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European Union

Briefing document & Podcast C-521/19 (CB) – Undeclared transactions must include VAT, preserving neutrality despite tax fraud circumstances

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Executive Summary

The case of CB v. Tribunal Económico-Administrativo Regional de Galicia (C-521/19), judged by the Court of Justice of the European Union (CJEU) on 1 July 2021, provides critical clarification on the interpretation of EU VAT law, particularly concerning tax fraud, the determination of the taxable amount, and the fundamental principle of VAT neutrality. The case centered on a self-employed agent (CB) who, in collaboration with the Lito group, engaged in undeclared, uninvoiced, cash transactions for services.

The key takeaway from the CJEU’s ruling is that when tax authorities reconstitute undeclared and uninvoiced transactions due to fraud, the amounts paid and received must be regarded as already including VAT. This is crucial for upholding the principle of VAT neutrality, which dictates that the ultimate tax burden should fall on the end consumer, not on taxable persons in the supply chain. The Court stressed that while Member States must combat fraud with effective penalties, they cannot alter the fundamental definition of the taxable amount (Articles 73 and 78 of Directive 2006/112/EC) as a means of punishment.

II. Case Overview and Background

  • Case Title: CB v. Tribunal Económico-Administrativo Regional de Galicia
  • Court: Court of Justice of the European Union (Third Chamber)
  • Date of Judgment: 1 July 2021
  • Case Reference: C‑521/19
  • Subject Matter: Interpretation of Council Directive 2006/112/EC (VAT Directive), specifically Articles 73 and 78, in the context of tax fraud.
  • Parties: CB (self-employed agent for performing artists) vs. Spanish tax authorities.

The Dispute: CB provided services as an agent for performing artists to the Lito group. Both CB and the Lito group engaged in a scheme involving cash payments for services, without issuing invoices or declaring these transactions to the tax authorities for corporate tax or VAT purposes. Following an inspection, the Spanish tax authority determined that the substantial amounts CB received (e.g., EUR 64,414.90 in 2010) did not include VAT and, consequently, assessed income tax and penalties based on these full amounts.

CB argued that, consistent with existing case-law, these undeclared and uninvoiced transactions, though subject to VAT, should be considered as already having VAT included in the agreed price. He contended that his inability to reclaim unpassed VAT due to his fraudulent conduct meant the VAT should be deemed inherent in the price. The Spanish referring court sought clarity from the CJEU on whether EU law precludes national legislation that interprets such concealed transactions as already including VAT.

III. Legal Context

A. EU Law: Directive 2006/112/EC (VAT Directive)

  • VAT Neutrality (Recital 7 & Article 1): The “common system of VAT should… result in neutrality in competition, such that within the territory of each Member State similar goods and services bear the same tax burden, whatever the length of the production and distribution chain.” VAT is a “general tax on consumption exactly proportional to the price… chargeable after deduction of the amount of VAT borne directly by the various cost components.” The ultimate aim is for VAT to be borne “solely by the end consumer.”
    • Taxable Amount (Articles 73 & 78):Article 73: Defines the taxable amount as “everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.”
    • Article 78: Clarifies that the taxable amount includes “taxes, duties, levies and charges, excluding the VAT itself; [and] incidental expenses, such as commission, packing, transport and insurance costs.”
  • Right of Deduction (Article 178): A fundamental principle of VAT, allowing taxable persons to deduct input VAT from output VAT. However, this right is conditional: “a taxable person must hold an invoice drawn up in accordance with Articles 220 to 236 and Articles 238, 239 and 240.”
  • Invoicing Obligations (Articles 220 & 226): Mandates taxable persons to issue invoices for supplies to other taxable persons, detailing “the taxable amount per rate or exemption, the unit price exclusive of VAT… the VAT rate applied; [and] the VAT amount payable.”
  • Prevention of Evasion (Article 273): Member States “may impose other obligations which they deem necessary to ensure the correct collection of VAT and to prevent evasion,” provided they ensure equal treatment and avoid frontier formalities. This article, however, “may not be relied upon in order to impose additional invoicing obligations over and above those laid down in Chapter 3.”

B. Spanish Law: Law 37/1992 on Value Added Tax

  • Article 78(1): Aligns with the EU Directive, defining the taxable amount as “the total amount of the consideration for taxable transactions received from the customer or third parties.”
  • Article 88 (Passing on Tax): Requires taxable persons to “pass on in full the amount of the tax to the person for whom the taxable transaction is carried out… shown separately from the taxable amount, including in the case of prices which are set officially.”
  • Article 89 (Correction of Amounts Passed On): Contains a critical provision: “the amounts of tax passed on shall not be corrected… Where the tax authorities demonstrate… amounts of tax due and not passed on… and it is established, by means of objective information, that that taxable person was involved in a fraud or that he knew or should have known… that he was carrying out a transaction which was part of a fraud.” This effectively precluded CB from correcting or deducting the VAT.

IV. CJEU’s Reasoning and Ruling

The CJEU’s judgment meticulously navigated the tension between combating tax fraud and upholding the core principles of the common VAT system.

  1. Combating Fraud vs. Defining Taxable Amount: The Court clarified that while “the prevention of tax evasion, avoidance and abuse is an objective recognised and encouraged by Directive 2006/112,” the determination of the taxable amount under Articles 73 and 78 “is not among the tools available to the Member States… for achieving that objective, in the sense that they could adopt, in case of fraud, an interpretation of those provisions different from that which should be adopted in the absence of fraudulent behaviour by taxable persons.” Fraudulent behavior should be addressed through “penalties,” not by altering the fundamental definition of the taxable base.
  2. Impossibility of Deduction Due to Fraud: The Court acknowledged that due to CB’s fraudulent conduct (failure to invoice and declare), Spanish law (Article 89(3)(2) of Law 37/1992) prevented him from deducting VAT. This outcome is consistent with Article 178 of the Directive, which requires a valid invoice for the exercise of the right to deduct.
  3. VAT System Aim and Reconstitution: The fundamental principle of the VAT system is that it “is aimed at taxing only the end consumer.” When tax authorities “reconstitute concealed transactions and lost revenue” due to fraud and lack of invoices, these methods “cannot claim perfect reliability and that they involve an inevitable margin of uncertainty.”
  4. Inclusion of VAT in Reconstituted Amounts: To uphold VAT neutrality, the Court ruled that “the result of a transaction concealed from the tax authority by taxable persons for VAT purposes… must be deemed… to include the VAT charged on that transaction.” Treating the reconstituted amount as VAT-exclusive would “run counter to the principle of VAT neutrality and would place part of the VAT burden on a taxable person, when VAT must be borne solely by the end consumer.”
  5. Distinction from Previous Case Law: The Court confirmed its ruling does not contradict judgments like Astone or Maya Marinova, as those cases did not specifically address whether VAT should be included in reconstituted income by tax authorities in cases of concealed, uninvoiced, fraudulent transactions.
  6. Penalties for Fraud Remain: Importantly, the ruling does not preclude Member States from imposing “effective and deterrent measures” to counter tax fraud, pursuant to Article 273 of Directive 2006/112 and Article 325 TFEU. “It is in the context of such penalties, and not by the determination of the taxable amount… that fraud such as that at issue in the main proceedings must be punished.”

V. Key Themes and Most Important Ideas/Facts

  • Principle of VAT Neutrality: This is the cornerstone of the judgment. The CJEU consistently emphasizes that VAT is a consumption tax meant to be borne by the end consumer. Taxable persons in the supply chain should be relieved of the VAT burden on their inputs.
    • “The common system of VAT should… result in neutrality in competition, such that within the territory of each Member State similar goods and services bear the same tax burden…”
    • “the VAT system is aimed at taxing only the end consumer”
    • “Any other interpretation would run counter to the principle of VAT neutrality and would place part of the VAT burden on a taxable person, when VAT must be borne solely by the end consumer”
  • Taxable Amount Definition (Articles 73 & 78): The definition of the taxable amount is objective and fundamental to the VAT system. It is the consideration received, excluding VAT itself. This definition cannot be distorted as a punitive measure for fraud.
  • Fraud and Consequences (No Right to Deduct): While Member States cannot alter the taxable amount definition for fraud, fraudulent behavior (e.g., failure to issue invoices) can legitimately lead to other severe consequences, such as the loss of the right to deduct input VAT.
    • “the EU legislature… has itself ensured that taxable persons who have not observed the basic rules of Directive 2006/112, in particular in relation to invoicing, bear the consequences of their behaviour by making it impossible to deduct VAT…”
  • Spanish law (Article 89(3)(2) of Law 37/1992) specifically reflects this by precluding VAT correction and deduction in cases of established fraud.
  • Reconstitution of Income (Inclusion of VAT): When tax authorities have to reconstruct income from undeclared, uninvoiced transactions, the inherent “inevitable margin of uncertainty” in such methods necessitates that the reconstituted amount be presumed to include VAT. This is essential to prevent the burden falling on the taxable person and preserve neutrality.
    • “the amounts paid and received must be regarded as a price already including VAT, unless, under national law, the taxable persons have the possibility of subsequently passing on and deducting the VAT at issue, notwithstanding the fraud.”
  • Separation of Punishments and Tax Base Determination: The Court clearly distinguishes between punishing tax fraud and defining the VAT taxable amount. Penalties are the appropriate tool for deterrence and enforcement against illegal activities, not the reinterpretation of core VAT principles.
    • “the determination of the taxable amount… is not among the tools available to the Member States… for achieving that objective [combating fraud]…”
    • “It is in the context of such penalties, and not by the determination of the taxable amount… that fraud such as that at issue in the main proceedings must be punished.”

VI. Conclusion

The CJEU’s ruling in CB v. Tribunal Económico-Administrativo Regional de Galicia reinforces the enduring importance of the principle of VAT neutrality in the EU common system. It establishes that, even in cases of severe tax fraud involving undeclared and uninvoiced transactions, the amounts subsequently reconstituted by tax authorities must be deemed to include VAT, unless national law provides a mechanism for the taxable person to retroactively pass on and deduct the tax. This approach ensures that the ultimate burden of VAT remains with the end consumer, while still allowing Member States to impose robust and effective penalties for fraudulent conduct outside of the core determination of the taxable amount.

See also

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