Judgment of the CJEU C-154/20 of 9 December 2021 Kemwater ProChemie s.r.o.
In December 2021, the Court of Justice of the EU (CJEU) ruled in the case of Kemwater ProChemie s.r.o. In it, the CJEU asked two questions that are of fundamental importance for many tax proceedings. The answers provided by the CJEU are presented by the Financial Administration of the Czech Republic as a confirmation of the correctness of its procedure in tax proceedings. The other side – business and tax experts - claim that, on the contrary, their view has been confirmed. In other words, both sides claim to have won the dispute. So where does the truth lie?
The dispute that led to the judgment concerned the circumstances under which the tax authorities are entitled to deny a taxpayer the right to deduct VAT when the identity of the supplier is called into question.
The Grand Chamber of the SAC referred the following questions to the CJEU for a preliminary ruling:
- Is it in accordance with Directive 2006/112/EC if the exercise of the right to deduct input VAT is subject to the taxable person's obligation to prove that the taxable supply received was supplied by another specific taxable person?
- If the answer to the first question is in the affirmative and the taxable person fails to meet that burden of proof, the right to deduct input tax may be denied without proof that the taxable person knew or could have known that the acquisition of the goods or services involved tax evasion?
The CJEU commented on the questions raised as follows:
- to claim the VAT deduction, it is necessary to comply with both substantive and formal conditions
- the substantive condition is that the supplier must be a "taxable person", i.e. it must be clear that the supply was made in the course of their economic activity for the purposes of their taxable supply
- the obligation for the customer to hold a tax document issued by the supplier and the indication of that supplier on the invoice relating to the goods or services in respect of which the VAT deduction is claimed is a formal condition for the claim
- the measures adopted by the Member States cannot be applied in such a way as to call into systematic question the right to deduct VAT, i.e. the neutrality of VAT
- the fundamental principle of VAT neutrality requires that input VAT should be deducted if the substantive conditions are met, even if taxable persons have not satisfied certain formal conditions
- where the identity of the actual supplier is not stated on the invoice relating to the goods or services in respect of which the deduction is claimed, if that fact makes it impossible to identify them and therefore to prove that they were a taxable person, the tax authorities are entitled to refuse the customer the right to deduct the tax
- the taxable person must prove, on the basis of objective evidence, that the supplier has taxable status if the data necessary to verify whether this substantive condition for entitlement to VAT deduction is fulfilled are not available to the Tax Administration
- also, where a Member State has made use of the possibility of granting an exemption to taxable persons whose annual turnover does not exceed a certain amount and it can be concluded with certainty from the facts, such as the volume and price of the goods or services received, that the annual turnover of the supplier exceeds that amount, the exemption provided for in this Article cannot apply to that supplier and the supplier is necessarily in the position of a taxable person
- the tax authorities cannot deny a taxable person the right to deduct VAT on the grounds that the actual supplier of the goods or services in question has not been identified and that the taxable person has not proved the taxable status of the supplier, even though the facts show with certainty that the supplier necessarily had that status
From the published conclusions of the CJEU, it can be said that neither side of the dispute is absolutely right. It is clear that the taxable status of the supplier is considered to be a substantive condition which the taxpayer, i.e. the taxable person, is obliged to prove when claiming tax deductions on supplies received from that supplier.
A taxable person is any person who independently carries on an economic activity at any place. The Czech Republic has made use of the Directive's authorisation and granted taxable persons an exemption from tax if their turnover for no more than 12 consecutive months did not exceed CZK 1 million.
I understand that the tax entity is obliged to prove in the course of tax proceedings, e.g. a tax audit, that its supplier was in the position of a taxable person and exceeded the specified limit.
At the same time, I also understand that if the tax administrator has the data necessary to verify whether this substantive condition for the right to deduct VAT is fulfilled (e.g. from the tax inspection carried out at the supplier, from filed tax returns including control reports, from the volume of goods or services supplied), then the taxpayer is not obliged to fulfil this obligation. This is because the wording of Article 9(1) of Directive 2006/112 (VAT Directive) shows that the term "taxable person" is defined quite broadly, based on the facts of the case, so that the taxable status of the supplier may also arise from the circumstances of the case.
It is difficult to imagine a situation where a customer receives a volume of goods and services of approximately EUR 177 million from a disputed supplier over several years. The supplier would not be in the position of a taxable person. This is the case even if the tax authorities were justified in questioning the declared supplier. It is clear from the above data that the hypothetical unknown supplier, or multiple suppliers, must necessarily be in the position of a taxable person(s) liable to tax in accordance with the quoted provision of the ITA (according to the actual case recently decided by the Supreme Administrative Court in favour of the taxpayer).
It is clear from the cited judgment of the CJEU that to claim a deduction it is sufficient for the taxpayer to prove the status of the supplier as a taxable person who has carried out taxable supplies in excess of the registration limit.
The answer to the question we asked at the beginning of the article must therefore be that the tax authorities are not entitled to deny the right to deduct VAT automatically if they question the supplier on the tax document. On the other hand, it must be stressed that they may do so if the customer fails to prove that the declared supplier has the status of a "taxable person".
So, who won? In my opinion, the verdict ended in a tie. And as a rule of thumb, it's better to have as much information as possible about your suppliers to avoid the problems described above.