings concerning the taxable person which come within that official body’s sphere of competence, such that, based on infringements identified in relation to the safety of the food supply chain – a matter outside its sphere of competence – it draws tax consequences for the taxable person, without that person being able to dispute the finding that he infringed the provisions on food supply chain safety in proceedings which are separate from the tax proceedings and which respect the fundamental guarantees and the parties’ rights, compatible with Articles 167, 168(a) and 178(a) of the VAT Directive, with the right to a fair trial recognised as a general principle in Article 47 of the Charter, and with the principle of legal certainty?

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