Flashback on ECJ cases C-78/00 (Commission v Italy) – Refunds of VAT cannot be made by issuing State loans

On October 25, 2001, the ECJ issued its decision in the case C-78/00 (Commission v Italy).

Context: Failure by a Member State to fulfil its obligations – Articles 17 and 18 of the Sixth VAT Directive – Issue of Government bonds to refund excess VAT – Category of taxable persons whose tax position is in credit.

Article in the EU VAT Directive

Articles 17 and 18 of the Sixth VAT Directive (Articles 167, 168 and 178 of the EC VAT Directive 2006/112/EC).

Article 167
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;
(b) the VAT due in respect of transactions treated as supplies of goods or services pursuant to Article 18(a) and Article 27;
(c) the VAT due in respect of intra-Community acquisitions of goods pursuant to Article 2(1)(b)(i);
(d) the VAT due on transactions treated as intra-Community acquisitions in accordance with Articles 21 and 22;
(e) the VAT due or paid in respect of the importation of goods into that Member State.

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;
(b) for the purposes of deductions pursuant to Article 168(b), in respect of transactions treated as the supply of goods or services, he must comply with the formalities as laid down by each Member State;
(c) for the purposes of deductions pursuant to Article 168(c), in respect of the intra-Community acquisition of goods, he must set out in the VAT return provided for in Article 250 all the information needed for the amount of VAT due on his intra-Community acquisitions of goods to be calculated and he must hold an invoice drawn up in accordance with Sections 3 to 5 of Chapter 3 of Title XI;
(d) for the purposes of deductions pursuant to Article 168(d), in respect of transactions treated as intra-Community acquisitions of goods, he must complete the formalities as laid down by each Member State;
(e) for the purposes of deductions pursuant to Article 168(e), in respect of the importation of goods, he must hold an import document specifying him as consignee or importer, and stating the amount of VAT due or enabling that amount to be calculated;
(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.

Facts & Questions

The Commission considers that, in issuing 5-year and 10-year Government bonds to taxable persons, the Italian Republic has infringed, inter alia, the provisions of Article 18(4) of the Sixth Directive on the treatment of excess VAT. The Commission claims that that provision allows the excess arising from the difference between the amount of authorised deductions and the amount of tax due to be carried forward to the following tax period only. To carry the excess forward to periods other than that immediately following the period concerned breaches the principle laid down by that provision, deprives the taxable persons concerned of the normal exercise of the right to deduct, and seriously undermines one of the fundamental principles of the common system of VAT, namely the immediate exercise of the right to deduct.
In the Commission’s view the obligation on national tax authorities to make an ‘immediate’ refund of the excess VAT to the taxable person is linked to the taxable person’s ‘immediate’ right to deduct. The Commission relies in this respect on Joined Cases C-286/94, C-340/95, C-401/95 and C-47/96 Molenheide and Others [1997] ECR I-7281, paragraph 45.
The Commission considers that the ‘conditions’ each Member State may lay down for making a refund, pursuant to Article 18(4) of the Sixth Directive, concern the forms the refund may take, subject to the obligation to make liquid funds available to persons whose VAT account is in credit by the amount of the excess. Thus, that refund can be made by means of a credit transfer to the current account of the taxable person, by sending that person a cheque, or other equivalent method.
By contrast, the Commission claims, a Member State clearly exceeds the discretionary power it enjoys in setting the conditions for the refund of excess VAT where, instead of making a payment of liquid funds to the taxable person, it imposes on that person a bond maturing in 5, or even 10 years’ time.
If the taxable person needed the money the State owed him in respect of VAT for his own working capital he would be obliged either to borrow a sum corresponding to the excess VAT from a bank, and therefore to pay high lending rates, certainly higher than the deposit rates that the Government bonds he had been given would yield, or to place those same bonds on the financial market at the risk of having to resell at a price lower than their face value, and of having to deduct the costs and broker’s commission from the proceeds of sale.

AG Opinion

– declare that, by providing that in the case of a category of taxable person whose tax position for 1992 is in credit, such persons be issued with Government bonds instead of receiving VAT refunds, the Italian Republic has failed to fulfil its obligations under Articles 17 and 18 of the 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;

– order the Italian Republic to pay the costs of the proceedings.

Decision

1. Declares that by providing that the category of taxable persons whose tax position for 1992 is in credit be belatedly issued with Government bonds instead of refunds of the excess value added tax the Italian Republic has failed to fulfil its obligations under Articles 17 and 18 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 95/7/EC of 10 April 1995 amending Directive 77/388/EEC and introducing new simplification measures with regard to value added tax – scope of certain exemptions and practical arrangements for implementing them;

2. Orders the Italian Republic to pay the costs.

Summary

By stipulating that, for a category of taxable persons who had a tax credit in the course of 1992, the refund of the surplus of VAT would be made by issuing State loans, which were moreover too late, the Italian Republic failed to fulfill its obligations complied with pursuant to Articles 17 and 18 of the Sixth Directive.

Source