VATupdate

Flashback on ECJ Cases – C-378/15 (Mercedes Benz Italy) – Mixed-use revenue-based pro rata does not violate EU law

On December 14, 2016, the ECJ issued its decision in the case C-378/15 (Mercedes Benz Italy).

Context: Reference for a preliminary ruling — Taxation — Value added tax — Directive 77/388/EEC — Article 17(5), third subparagraph, point (d) — Scope — Application of a deductible proportion to the value added tax charged on the acquisition of all goods and services used by a taxable person — Incidental transactions — Use of turnover as an indicator


Article in the EU VAT Directive

Articles 17(5) and Article 19 of the Sixth VAT Directive (Articles 173, 174 and 175 of the EU VAT Directive 2006/112/EC)

Article 173 (Proportional deduction)
1. In the case of goods or services used by a taxable person both for transactions in respect of which VAT is deductible pursuant to Articles 168, 169 and 170, and for transactions in
respect of which VAT is not deductible, only such proportion of the VAT as is attributable to the former transactions shall be deductible.
The deductible proportion shall be determined, in accordance with Articles 174 and 175, for all the transactions carried out by the taxable person.
2. Member States may take the following measures:
(a) authorise the taxable person to determine a proportion for each sector of his business, provided that separate accounts are kept for each sector;
(b) require the taxable person to determine a proportion for each sector of his business and to keep separate accounts for each sector;
(c) authorise or require the taxable person to make the deduction on the basis of the use made of all or part of the goods and services;
(d) authorise or require the taxable person to make the deduction in accordance with the rule laid down in the first subparagraph of paragraph 1, in respect of all goods and services used for all transactions referred to therein;
(e) provide that, where the VAT which is not deductible by the taxable person is insignificant, it is to be treated as nil.

Article 174
1. The deductible proportion shall be made up of a fraction comprising the following amounts:
(a) as numerator, the total amount, exclusive of VAT, of turnover per year attributable to transactions in respect of which VAT is deductible pursuant to Articles 168 and 169;
(b) as denominator, the total amount, exclusive of VAT, of turnover per year attributable to transactions included in the numerator and to transactions in respect of which VAT is not deductible.
Member States may include in the denominator the amount of subsidies, other than those directly linked to the price of supplies of goods or services referred to in Article 73.
2. By way of derogation from paragraph 1, the following amounts shall be excluded from the calculation of the deductible proportion:
(a) the amount of turnover attributable to supplies of capital goods used by the taxable person for the purposes of his business;
(b) the amount of turnover attributable to incidental real estate and financial transactions;
(c) the amount of turnover attributable to the transactions specified in points (b) to (g) of Article 135(1) in so far as those transactions are incidental.
3 Where Member States exercise the option under Article 191 not to require adjustment in respect of capital goods, they may include disposals of capital goods in the calculation of the
deductible proportion.

Article 175
1. The deductible proportion shall be determined on an annual basis, fixed as a percentage and rounded up to a figure not exceeding the next whole number.
2. The provisional proportion for a year shall be that calculated on the basis of the preceding year’s transactions. In the absence of any such transactions to refer to, or where they were
insignificant in amount, the deductible proportion shall be estimated provisionally, under the supervision of the tax authorities, by the taxable person on the basis of his own forecasts.
However, Member States may retain the rules in force at 1 January 1979 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession.
3 Deductions made on the basis of such provisional proportions shall be adjusted when the final proportion is fixed during the following year.


Facts

  • Mercedes Benz is responsible for the strategic direction of the marketing of the Daimler-Chrysler Group brands in Italy.
  • In its VAT return for the 2004 tax year, Mercedes Benz classified its financial activities, namely the granting of loans to its subsidiaries, as ‘incidental’ to its taxable activities, thereby justifying the exclusion of the interest accrued on those loans from the calculation of the denominator in the fraction used to establish the deductible proportion referred to in Article 19-bis of DPR No 633/72.
  • As a result of a tax audit carried out in 2008 and relating to the 2004 tax year, Mercedes Benz was made subject, by decision of the tax authority, to an additional assessment to VAT in the amount of EUR 1 755 882, on the ground that the interest received on those loans had been improperly excluded from the denominator of the fraction used to establish the deductible proportion, in so far as the granting of those loans was one of Mercedes Benz’s main activities, since the accrued interest on those loans represented 71.64% of its total turnover.
  • Mercedes Benz brought an action against that decision before the Commissione tributaria provinciale di Roma (Provincial Tax Court, Rome, Italy), which was dismissed. Mercedes Benz subsequently lodged an appeal against that decision before the referring court, the Commissione tributaria regionale di Roma (Regional Tax Court, Rome, Italy).
  • In the dispute, Mercedes Benz has argued that it was entitled to exclude the accrued interest on the loans made from the denominator of the fraction used to establish the deductible proportion of the VAT and, in particular, it claimed that in any event the national legislature had incorrectly transposed Articles 168 and 173 to 175 of Directive 2006/112 by providing that the deductible proportion referred to in Article 19-bis of DPR No 633/72 applies without distinction to all goods and services acquired by a taxable person, irrespective of whether those goods and services are used for transactions in respect of which VAT is deductible, for transactions in respect of which VAT is not deductible, or for both types of transactions.

Questions

For the purposes of exercising the right of deduction, are national provisions (in particular Articles 19(5) and 19-bis of Decree 633/1972 of the President of the Republic) and the practice of the national tax authorities which require that reference be had to the composition of a trader’s turnover, including in order to identify so-called incidental transactions, but make no provision for a method of calculation that is based on [both] the composition and the actual destination of the acquisitions and that objectively reflects the actual share of the expenditure attributable to each of the — taxed and untaxed — activities engaged in by the taxpayer incompatible with an interpretation of Articles 168, 173, 174 and 175 of Directive 2006/112/EC 1 which is guided by the principles of proportionality, effectiveness and neutrality, as set out in Community law?


AG Opinion

Article 17(2) and (5) and Article 19 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 91/680/EEC of 16 December 1991, must be interpreted as precluding national provisions and a practice of the national tax authorities, such as the provisions and practice at issue in the main proceedings, which require taxpayers who carry out both transactions in respect of which VAT is deductible and transactions in respect of which VAT is not deductible to determine the amount of VAT deductible by applying a proportion, established in accordance with Article 19 of that directive, in respect of all goods and services acquired, including those used exclusively to carry out either transactions in respect of which VAT is deductible or transactions in respect of which VAT is not deductible.

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Decision

Point (d) of the third subparagraph of Article 17(5) and Article 19 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, must be interpreted as not precluding national rules and practice, such as those at issue in the main proceedings, which require a taxable person:

– to apply to all goods and services which he has acquired a deductible proportion based on turnover, without providing for a method of calculation which is based on the nature and actual destination of each of the goods and services acquired and which objectively reflects the portion of the expenditure actually to be attributed to each of the taxed and untaxed activities; and

– to refer to the composition of his turnover in order to identify transactions which may be classified as ‘incidental’, in so far as the assessment carried out for that purpose also takes account of the relationship between those transactions and the taxable activities of that taxable person and, as the case may be, of the use which they entail of the goods and services which are subject to value added tax.


Summary

The EU Court of Justice rules that Italy does not violate EU law by applying a pro rata based on turnover. It is immaterial that no calculation method is provided that is based on the nature and actual destination of each of the acquired goods and services.

Mercedes Benz Italia SpA does not take into account its financial activities in its VAT return for the year 2014. According to Mercedes Benz, the granting of loans must be classified as ancillary to its taxable transactions. According to Mercedes Benz, the interest on these loans therefore does not have to be included in the calculation of the pro rata. However, the Italian tax authorities disagree. According to the tax authorities, granting the loans is one of the main activities of Mercedes Benz. The tax authorities point out that the interest constitutes 71.64% of the company’s total turnover. The Italian court has referred a question for a preliminary ruling in this case.

The Court of Justice of the EU rules that Italy does not violate EU law by applying a pro rata for the application of the VAT deduction for all goods and services acquired by it, which is based on turnover. The Court of Justice of the EU does not consider it important that it does not provide for a calculation method that is based on the nature and actual destination of each of the goods and services acquired and that objectively reflects what share of the expenditure is actually attributable to each of the the taxed or non-taxed activities.


Source:


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