Judgment of the Court (Seventh Chamber) in Case C‑8/17, Biosafe — Indústria de Reciclagens SA v Flexipiso — Pavimentos SA on April 12, 2018
Subject: Interpretation of the VAT Directive (2006/112/EC) regarding the right to deduct VAT when initial invoices are rectified following a tax adjustment, particularly concerning the starting point of the deduction period.
Executive Summary:
This European Union Court of Justice (CJEU) ruling clarifies the application of the right to deduct Value Added Tax (VAT) in situations where a seller has incorrectly applied a lower VAT rate and is subsequently required by tax authorities to pay additional VAT. The seller then seeks to recover this additional amount from the purchaser by issuing rectifying documents (debit notes). The core issue is whether a national law can preclude the purchaser’s right to deduct this additional VAT if the statutory period for deduction, calculated from the date of the initial incorrect invoice, has expired before the rectifying documents are issued or received.
The Court found that EU law, specifically the VAT Directive and the principle of fiscal neutrality, precludes national legislation that denies the right to deduct VAT in such circumstances based on the expiry of a limitation period that started from the date of the initial, incorrect invoices. This is because, until the rectifying documents are issued, the purchaser objectively cannot exercise their right to deduct the additional VAT. The principle of fiscal neutrality, which aims to relieve taxable persons entirely of the burden of VAT on their economic activities, would be undermined if a right to deduct could be denied due to circumstances beyond the taxpayer’s control and prior knowledge.
Key Facts and Background:
- Parties: Biosafe (seller of rubber granules) and Flexipiso (purchaser, a taxable person for VAT purposes).
- Initial Transaction: Biosafe sold rubber granules to Flexipiso between 2008 and 2010, applying a reduced VAT rate (5%).
- Tax Adjustment: A 2011 tax inspection determined that the standard VAT rate (21%) should have been applied, resulting in a revised VAT assessment for Biosafe amounting to EUR 100,906.50.
- Biosafe’s Action: Biosafe paid the additional VAT and attempted to recover it from Flexipiso by sending debit notes (rectifying documents) in October 2012.
- Flexipiso’s Refusal: Flexipiso refused to pay the additional VAT, arguing that the four-year period under Portuguese law (Article 98(2) of the CIVA) for exercising the right to deduct VAT had expired for transactions occurring before 24 October 2008, before they received the debit notes. They also argued that they should not bear the consequences of Biosafe’s error.
- Portuguese Courts’ Decisions: The lower Portuguese courts rejected Biosafe’s claim, agreeing with Flexipiso that the purchaser could only be required to pay the tax if invoices were issued in time for deduction, and that the error was attributable to Biosafe.
- Reference to CJEU: The Supremo Tribunal de Justiça (Supreme Court, Portugal) referred the case to the CJEU for a preliminary ruling to clarify whether EU VAT law and the principle of fiscal neutrality preclude national legislation that sets the deduction period from the date of the initial invoices in such a scenario.
Main Themes and Important Ideas:
- Right to Deduct VAT as a Fundamental Principle:
- The judgment reiterates that the right of taxable persons to deduct input VAT is a fundamental principle of the common system of VAT in the EU. It is intended to ensure neutrality of taxation for economic activities.
- “the right of taxable persons to deduct the VAT due or already paid on goods purchased and services received as inputs from the VAT which they are liable to pay is a fundamental principle of the common system of VAT established by EU legislation” (Paragraph 27).
- “The common system of VAT therefore ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are in principle themselves subject to VAT” (Paragraph 28).
- Origin and Exercise of the Right to Deduct:
- The right to deduct arises when the tax becomes chargeable (Article 167 of the VAT Directive).
- To exercise the right, a taxable person must generally hold an invoice (Article 178(a) of the VAT Directive).
- Rectifying documents that amend and refer specifically to the initial invoice are treated as invoices (Article 219 of the VAT Directive).
- Limitations on the Right to Deduct:
- While generally immediate and not subject to limitations, the possibility of exercising the right to deduct without any temporal limit is contrary to the principle of legal certainty (Paragraph 36).
- National limitation periods for exercising the right to deduct are permissible provided they comply with the principles of equivalence and effectiveness (Paragraph 37).
- Member States can impose obligations for correct VAT collection and prevention of evasion/avoidance (Article 273 of the VAT Directive), but these measures “must not go further than is necessary to attain such objectives” and “may not be used in such a way that they would have the effect of systematically undermining the right to deduct VAT and, consequently, the neutrality of VAT” (Paragraph 38).
- Objective Impossibility of Exercising the Right: The core of the Court’s reasoning in this case lies in the fact that Flexipiso was objectively unable to exercise its right to deduct the additional VAT until it received the rectifying documents.
- “In those circumstances it seems that it was objectively impossible for Flexipiso to exercise its right to deduct before the VAT adjustment carried out by Biosafe, since beforehand it did not possess the documents rectifying the initial invoices and did not know that additional VAT was due” (Paragraph 42).
- The substantive and formal conditions for the right to deduct the additional VAT were only met after the tax adjustment and issuance of the debit notes (Paragraph 43).
- Principle of Fiscal Neutrality: Denying the right to deduct in this scenario, where the taxpayer is not at fault or engaged in fraud, would violate the principle of fiscal neutrality by leaving the burden of VAT on the purchaser.
- “…since Flexipiso did not show any lack of diligence before the receipt of the debit notes, and failing any abuse or fraudulent collusion with Biosafe, a period which started to run from the date of issue of the initial invoices and which, for certain transactions, expired before this adjustment, could not validly be used to deny Flexipiso the exercise of the right to deduct VAT…” (Paragraph 43).
- Role of National Courts: The assessment of facts, including whether there was fraud or abuse, falls within the jurisdiction of national courts (Paragraph 41). In this specific case, the referring court stated that the error was attributable to Biosafe, implying no fault on the part of Flexipiso.
Most Important Ideas/Facts:
- The right to deduct VAT is a fundamental principle and a cornerstone of the EU VAT system’s neutrality.
- A limitation period for exercising the right to deduct is generally permissible for legal certainty, but its application must not render the right excessively difficult or impossible to exercise (effectiveness).
- In situations where additional VAT becomes due following a tax adjustment on transactions for which incorrect invoices were issued, the purchaser’s right to deduct this additional VAT arises when they are properly informed and possess the necessary rectifying documents (debit notes in this case).
- A national law that calculates the limitation period for deducting this additional VAT from the date of the original, incorrect invoices, thereby denying the right to deduct before the purchaser was even aware of or could act upon the additional VAT liability, is incompatible with the VAT Directive and the principle of fiscal neutrality.
- The CJEU explicitly states that Articles 63, 167, 168, 178 to 180, 182 and 219 of the VAT Directive and the principle of fiscal neutrality preclude such national legislation.
Outcome:
The CJEU ruled in favor of the purchaser (Flexipiso), finding that national legislation which denies the right to deduct additional VAT based on the expiry of a period starting from the date of the initial incorrect invoices is contrary to EU law. The second question regarding the purchaser’s right to refuse payment was deemed unnecessary to answer given the affirmative answer to the first question.
Significance:
This ruling reinforces the principle of fiscal neutrality and the right to deduct VAT, particularly protecting taxable persons from being penalized by limitation periods in situations where they could not reasonably have exercised their deduction right due to the supplier’s error and subsequent tax adjustments. It clarifies that the ability to deduct VAT, in such cases, is linked to the point in time when the taxable person can actually act on that right, which is when the rectifying documents are issued and received.
See also
- Join the Linkedin Group on ECJ/CJEU/General Court VAT Cases, click HERE
- VATupdate.com – Your FREE source of information on ECJ VAT Cases
