Reverse charge and VAT invoice. The right to deduct according to the CJEU
The Court of Justice of the European Union (CJEU) with regard to the case C-691/17, commented on the right to deduct input tax resulting from an invoice issued by the seller, in a situation where the sale should be taxed under the reverse charge procedure.
The case concerned a Hungarian company, which was involved in construction of the motorway and received from some subcontractors invoices based on general principles with VAT applied. The buyer settled receivables documented by the invoices, deducted VAT and then requested a tax refund. The tax authority held that these transactions were taxed under the reverse charge procedure. The invoices should be issued without stating the rate and amount of tax together with an appropriate remark. In consequence, a customer could deduct the input tax providing that he had previously shown it as due. He was not entitled, according to the Hungarian tax authorities, to deduct the tax indicated on the invoices. It should be pointed out that the authority did not call into question the mere fact of the transaction. The issuers of the invoices had fulfilled the obligation to pay tax to the national treasury.
The case was referred to an administrative court, which sought a preliminary ruling from the CJEU. The subject of its deliberations was whether the principles of proportionality, fiscal neutrality and effectiveness, as expressed in Council Directive on VAT allow the tax authority to refuse the right to deduct VAT from the invoice, as the sale should be taxed under the reverse charge procedure. Additionally, it was pointed out that the Hungarian tax office, before refusing the right to deduction did not examine whether the service providers were entitled to return the unduly paid amount of VAT to the company. Tax authorities did not pay attention whether or not the issuers of invoices were entitled to make corrections and obtain a refund of the tax paid by them improperly. The tax paid was not returned in any way to the recipient of services who had borne its economic burden.
The Court ruled that the condition which would have entitled the purchaser of services in a reverse charge procedure to deduct VAT, to wit the earlier payment (indication) of that tax by a tax payer applying for deduction, was not fulfilled. This prevented, according to the CJEU, the control of the reverse charge mechanism and entailed the risk of losing a budget revenue. Furthermore, VAT paid to the service providers was never due. The exercise of the right of deduction is only limited to the tax due. For this reason, the Court refused the company the right to deduct the tax paid.
Another issue is the obligation of the tax authority to verify if the service providers have an opportunity to correct invoices and refund the indicated amount of tax to the customer. Otherwise, the purchaser would be a subject to double taxation. The company was of the opinion that the sellers did not have such an opportunity under Hungarian tax regulations.
The CJEU stated, however, that in a situation where a service provider who incorrectly paid to the Tax Office tax concerning an invoice should be entitled to refund under the national legislation. The recipient of services on the other hand can bring a civil action against him for the recovery of the undue payment. Such a system enables a customer, who bears the burden of a tax, to receive a refund of the amount paid unduly.
At the same time, the Court pointed out yet another vitally important issue. In a situation where VAT has already been paid to the state treasury by a seller and its return to the customer is impossible or overly constricted, in particular in case of a service provider’s bankruptcy, the purchaser of such services should be able to make a request for a refund directly to the tax authorities. Member States should establish such an opportunity by defining appropriate procedural rules and measures.
The above considerations show how considerable problems can be caused by interpretation of regulations concerning reverse taxation of VAT. Regulations and the practice of their application by tax authorities still do not take into account the basic challenge facing each entrepreneur, i.e. the maintenance of the company’s cash flow.
Wojciech Jasiński, Tax Consultant, ATA Tax Sp. z o.o.
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