Current case law in the field of VAT

The Court of Justice of the European Union (CJEU) has recently delivered two interesting judgments which, in my view, will have a major impact on current administrative practice.

The first is a judgment which changes the perspective on the beginning of the period for correcting the tax base in the event of an irrecoverable claim (Case C-507/20 FGSZ Földgázszállító of 3 March 2021).

The judgment states that if there is a national limitation period for claiming a VAT refund on an irrecoverable claim, that period must begin to run not at the time when the claim is due, but when the claim has become definitively irrecoverable.

Section 46 (4) of the Czech Value Added Tax Act states that the adjustment of the tax base for bad debts, understood as the state refunding the VAT paid to the supplier, cannot be made after three years from the end of the tax period in which the taxable supply took place.

Although it allows the said period to be interrupted, for example, in the case of ongoing execution proceedings, insolvency proceedings, or for the duration of inheritance proceedings, the period is still calculated from the moment of delivery of the goods or provision of the service. This is clearly contrary to the cited judgment.

The judgment addresses the situation where FGSZ filed its claim in insolvency proceedings in 2011 and after the conclusion of this proceeding in 2019, the receivable definitively expired as unpaid. FGSZ subsequently applied for a refund of VAT, which the tax authorities rejected on the grounds that the national five-year limitation period, calculated from the original due date of the claim, had expired in vain.

The CJEU refused to accept a national period which essentially precludes the correction of the tax base, for example because of the length of the recovery procedure, and thus the practical use of that institute of correction of the tax base.

The CJEU recalled that if a Member State has determined that a creditor's entitlement to a reduction in the tax base provided for in Article 90 of the VAT Directive is subject to a limitation period, the relevant limitation period must begin to run not at the time of the original maturity, but at the moment the claim became definitively irrecoverable. The CJEU then added that Article 90 (1) of the Directive fulfilled the conditions required for it to have direct effect.

Although the cited judgment does not address further deadlines for the correction of the tax base, we can assume that even in these cases the opinion of the CJEU would not differ.

An even more significant impact on administrative practice will be the judgment of the CJEU, which deals with the lump-sum sanctioning of unjustified deduction of VAT (judgment C - 935/19 Grupa Warzywna of 15 April 2021).

In that judgment, the CJEU concluded that national legislation which provides for a lump sum penalty of 20% of an unduly claimed deduction is contrary to the VAT Directive and the principle of proportionality, where the parties to the transaction have incorrectly assessed the tax scheme of the transaction and moreover there is no evidence of tax evasion.

In Section 251 of the Tax Code, the domestic regulation of sanctions stipulates, among other things, a lump sum penalty of 20% of the assessed tax liability, regardless of why the VAT was assessed. It can therefore be stated that this sanction is identical to the one on which the CJEU commented.

The Polish company acquired the property and deducted the VAT it paid to the seller. The Polish tax administrator concluded that the contracting parties had incorrectly assessed the VAT regime of the supply in question, as the failure to submit a declaration of waiver of exemption (cf. Section 56 (6) of the Czech VAT Code) involved an exempt transfer of real estate. As a result, the company denied the right to deduct and imposed on it a non-discretionary statutory penalty of 20% of the amount of the unduly claimed deduction.

The CJEU has stated that, in the present case, the penalty is imposed automatically on a taxable person who has incorrectly classified a supply in relation to VAT. This is to ensure that the method of determining it does not allow the tax authorities to assess its amount individually so that it does not go beyond what is necessary to achieve the objectives of ensuring the correct collection of the tax and preventing tax evasion. Such national legislation is then contrary to Article 273 of the VAT Directive and the principle of proportionality.

In essence, the CJEU ordered the tax administrator to consider the way in which the taxpayer reduced VAT when imposing sanctions. Given the wording of the Tax Code, in my view it is possible to use that judgment, for example, in the case of an application for remission of the penalties imposed. As in the previous case, the tax administrator is obliged to accept the judgment of the CJEU in its administrative practice from the date of its issuance.

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