Flashback on ECJ Cases – C-574/15 (Scialdone) – EU law does not preclude a higher financial threshold applicable to VAT related offences

OnMay 2, 2018, the ECJ issued its decision in the case C-574/15 (Scialdone).

Context: Reference for a preliminary ruling — Value added tax (VAT) — Protection of the European Union’s financial interests — Article 4(3) TEU — Article 325(1) TFEU — Directive 2006/112/EC — PFI Convention — Penalties — Principles of equivalence and effectiveness — Failure to pay, within the time limit prescribed by law, the VAT resulting from an annual tax return — National legislation imposing a custodial sentence only where the amount of unpaid VAT exceeds a certain criminalisation threshold — National legislation imposing a lower criminalisation threshold for a failure to pay withholding income tax

Article in the EU VAT Directive

Articles 206, 250(1), 273 of the EU VAT Directive 2006/112/EU

Article 206

Any taxable person liable for payment of VAT must pay the net amount of the VAT when submitting the VAT return provided for in Article 250. Member States may, however, set a different date for payment of that amount or may require interim payments to be made.

Article 250(1)

Every taxable person shall submit a VAT return setting out all the information needed to calculate the tax that has become chargeable and the deductions to be made including, in so far as is necessary for the establishment of the basis of assessment, the total value of the transactions relating to such tax and deductions and the value of any exempt transactions.

Article 273

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.

Facts

The Agenzia delle Entrate (tax authorities, Italy) conducted a tax inspection of Siderlaghi. That inspection revealed that that company had failed to pay, within the time limit prescribed by law, the VAT resulting from its annual return for the tax year 2012, amounting to a total of EUR 175 272. The tax authorities notified Siderlaghi of that irregularity and asked it to regularise its situation by paying the tax due, default interest and, in accordance with Article 13(1) of Legislative Decree No 471/97, a fine in the amount of 30% of its tax debt. The company undertook to discharge the unpaid VAT in instalments within 30 days of the notification and therefore received a reduction of two-thirds of the fine.
On 29 May 2015, the Procura della Repubblica (public prosecutor, Italy) brought an application before the referring court, the Tribunale di Varese (District Court, Varese, Italy), seeking that Mr Scialdone be ordered to pay a fine of EUR 22 500. That application was based on the fact that the failure to pay the VAT in question constituted the offence provided for and punished by Articles 10 bis and 10 ter of Legislative Decree No 74/2000 since, inter alia, the amount of unpaid VAT exceeded the criminalisation threshold of EUR 50 000 above which such failure was punishable by the penalty laid down by those provisions, and on the fact that the offence was attributable to Mr Scialdone in his capacity as sole director of Siderlaghi.
On 22 October 2015, Legislative Decree No 158/2015 entered into force. The referring court states that the amendments made by that instrument to Legislative Decree No 74/2000 apply retroactively to the conduct ascribed to Mr Scialdone since they are provisions more favourable to the defendant. Consequently, the conduct in question no longer constitutes a criminal offence since Article 10 ter of Legislative Decree No 74/2000, as amended by Legislative Decree No 158/2015, now lays down a criminalisation threshold of EUR 250 000 for failure to pay VAT and the tax debt of Siderlaghi is below the new threshold. Moreover, Mr Scialdone could benefit from the ground for exemption from penalties now contained in Article 13 of Legislative Decree No 74/2000, as amended by Legislative Decree No 158/2015, since Siderlaghi and the tax authorities agreed for the VAT debt, fine and default interest to be paid by instalments.
Mevertheless, the referring court harbours doubts as to whether the amendments made to Italian legislation by Legislative Decree No 158/2015 are compatible with EU law, particularly since, if those amendments were to be found incompatible with EU law, it would consider itself bound to disapply them in favour of the initial version of Legislative Decree No 74/2000, with the result that Mr Scialdone would still be liable to a criminal penalty.
In that regard, first, the referring court notes that, under Articles 10 bis and 10 ter of Legislative Decree No 74/2000, in its initial version, the same criminalisation threshold of EUR 50 000 applied to both the failure to pay withholding income tax and the failure to pay VAT. However, since the amendment of Legislative Decree No 74/2000 by Legislative Decree No 158/2015, that threshold is EUR 150 000 for failure to pay withholding income tax, pursuant to the new Article 10 bis, and EUR 250 000 for failure to pay declared VAT, pursuant to the new Article 10 ter. That court harbours doubts as to whether such a difference is compatible with the requirements arising from Article 4(3) TEU, Article 325 TFEU and the VAT Directive, since, in its view, it entails better protection of national financial interests than of the European Union’s financial interests.
Second, the referring court infers from those provisions and from the PFI Convention that Member States might be required to penalise failures to pay VAT, such as the failure at issue in the main proceedings, by custodial sentences where the unpaid amount exceeds EUR 50 000. If that were the case, Article 10 ter of Legislative Decree No 74/2000, as amended by Legislative Decree No 158/2015, would be incompatible with EU law since the penalty provided for by that article applies only to failure to pay an amount greater than or equal to EUR 250 000. For similar reasons, that court has doubts as to whether a ground for exemption from penalties such as that provided for in Article 13 of Legislative Decree No 74/2000, as amended by Legislative Decree No 158/2015, is compatible with EU law.

Questions

(1) May EU law, and more particularly Article 4(3) TEU, in conjunction with Article 325 TFEU and [the VAT Directive], which lay down for the Member States the duty of equal treatment so far as concerns policies relating to penalties, be interpreted as precluding the enactment of a provision of national law providing that the penal consequences of failure to pay VAT follow once a financial threshold is crossed greater than the threshold provided for in the case of failure to pay income tax?

(2) May EU law, and more particularly Article 4(3) TEU in conjunction with Article 325 TFEU and [the VAT Directive], which oblige the Member States to provide effective, dissuasive and proportionate penalties to protect the financial interests of the European Union, be interpreted as precluding the enactment of a national provision which exempts the defendant (whether a director, legal representative, person to whom responsibility for fiscal matters has been delegated or an accessory to the offence) from liability to punishment if the entity with legal personality concerned has made late payment both of the tax itself and of the administrative penalties owed in connection with VAT, even though the tax assessment has already been made, criminal proceedings and indictment initiated, and the establishment of inter partes proceedings duly confirmed, but before trial proceedings have been declared opened, in a system that does not impose on that director, legal representative, or delegate and accessory to the offence any other penalty, not even an administrative penalty?

(3) Must the concept of fraud governed by Article 1 of the PFI Convention be interpreted as encompassing cases of failure to pay or of partial or late payment of VAT and, consequently, does Article 2 of that convention require the Member State to punish with a term of imprisonment failure to pay or partial or late payment of VAT in relation to sums in excess of EUR 50 000? If the answer is in the negative, it will be necessary to determine whether the rule under Article 325 TFEU, which requires the Member States to provide penalties, including criminal penalties, which are dissuasive, proportionate and effective, must be interpreted as precluding national legislation which exempts from criminal and administrative liability the directors and legal representatives of legal persons, or the persons to whom the functions of those legal persons are delegated and persons who are accessories to the offence, for failure to pay or partial or late payment of VAT in relation to sums equivalent to three or five times the minimum threshold laid down in case of fraud, that is to say, EUR 50 000.

AG Opinion

– The concept of fraud in Article 1(1)(b) of the PIF Convention on the protection of the European Communities’ financial interests does not cover an offence, such as the one at issue in the main proceedings, concerning the failure to pay correctly declared VAT within the deadline set by law.

– Article 4(3) TEU, read in conjunction with Article 325(1) TFEU and the VAT Directive, does not preclude national provisions establishing, for the purposes of determining the punishable character of the conduct consisting in failure to pay a tax by the legal deadline, a financial threshold which is higher for value added tax (VAT) than the one provided for withholding tax.

– The duty to provide effective, dissuasive and proportionate penalties to ensure correct collection of VAT imposed by Article 325(1) TFEU and Article 4(3) TEU, read in conjunction with VAT Directive, does not preclude national legislation, such as that at issue in the present case, which, while providing for a system of administrative sanctions, exempts natural persons responsible for tax matters:

– from criminal and administrative liability for failure to pay correctly declared VAT within the deadline set by law in relation to sums equivalent to three or five times the minimum threshold of EUR 50 000 laid down by the PIF Convention;

– from criminal liability if the entity with regard to which they operate has made late payment of the VAT due, as well as interest and the amounts imposed by administrative sanctions, before the trial at first instance is declared open.

Decision

Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with Article 4(3) TEU, and Article 325(1) TFEU must be interpreted as not precluding national legislation which provides that failure to pay, within the time limit prescribed by law, the value added tax (VAT) resulting from the annual tax return for a given financial year constitutes a criminal offence punishable by a custodial sentence only when the amount of unpaid VAT exceeds a criminalisation threshold of EUR 250 000, whereas a criminalisation threshold of EUR 150 000 is laid down for the offence of failing to pay withholding income tax.

Summary

Italian legislation whereby a non-payment for VAT is punishable by a custodial sentence only if the amount of the unpaid VAT exceeds a threshold of €250,000, while a threshold of €150,000 applies for income tax is not allowed.

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