ECJ VAT C-624/23 (SEM Remont) – Questions – Right to deduct input VAT based on a protocol

The questions have been released in the case ECJ VAT case C-624/23 (SEM Remont).

Summary

The case involves an agreement between SEM Remont and Gidrostroy-Rusia for dredging and excavation work.
Gidrostroy-Rusia, the service provider, did not include VAT on invoices to SEM Remont.
After a tax audit, it was discovered that Gidrostroy-Rusia had a pre-existing VAT debt, and invoices without VAT were issued to SEM Remont.
Gidrostroy-Rusia created a protocol, listing the invoices and declaring itself both the service provider and customer.
VAT was calculated based on these invoices.
The Bulgarian tax authorities found that an authorized representative of Gidrostroy-Rusia used funds from a loan received from SEM Remont to pay VAT.
SEM Remont claimed the right to deduct input VAT based on the protocol, but the tax authorities disagreed.
The case questions the VAT Directive’s authorization of a national provision and tax authority practice that denies input VAT deduction for the recipient of services.
The court seeks clarification on various legal provisions and practices related to input VAT deduction.

Articles in the Directive

Article 63, 167, 168(a), 176, 178(a), 203, 218, 219, 220, 226 and 228.

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;

Facts

SEM Remont has entered into an agreement with Gidrostroy-Rusia for the execution of dredging and excavation work. Gidrostroy-Rusia is the service provider and SEM Remont is the customer. Gidrostroy-Rusia is a company registered in Russia and not affiliated with SEM Remont. Gidrostroy-Rusia did not include VAT on the invoices to SEM Remont. Through a tax audit, it was determined that Gidrostroy-Rusia already had a VAT debt before the work was carried out and the invoices without VAT were issued to SEM Remont. In the context of that inspection, Gidrostroy-Rusia drew up a protocol in which it declared that it was both a service provider and a customer and in which the invoices issued to SEM Remont were listed. The VAT has been calculated based on the taxable amount of these invoices. The Bulgarian tax authorities subsequently established that an authorized representative of Gidrostroy-Rusia paid the VAT for this service to the tax authorities using funds from a loan received from SEM Remont. The basis for the exercise of the right to deduct input tax by SEM Remont is the aforementioned protocol and not a corrective invoice issued by Gidrostroy-Rusia. The Bulgarian tax authorities levied additional tax on SEM Remont for the amount of this agreement due to irregularities in the VAT return and denied it the right to deduct input VAT.

Consideration:

The proceedings before the referring court question whether the VAT Directive authorizes a national legal provision and a practice of the Bulgarian tax authorities, according to which the recipient of services is denied the right to deduct input VAT in the circumstances in question. SEM Remont states that, on the basis of the mention of the protocol in the tax return, it is entitled to a deduction of input VAT now that the taxable services have actually been provided and the VAT due has been declared by Gidrostroy-Rusia in the tax return and paid to the tax authorities in accordance with the regulations . According to the Bulgarian tax authorities, the protocol does not provide adequate proof of the existence of the right to deduct input tax. According to the referring court, this case differs from previous cases dealt with by the Court (in the judgments mentioned below) and the Court should therefore be asked to explain it.

Questions

1. Pursuant to Article 63, Article 167, Article 168(a), Article 178(a), Article 218, Article 219, Article 220, Article 226 and Article 228 of Directive 2006/112/EC on the common system of value added tax (hereinafter: ‘VAT Directive’) a practice of the tax authorities regarding the application of national provisions, in particular Article 71(1) of the Zakon za danak varhu dobavenata stoynost (Tax Act on added value; hereinafter: ‘ZDDS’, read in conjunction with Article 25(1) ZDDS, read in conjunction with Article 102(4), Article 114, Article 116 and Article 117 ZDDS, read in conjunction with Article 125 ZDDS and Article 126 ZDDS, permissible, according to which the purchaser of a service subject to VAT is denied the right to deduct input VAT, both for the period in which the service was provided and for the period in which it was declared in the tax return, on the grounds that no VAT was stated on the invoice issued by the service provider and that a document was drawn up at a later date (in the context of the tax audit at the service provider) that does not meet the requirements for the content of an invoice (there is a protocol in which the originator is regarded as a service provider and as a customer) and in which the invoice issued to the customer is stated and the VAT paid has been calculated on the taxable amount stated therein, and only then does the customer have the right to deduct input VAT (‘right on the use of a tax credit” according to the ZDDS) on the basis of the protocol, and does this make the exercise of the right to deduct input tax for the taxpayer in practice impossible or extremely difficult?

2. If the first question is answered in the negative: at what time must the right to deduct input VAT be exercised – at the time of issuance of the invoice without the VAT indicated on it or at the time of issuance of the protocol by the service provider ?

3. In the light of Article 203, read in conjunction with Article 178(a) and Article 176 of the VAT Directive and the principle of fiscal neutrality, are a scheme such as that of Article 102(4) ZDDS and a practice of the national tax authorities, according to which the supplier of a service subject to VAT who has not submitted an application for registration under the ZDDS within the statutory period from the date on which he became obliged to register under the ZDDS, must only pay VAT on the services he owes in the period from the date on which the registration obligation arose until the registration with the tax authorities and no possibility is offered that the service provider for whom the VAT obligation is in accordance with Article 102(4) ZDDS established, issues corrective invoices (or another document) to the recipients of the services, so that they can exercise the right to deduct input VAT?

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