Flashback on ECJ Cases – C-188/09 (Profaktor Kulesza, Frankowski, Jóźwiak, Orłowski) – Restriction of right to deduct in case of violation of obligation to use cash register

On July 29, 2010, the ECJ issued its decison in the case C-188/09 (Profaktor Kulesza, Frankowski, Jóźwiak, Orłowski).

Context: Reference for a preliminary ruling – VAT – Right to deduct – Reduction of the extent of the right to deduct in the event of breach of the obligation to use a cash register

Article in the EU VAT Directive

Articles 2, 10(1) and (2) and 17(1) and (2), 27 (1) of the Sixth VAT Directive (Articles 2, 62, 63, 64, 65, 66, 167, 168, 394, 395 of the EU VAT Directive 2006/112/EC).

Article 10(1)(a) of that directive defines the ‘chargeable event’ which gives rise to the tax as ‘the occurrence by virtue of which the legal conditions necessary for tax to become chargeable are fulfilled’. Article 10(2) provides:

‘The chargeable event shall occur and the tax shall become chargeable when the goods are delivered or the services are performed. Deliveries of goods other than those referred to in Article 5(4)(b) and supplies of services which give rise to successive statements of account or payments shall be regarded as being completed at the time when the periods to which such statements of account or payments pertain expire. …’

Article 17

‘1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) [VAT] due or paid in respect of goods or services supplied or to be supplied to him by another taxable person;

(b) [VAT] due or paid in respect of imported goods;

Article 27(1)

‘The Council, acting unanimously on a proposal from the Commission, may authorise any Member State to introduce special measures for derogation from the provisions of this Directive, in order to simplify the procedure for charging the tax or to prevent certain types of tax evasion or avoidance. Measures intended to simplify the procedure for charging the tax, except to a negligible extent, may not affect the overall amount of the tax revenue of the Member State collected at the stage of final consumption.’

Facts

By a decision of 17 October 2006, the Dyrektor Urzędu Kontroli Skarbowej w Białymstoku (Director of the Tax Inspection Authority, Białystok) fixed the VAT owed by Profaktor in respect of certain months of 2004 and 2005 at a different amount than that which, according to that partnership, ought to have resulted from the tax returns which it had lodged. Pursuant to Article 111 of the 2004 Law on VAT, the Dyrektor reduced by 30% the input tax paid on the acquisition of goods and services which had been set against the amount of tax due, on the ground that Profaktor had not complied with the obligation to record its turnover and the amount of tax due by means of cash registers.
Following an appeal by Profaktor, the contested decision was confirmed on 7 February 2007 by the Dyrektor Izby Skarbowej w Białymstoku.
Profaktor applied to the Wojewódzki Sąd Administracyjny w Białymstoku (Regional Administrative Court, Białystok) to have the decision of 7 February 2007 set aside. That court upheld that application in part after forming the view that, for the period following the Republic of Poland’s accession to the European Union, the disputed provisions of Article 111 of the 2004 Law on VAT were incompatible with European Union law, specifically with Articles 17 and 27 of the Sixth VAT Directive. It held that the restriction of the right to deduct input VAT, contained in the provisions of Article 111 of the 2004 Law on VAT, amounted to a derogation from that right provided for in Article 17 of the Sixth VAT Directive, and thus was in fact in the nature of a special measure which had not been implemented by the Republic of Poland in accordance with the conditions set out in Article 27 of that directive.
The Dyrektor Izby Skarbowej w Białymstoku appealed in cassation against that ruling, contending that the provisions at issue were in the nature of a sanction only, which therefore did not constitute a derogation from the Sixth VAT Directive and the objective of which was not to restrict the right to deduct but to prevent tax evasion.
The Naczelny Sąd Administracyjny (Supreme Administrative Court), before which that appeal was brought, took the view, inter alia, that that sanction constituted, for a taxable person who has failed to comply with the recording obligation, an infringement of the principle of the neutrality of VAT inasmuch as it shifted to that person the burden of a portion of the input VAT. It held that doubt remained as to whether the provisions at issue complied with the principle of proportionality, as to whether they constituted an administrative sanction or a special measure within the meaning of Article 27 of the Sixth VAT Directive, and as to whether the measure could itself be regarded as a tax or as a charge equivalent to a turnover tax.

Questions

1. Do the first and second paragraphs of Article 2 of [the] First [VAT] Directive …, in conjunction with Articles 2, 10(1) and (2) and 17(1) and (2) of [the] Sixth [VAT] Directive …, rule out the possibility of introducing temporary forfeiture of the right to reduce the amount of tax due by an amount equivalent to 30% of the input tax on the acquisition of goods and services in relation to taxable persons who effect sales to natural persons not engaged in economic activity, … and who fail to fulfil the obligation to keep records of turnover and amounts of tax due by using cash registers, pursuant to Article 111(2) of the [2004 Law on VAT], in conjunction with Article 111(1) thereof?

2. Can “special measures” within the terms of Article 27(1) of [the] Sixth [VAT] Directive … consist, regard being had to their character and purpose, in a temporary restriction of the scope of a taxable person’s right to reduce tax referred to in Article 111(2) of the [2004 Law on VAT], in conjunction with Article 111(1) thereof, in relation to taxable persons who fail to fulfil the obligation to keep records of turnover and amounts of tax by using cash registers, with the result that the introduction thereof requires compliance with the procedure set out in Article 27(2) to (4) of the … Sixth [VAT] Directive?

3. Does the right of a Member State referred to in Article 33(1) of [the] Sixth [VAT] Directive … encompass the right to impose a sanction on taxable persons who fail to fulfil the obligation to keep records of turnover and amounts of tax by using cash registers in the form of temporary forfeiture of the right to reduce the amount of tax due by an amount equivalent to 30% of the input tax on the acquisition of goods and services referred to in Article 111(2) of the [2004 Law on VAT], in conjunction with Article 111(1) thereof?

AG Opinion

None

Decision

1. The common system of value added tax, as defined in Article 2(1) and (2) of First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes and in Articles 2, 10(1) and (2) and 17(1) and (2) 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 2004/7/EC of 20 January 2004, does not preclude a Member State from imposing a temporary restriction on the extent of the right of taxable persons who have not complied with a formal requirement to keep accounting records of their sales to deduct input tax paid, on condition that the sanction thus provided for complies with the principle of proportionality.

2. Provisions such as those of Article 111(1) and (2) of the Law on the Tax on Goods and Services (ustawa o podatku od towarów i usług) of 11 March 2004 are not ‘special measures for derogation’ intended to prevent certain types of tax evasion or avoidance within the meaning of Article 27(1) of Sixth Directive 77/388, as amended by Directive 2004/7.

3. Article 33 of Sixth Directive 77/388, as amended by Directive 2004/7, does not preclude the maintenance of provisions such as those of Article 111(1) and (2) of the Law on the Tax on Goods and Services of 11 March 2004.

Summary

Restriction of right to deduct in case of violation of obligation to use cash register

A Member State may temporarily limit the amount of the right to deduct input tax paid for taxable persons who have failed to comply with a formality for the entry of their sales in the accounts, provided that the penalty thus prescribed complies with the principle of proportionality.

The Polish legal provisions do not constitute ‘special derogating measures’ to prevent certain forms of tax evasion or avoidance within the meaning of Article 27(1) of the Sixth Directive .

Article 33 of the Sixth Directive does not preclude enforcement of the Polish provisions.

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