This judgment of the Court of Justice of the European Union (CJEU) from May 2023 clarifies the possible meaning of the writing off of goods that occurred after VAT return, and when the taxable person should make adjustments to the amount to be deducted.
The story behind the case of the CJEU
A Bulgarian company which provides telecommunications services acquires various fixed assets for the needs of its activity, including mobile devices and equipment for resale for the purposes of using the provided services. The VAT paid in connection with the purchase of the assets (the input VAT) is subject to deduction.
The company afterwards writes off various goods deemed no longer fit for use or sale (due to wear and tear, defects or their obsolete or unsuitable nature). Some of those goods were then sold as waste to third parties, also taxable persons, and other goods were destroyed or disposed of. As a result of the writing off, adjustments were made, involving the repayment of the input VAT deducted in respect of the goods concerned.
The company submits a request for reimbursement of the amounts paid in connection with those adjustments. The company claims that Art. 79, para. 1 of the VATA (Art. 79, Paragraph 3 of the VATA before 01.01.2017 – in the same sense) contradicts Art. 185, para. 2 of the Directive 2006/112/EC (the “Directive”).
The request was refused by the National Revenue Agency. The company’s appeal to the Administrative Court was also dismissed. The Company appealed to the Supreme Administrative Court (“SAC”). The SAC stays the proceedings and refers questions to the CJEU.
Legislation and considerations of the SAC
According to the Directive:
- If the goods are used for the purposes of the taxed transactions of a taxable person, the taxable person is entitled to deduct, in the Member State where transaction is carried out, from the VAT which is liable to pay the VAT due or paid in respect of the supply to him of goods to him by another taxable person.
- According to Art. 185, para. 1 of the Directive, an adjustment shall be made when, after the VAT return is made, there is a change in the factors used to determine the amount to be deducted. Regardless of the above, according to Art. 185, para. 2 of the Directive, no adjustment shall be made in cases of destruction, loss or theft of property, duly proved or confirmed.
According to VATA:
- Input VAT deducted is the amount of tax which a person registered under this law has deducted in the year in which the right to deduct is exercised.
- According to Art. 79, para. 1 of the VATA (Art. 79, para. 3 of the VATA before 01.01.2017) a registered person who has deducted a tax credit on goods he has produced, acquired or imported, shall, in cases of destruction, shrinkages or wastage of those goods, pay tax in the amount equivalent to that of the input VAT deducted.
- According to Art. 80 of the VATA adjustments are not made in cases of destruction, shrinkage or wastage caused by force majeure, accidents, disasters, shrinkage resulting from a change in the physical and chemical properties in normal corresponding to the standards for the limit values for natural loss, wastage due to expiry of service life, etc.
The SAC aims to clarify Art. 185 of the Directive regarding:
- the significance of the fact that, in the particular case, written-off goods were subsequently sold as waste by way of taxable transactions;
- whether the writing-off represents a change in the factors used to determine the amount to be deducted within the meaning of Art. 185, para. 1 of the Directive, if those goods are afterwards destroyed or disposed of and are not used for exempt supplies or supplies outside the scope of VAT;
- whether the main element is the objective destruction or it is necessary for the destruction to be the result of events beyond the control of the taxable person in order for the writing-off to be “loss” within the meaning of Art. 185, par. 2 of the Directive.
The CJEU combines the questions of the SAC and gives its answers relevant to the exact determination of the VAT deduction in cases of goods written-off. The CJEU clarifies in which cases there is a change in the factors used to determine the amount to be deducted.
The answers and reasons of the CJEU
- Does the writing off goods which the taxable person considered to have become unusable in the course of his or her usual economic activities, followed by the sale of those goods as waste, which was subject to VAT, constitute a “change … in the factors used to determine the amount to be deducted” in the sense of art. 185, para. 1 of the Directive?
According to Art. 185, para. 1 of the Directive, such writing off goods, followed by the sale of those goods as waste, which was subject to VAT, does not constitute a change in the factors used to determine the amount to be deducted.
When a taxable person acting as such acquires goods and uses them for his or her taxable transactions, he or she has is entitled to deduct the VAT due or paid in respect of those goods. The purpose of the rules governing deduction is to completely relieve the trader from the burden of the VAT payable or paid in the course of all his or her economic activities. The common system of VAT aims to ensure complete neutrality of taxation of all economic activities, regardless of their purpose or results, provided that those activities are themselves subject to VAT.
The use to which the goods are put or intended to be put determines the scope of the initial deduction to which the taxable person is entitled, as well as the extent of any adjustments in the course of the following periods.
The rules in respect of adjustments in the Directive are intended to guarantee the precision of deductions and maintain a close and direct relationship between the right to deduct input VAT and the use of goods for taxable output transactions.
According to Art. 185, para. 1 of the Directive, an adjustment must be made when changes to factors which were taken into consideration for the determination of the amount of that deduction occurred after the VAT return.
In the particular case, the goods are sold in the context of taxable transactions – this allows the application of the right to deduct. The fact that the sale of waste is not one of the usual economic activities of the taxable person or that the sale value of the goods is reduced in relation to their initial value is irrelevant. The deduction system applies to all economic activities, regardless of their purpose or results.
- Does the writing off goods, which the taxable person considered to have become unusable in the course of his or her usual economic activities, followed by the voluntary destruction of those goods, constitute a “change … in the factors used to determine the deduction amount” within the meaning of Art. 185, para. 1 of the Directive? If yes, does the writing off the goods in such circumstances constitute “destruction … duly proved or confirmed” or “loss … duly proved or confirmed” within the meaning of Art. 185, par. 2 of the Directive, although it is not an event that is beyond the control of the taxable person and which that person could neither have foreseen nor avoided?
According to Art. 185, para. 1 of the Directive, such writing off goods, followed by the voluntary destruction of those goods, constitutes a change in the factors used to determine the amount to be deducted. However, such a situation constitutes “destruction” within the meaning of Art. 185, para. 2 of the Directive, regardless of its voluntary nature, and therefore that change does not lead to an adjustment obligation, as long as the destruction is duly proved or confirmed and that the goods had objectively lost all usefulness in the economic activities of the taxable person. The duly proven disposal of goods must be treated in the same way as their destruction as long as it leads to the irreversible disappearance of those goods.
The destruction of goods leads to the loss of any possibility of using them in the context of taxable transactions – this leads to a break in the close and direct relationship between the right to deduct input VAT and the use of the goods for taxable output transactions.
Art. 185, para. 2 of the Directive uses “destruction” and “loss” in the usual and generally applicable sense. The destruction of goods could not be the result of a deliberate action of the person, whereas that cannot be ruled out in the case of destruction. Since the destruction of the goods is the result of actions of the taxable person, it should be assumed that it is a question of destruction and not of destruction.
It does not follow from Art. 185, para. 2 of the Directive that the destruction of goods must be completely beyond the control of the taxable person. A taxable person may decide to destroy goods after he or she has established that they have become unsuitable for use in his or her usual economic activities.
The destruction must be duly proved or confirmed and it is about the destruction of goods, for which a decision has been taken, because the goods are no longer objectively useful for the usual economic activities of the taxable person.
In the case of goods that are “disposed of”, it should be established whether it is the question about irreversible disappearance of those goods. The disposal of goods as waste leads to the “destruction” of the goods if the particular result is the irreversible disappearance of the goods.
- Does Art. 185 of the Directive preclude provisions of national law which provide for the adjustment of input VAT deducted upon acquisition of goods where they have been written off, the taxable person having considered that they had become unusable in the course of his or her usual economic activities, regardless whether, subsequently, the goods were sold subject to VAT or were destroyed or disposed of in a duly proved or confirmed manner?
Art. 185 of the Directive precludes provisions of national law which provide for the adjustment of input VAT deducted upon acquisition of goods where they have been written off, the taxable person having considered that they had become unusable in the course of his or her usual economic activities and where, subsequently, those goods were either sold subject to VAT or destroyed or disposed of in a way which effectively means that they have disappeared irreversibly. The destruction shall be duly proved or confirmed and the goods shall have objectively lost all usefulness in the economic activities of the taxable person.
This follows directly from the answers above.
The destruction of a good is not one of the cases in which Art. 185, para. 2 of the Directive authorises the Member States to require the adjustment of deductions.
