Flashback on ECJ Cases – C-284/11 (EMS-Bulgaria Transport) – Limitation period for the exercise of the right to deduct is permitted, unless it makes the exercise of this right impossible

On July 12, 2012, the ECJ issued its decision in the case C-284/11 (EMS-Bulgaria Transport).

Context: VAT — Directive 2006/112/ EC — Right to deduct — Limitation period for the exercise of the right to deduct VAT — Principle of effectiveness — Refusal of the right to deduct VAT — Principle of fiscal neutrality

Article in the EU VAT Directive

Article 179, 180. 273 of the EU VAT Directive 2006/112/EC

Article 179 (Rules governing exercise of the right of deduction)

The taxable person shall make the deduction by subtracting from the total amount of VAT due for a given tax period the total amount of VAT in respect of which, during the same period, the right of deduction has arisen and is exercised in accordance with Article 178.

However, Member States may require that taxable persons who carry out occasional transactions, as defined in Article 12, exercise their right of deduction only at the time of supply.

Article 180

Member States may authorise a taxable person to make a deduction which he has not made in accordance with Articles 178 and 179.

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.

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

It is apparent from the order for reference that Marcotran International Transport C.A., a company established in Spain, sold, on 14 November 2008, second-hand lorries and traction vehicles to EMS, established in Bulgaria. On that occasion, the Spanish supplier issued 10 invoices for the ‘sale of second-hand lorries (traction vehicles)’ and reported an intra-Community supply in the electronic database of the VAT Information Exchange System (VIES).
It is also apparent from that order that, on 22 December 2008, EMS applied for voluntary VAT registration in accordance with Article 100(1) of the ZDDS and that the registration was carried out on 12 January 2009.
In June 2009, EMS issued 10 protocols relating to intra-Community acquisitions in accordance with Article 117 in conjunction with Article 84 of the ZDDS. It accounted for the VAT and exercised the right to deduct. The rules of the reverse charge procedure were applied.
According to the order for reference, the tax authorities took the view that, on 14 November 2008, EMS had effected an intra-Community acquisition of goods which, as they were neither new means of transport nor goods subject to excise duty, were not covered by the exemption in Article 99(5) of the ZDDS. As the total value of the intra-Community acquisitions exceeded BGN 20 000 and the taxable value of the intra-Community acquisition was greater than BGN 20 000 in each of the 10 invoices, EMS was required to register for VAT purposes under Article 99(1) of the ZDDS and, under Articles 86 and 99(3) of that law, to account for VAT on the total value of the intra-Community acquisitions, namely, the sum of BGN 229 548.50. The settlement was effected in the month of June 2009 and not in the month of November 2008.
On account of that delay, EMS was required to pay a sum of BGN 18 250.38 by way of default interest.
Furthermore, the tax authorities refused EMS, under Article 70(4) of the ZDDS, the right to deduct VAT, on the grounds that that right was exercised outside the time-limit laid down in Article 72(1) of the ZDDS and that Section 18 of the transitional and concluding provisions of the Law amending and supplementing the ZDDS, which had been in force since 1 January 2009, was not applicable.
Both the administrative action before the Direktor na Direktsia ‘Obzhalvane i upravlenie na izpalnenieto’ Plovdiv (Director of the ‘Appeals and the Administration of Enforcement’ Office, Plovdiv) and that brought before the Administrativen sad — grad Plovdiv (Administrative Court, Plovdiv) were dismissed.
According to that last court, Article 73a of the ZDDS is a substantive provision which has applied since 1 January 2009. Its retroactive effect is provided for in Section 18(1) of the transitional and concluding provisions of the Law amending and complementing the ZDDS, which also entered into force on 1 January 2009. That section permits registered persons to account for the tax and exercise their right to deduct within four months of the entry into force of the amending Law, if the VAT was chargeable before the entry into force of that law. Since EMS was not registered when Section 18 of that law came into force, it cannot rely on that provision and does not therefore have the right to deduct the VAT.
The referring court however states that EMS was not refused the right to deduct VAT because it did not register for VAT purposes, but because it did not comply with the limitation period.
EMS appealed on a point of law against that judgment before the Varhoven administrativen sad (Supreme Administrative Court).
That court takes the view that there was an intra-Community acquisition and that the tax became chargeable on 14 November 2008 when the invoices were issued. The fact that, at that time, EMS was not registered in accordance with the ZDDS does not mean that no intra-Community acquisition took place.
The Varhoven administrativen sad states that the fact that persons have to be registered in accordance with the ZDDS to exercise the right to deduct VAT is based on, inter alia, Article 72(1) of that law.
Furthermore, it is apparent from the order for reference that, the intention of the Bulgarian legislature in passing the new Article 73a of the ZDDS, which came into effect on 1 January 2009, was to avoid excessively restricting the exercise of the right to deduct in cases involving the reverse charge procedure by allowing that right to be exercised even if the time-limit provided for in Article 72 of that law had not been complied with, so long as the tax authorities had the necessary information and the person concerned, as the recipient of the supply, was the person who had to pay the VAT. In the present case, the tax authorities undoubtedly have that information which is, moreover, documented in the EMS’ accounts.
The referring court states, lastly, that the new period during which taxable persons may exercise their right to deduct resulting from the amendment to Article 72(1) of the ZDDS which entered into force on 1 January 2010 — namely 12 instead of 3 tax periods after the period in which the right to deduct arose — means that the previous limitation period was too short and made the exercise of the right to deduct difficult.
According to the referring court, that period was shortened in the present case since EMS had to register for VAT purposes before exercising its right to deduct although the limitation period had already begun to run. Consequently, according to that court, EMS had only one month in which to exercise its right to deduct.

Questions

1. Are the first paragraph of Article 179, Article 180 and Article 273 of [the VAT] Directive and the principle of effectiveness in the field of indirect taxation, which is discussed in the judgment of 8 May 2008 in Joined Cases C‑95/07 and C‑96/07 Ecotrade [2008] ECR I‑3457, to be interpreted as permitting a limitation period such as that in the present case under Article 72(1) of [the ZDDS] (2008 version), which period was extended — under Section 18 of the transitional and concluding provisions of the Law amending and supplementing [the ZDDS] — until the end of April 2009 solely for recipients of supplies who became taxable before 1 January 2009, taking into account the circumstances of the case, that is to say:

– inasmuch as registration is a precondition for exercising the right to deduct input VAT, a person who has made an intra-Community acquisition of goods and who is not registered in accordance with [the ZDDS] must register voluntarily, even though that person does not meet the conditions for compulsory registration;

– the new legislative provision in Article 73a of [the ZDDS] (in force since 1 January 2009) whereby the right to deduct value added tax is to be granted irrespective of whether the time-limit under Article 72(1) of [the ZDDS] was complied with, if the tax is chargeable to the recipient of the supply, provided the supply was not concealed and is documented in the accounts;

– the subsequent amendment of Article 72(1) of [the ZDDS] (in force since 1 January 2010), whereby the right to deduct input VAT may be exercised during the tax period in which that right arose or in one of the subsequent twelve tax periods?

2. Is the principle of tax neutrality as a fundamental principle, which is of importance for the establishment and functioning of the common system of VAT, to be interpreted as meaning that a tax assessment practice such as that at issue in the main proceedings, which acknowledges the late accounting for of value added tax, levies interest as a penalty and imposes an additional penalty of denial of the right to deduct input VAT, is permissible in the actual circumstances of the applicant’s case, taking into account the fact that the transaction was not concealed, it was documented in the accounts, the tax authorities had the necessary information, no abuse occurred and the budget was not adversely affected?

AG Opinion

None

Decision

1. The first paragraph of Article 179, Article 180 and Article 273 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that they do not preclude a limitation period for the exercise of the right to deduct, such as that at issue in the main proceedings, to the extent that it does not render the exercise of that right excessively difficult or impossible in practice. It is for the national court to carry out such an assessment and it may take into account, inter alia, a subsequent considerable extension of the limitation period and the duration of a value added tax registration procedure which had to be completed within that same period for it to be possible to exercise that right to deduct.

2. The principle of fiscal neutrality precludes a penalty consisting in a refusal of the right to deduct if VAT is accounted for belatedly, but does not preclude the payment of default interest, provided that that penalty complies with the principle of proportionality, which it is for the national court to determine.

Summary

Time-limit for exercising the right to deduct VAT – Principle of effectiveness – Refusal of the right to deduct VAT – Principle of fiscal neutrality

A limitation period for the exercise of the right to deduct is permitted, insofar as this period does not make the exercise of this right extremely difficult or virtually impossible. It is for the national court to determine whether that is the case, taking into account, inter alia, the fact that the limitation period has subsequently been considerably extended and the length of a registration procedure for the purposes of VAT, which the same period must be completed in order for the taxable person to be able to exercise his right to deduct.

The principle of fiscal neutrality precludes a penalty consisting in refusing the right to deduct in the event of late payment of VAT, but does not preclude payment of default interest, provided that such penalty is in accordance with the proportionality principle. It is for the referring court to verify this.

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