In a judgment of June 2020, the Court of Justice of the European Union (the Court) reaffirmed the basic principles of the VAT taxation for the Member States. The judgment was issued in response to a request from a Romanian court in a tax dispute between a Romanian company and the relevant national public finance administration regarding VAT and corporate taxation.
The judgment commented two groups of questions on the application of the legislation of the European Union (EU) during a tax audit for VAT assessment, namely:
- Was the right of the defence violated provided that the person did not have access to information from his administrative file and this information was taken into account in determination in a decision of additional tax obligations? Shall that decision in such a case be subject to revocation?
- Dies the denial for VAT deduction, if the person cannot present other evidence for the real execution of the transactions, except for an invoice, represent violation of the principles of fiscal neutrality and legal certainty?
The Court gave the following reply to the above questions:
Regarding the right of the defence upon tax audits for establishment of VAT obligations
The decision for establishment of additional VAT obligations to a person shall be revoked because of violation of the right of the defense, when the following requirements are at hand together:
- During the tax audit the person requested and the information which was contained in his administrative file was not communicated to him;
- That information was considered by the public authority upon adoption of the decision for establishment of additional tax obligations;
- There were no objectives of public interest which justified the restriction of the access to that information;
- The national authority under the appeal considered that if the person had had access to the administrative file, the audit would have had a different outcome.
Regarding the application of the principles of fiscal neutrality and legal certainty on the part of the Member States
The right to deduct VAT shall not be denied to the person only on the ground that he cannot present other evidence for the real execution of the transactions, except for the invoice. Any unproven suspicions of the national tax administration cannot justify non-recognition of the right of VAT deduction.
This is because of principles of the common system of VAT of the Member States.
These principles are confirmed by the Court and are as follows:
- The persons have right to deduct VAT for goods bought and services received by them and used for the purposes of their taxable supplies. The right of deduction is an integral part of the VAT scheme and cannot generally be limited.
- The common system of VAT ensures the absolute neutrality of taxation of all business activities provided that they are themselves subject, in principle, to VAT taxation.
- The national authorities shall deny the acknowledgement of the right of VAT deduction if they established objectively that the person claimed his right for purposes of abuse or fraud.
- Denial is possible if it was objectively established that the person-recipient of the goods or services knew or should have known that he was participating in a transaction connected with VAT fraud.
- The national tax administration is responsible to find out whether the taxable person knew or should have known he participated in a VAT fraud.
- The objective findings should be made in compliance with the rules provided in the national legislation.
- The measures that a person must have taken to ensure that he or she was not involved in a fraud depend on the specific case. However, it cannot in principle be required that that person has verified that his supplier is able to make the supplies and has declared and paid VAT. It cannot be expected that the person has documents from his supplier.
The submission of additional documents, other than the invoice, by the person may disproportionately affect the right of VAT deduction and the principle of fiscal neutrality. Therefore, the national tax administration cannot, as a rule, require such documents.