ECJ’s decision of April 23rd, 2015. GST Sarviz. Person liable for VAT and refusal of refund. Neutrality principle


Once again the Court of Justice of the EU is pronounced about the principle of neutrality of VAT and the limitation to recover the tax paid by the service provider, who is liable to VAT, this resulting from an incorrect practice of the tax authorities when refusing to refund the tax paid.

In this case it is a German company that provides technical and consulting services to another company established in Bulgaria. Initially, under the rule of reverse charge, contained in the article 194 of the VAT Directive, it was the Bulgarian company who acquired the status of person liable to pay the VAT, considering that the supplier did not act in Bulgaria through a permanent establishment (PE) for VAT. In any case, the Administration did not allow the deduction of the VAT paid by the Bulgarian company as it did not have a tax document required by the local regulations.

However, later, the Bulgarian Tax Administration raised a complementary VAT settlement to the German company as it considered that it provided the services from a PE in Bulgaria, making it liable to pay the VAT. The supplier proceeded to pay the requested VAT and in turn requested the refund of the tax, as he understood that there had been an unduly payment by collecting the VAT from the German company and the Bulgarian one, but did not allowing the Bulgarian company to deduct the VAT. Surprisingly, the administration considered that there was not an undue payment and denied the VAT recovery alleging that after a complementary settlement the supplier cannot proceed to the regularization of the invoices, then the German company had no ability to amend the bills in order to charge VAT to the recipient, as well as being denied the refund by the Administration.

In response, the national court asks the Court of the EU, on the one hand, whether the articles 193 and 194 of the Directive allow both, the provider and the recipient of the service, may be simultaneously liable to pay the VAT, even though the initial error considering as not established to the provider, and ultimately, if it goes against the principle of tax neutrality the denial of the possibility of regularizing, once they have proceeded with a complementary settlement, and thus the VAT was paid twice.

As could be expected otherwise, the Court replies that it is only the person who performs the service, whenever it makes the provision through a PE in the country of the service, the one who is liable to VAT, which is contrary to the EU Directive to consider both parts as liable for the tax, even though initially he thought that the provider was not established, and therefore cannot be requested to the recipient the VAT.

Regarding the possibility of refusing a tax refund when there is a duplicate, as it is the present case, the Court recalls that from the moment it has been completely eliminated the risk of a tax loss, the principle of neutrality of VAT requires to rectify the situation, without being able to subordinate it to the good faith of the issuer of the invoice and cannot be dependent upon the discretion of the tax authority.

In short, as far as it does not allow the supplier to regularize and recover from the recipient the tax paid nor has it enabled the recipient to deduct the VAT, there is clearly an undue enrichment of the Administration since it receives more amount of VAT due to shifting the tax burden to both, the provider and the recipient, which is totally contrary to the principle of neutrality of VAT.

Do not forget that the principle of neutrality of VAT is fundamental to the proper functioning of the tax, and the Administration cannot obviate this and to exceed its anti-fraud measures.

A copy of the judgment in case C-111/14 is attached.

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ECJ VAT taxpayer and refusal of deduction

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