Non-compliance of the Goods and Services Tax Act with Directive 2006/112 on the right to deduct input tax on intra-Community acquisitions of goods

Date 1 January 2017 to the Goods and Services Tax Act 1 several major changes have been made. one of which there was a way of clearing input tax on intra-Community acquisitions of goods.

A taxpayer wishing to exercise the right to deduct input tax during the same period during which he is obliged to clear the tax due must do so within the time limit three months after the date of the tax obligation.

The subsequent display of WNT results in the obligation to settle the tax due retroactively by correcting the relevant declaration, while showing the input tax on an ongoing basis.

Consequently, exceeding the three-month time limit for the demonstration of the WNT entails paying the tax due together with interest on late payment from the tax due date until the date of its payment.

The subject matter of the following study is to examine whether the provisions introduced by the amendment of the Act are compatible with Directive 2006/112 2 and the resulting principle of VAT neutrality and proportionality.

Introduction

Year 2017 started with a comprehensive package of changes to the VAT Act one of them, there has been a modification of the provisions concerning the time limit within which the taxable person may reduce the amount of tax due for the intra-Community acquisition of goods (hereinafter: WNT) referred to under Article 9 the VAT Act 3.

By way of introduction, it should be recalled that intra-Community acquisitions of goods are accounted specifically for in the so-called reverse charge procedure. VAT as a consumption tax should in principle be settled in the country where the alleged consumption takes place.

In order to apply this general rule to intra-Community transactions, sellers from EU countries would have to register in each of the EU countries with which they trade in order to settle the tax due on the goods and services sold.

It would be quite burdensome to settle intra-Community transactions in this way. Therefore, in order to simplify administrative obligations, the duty to settle the tax due on intra-Union sales was transferred from the seller to the buyer.

The supplier shall, subject to the appropriate conditions, show in his country the intra-Community supply of goods (PDT) at a rate of taxed 0%, Whereas the purchaser – intra-Community acquisition of goods under which he is obliged to charge the tax due at the national tax rate, at the same time using the right to reduce the amount of tax due by the input tax.

Rules for deduction of WNT input tax applicable from 1 January 2014

As noted above, the VAT taxable person buying the goods retains the right to deduct input tax resulting from the WNT transaction. Key regulations Article 86 the VAT Act

Paragraph first that provision specifies that, in so far as goods and services are used to carry out taxable activities, the taxable person concerned under Article 15, is entitled to reduce the amount of tax due by the amount of input tax[4].

Article 86(2)(4) point (c) the VAT Act points out that for WNT, the amount of input tax is the tax due for the intra-Community acquisition of the goods in question under Article 9. Thus, the taxpayer will be able to demonstrate as a tax the amount of tax due in connection with WNT.

The general rule on deduction of input tax, which also refers to the acquisition of goods under the WNT, is recorded under Article 86(10) the VAT Act That provision provides that the right to reduce the amount of tax due by the amount of input tax is to be settled for the period during which the tax obligation arises for goods and services purchased or imported by the taxable person. This adjustment is an equivalent Article 167 Directives 112, according to which ‘the right to deduct arises when the tax to be deducted becomes chargeable’.

Consequently, the right to deduct arises during the period during which the tax liability for WNT arose. At this point, it should be recalled that according to Article 20(5) the VAT Act, the moment when the tax obligation in intra-Community acquisition of goods arises when the taxable person issues an invoice for value added tax, but no later than 15. the day of the month following that in which the goods covered by the WNT were delivered. Decides the date of this event that will occur as first.

This general rule is subject to additional special conditions in the following legislation the VAT Act 5.

According to Article 86(10b)(2) the VAT Act, the right to reduce the amount of tax due by the amount of input tax for WNT arises in accordance with section 10, provided that the taxable person:

(a) receive an invoice documenting the delivery of the goods constituting an intra-Community acquisition of the goods within the time limit three months after the expiry of the month in which the tax liability arose for purchased goods,

(b) take into account the amount of tax due for intra-Community acquisitions of goods in the tax return in which it is obliged to settle that tax.

The right to deduct was therefore granted to taxable persons subject to receipt of an invoice documenting the WNT during the three months from the end of the month in which the tax obligation arose. However, this does not mean that a taxable person with deduction of input tax must wait until the invoice is received.

As indicated section 10g under Article 86 the VAT Act, in the event that the invoice is not received within that period, the taxable person shall be obliged to reduce the amount of input tax charged in the accounts accordingly for the period during which that period expired.

This means that failing to receive an invoice will require him to correct the previously deducted input tax. This tax may be deducted again for the period during which the taxable person received the invoice according to Article 86(10h) the VAT Act

second of the conditions obliges the taxpayer to demonstrate the tax due in the tax return for the period during which the tax obligation arose for WNT.

The method of accounting can be illustrated by the following example:

The taxpayer made In January 2016 intra-Community acquisition of goods. However, by the end of that month, he had not received a VAT invoice from the counterparty and had no knowledge of the date of issue. Therefore, he recognised the tax obligation under the WNT 15 February. In the declaration for this period, he showed due tax and deducted the tax charged on this transaction. Due to the tardiness of the supplier, invoice dated the issue 5 February received only

15 July. As the three-month deadline for receipt of the invoice expired at the end of May, the taxable person will be required in the declaration for that month to deduct the tax charged accordingly in February. At the same time, receipt of the invoice in July entitles the taxpayer to deduct the tax charged in the July return.

If the taxpayer had waited to show WNT by July, he would have had to take into account the tax due and charged in the correction of the declaration for February submitted in July. It should then, as above, also correct the declaration for May, reducing the amount of input tax which may be deducted again in the July declaration.

Amendment of regulations from 1 January 2017

Act with 1 December 2016 amending the Goods and Services Tax Act and certain other laws[6], under Article 1(4) modified content Article 86(10b)(2) point (b) and point 3, giving them a new wording and added section 10i.

As explained in the Law, the purpose of the amendments in question was to discipline taxable persons to properly demonstrate intra-Community transactions in the acquisition of goods, ‘The introduction of this clarification is justified by the existence of irregularities in the declaration by certain intra-Community entities to acquire goods and other transactions in which, in principle, the tax payable is equal to the input tax.

The proposed amendment will allow for better control of areas such as intra-Community trade or national reverse VAT burden."[7].

In the Amending Act first the conditions of the right of deduction remain unchanged. On the other hand, Article 86(10)(2)

point (b) amended as follows: the right to reduce the amount of tax due by the amount of input tax arises according to section 10, provided that the taxable person ‘includes the amount of tax due for the intra-Community acquisition of goods in the tax return in which he is obliged to settle that tax, no later than the time limit

3 months after the expiry of the month in which the tax liability arose for the goods purchased’ 8 .

In turn added to the bill section 10i is replaced by the following: ‘Where a taxable person takes account of the amount of tax due in the tax return in which he is obliged to settle that tax at a later date than the specified amount Under section 10b point 2 point (b) and point 3, the taxable person may appropriately increase the amount of input tax in the settlement period for which the time limit for filing the tax return has not yet expired.’ 9 .

first it introduces an additional condition necessary to exercise the right of deduction. From 1 January 2017 it is no longer sufficient for the taxpayer to take into account the amount of WNT tax due in the tax return for the period during which he is required to demonstrate that tax. This tax must be settled no later than the deadline 3 months from the end of the month in which the tax obligation arose.

If the taxable person does not comply with this deadline, it shall apply second from the provisions cited above, indicating that, in such a situation, the amount of input tax resulting from WNT may be included by the taxable person in the settlement for a period for which the time limit for submitting the tax return has not yet expired, and therefore on an ongoing basis.

At the same time, the tax due on this transaction should be included during the period during which the tax obligation was imposed in the WNT by correcting the relevant declaration, i.e. on a retroactive date.

As a result of such settlement, the taxable person shall bear the economic burden of the tax due together with the interest accrued for the delay from the day following the due date of the tax until the date of payment.

Example

The taxpayer made an intra-Community acquisition of goods in January. Since he did not receive an invoice from the supplier and had no information about the date of issue, he recognized the tax obligation 15 February. However, he decided to wait until the invoice was received. invoice with date of issue 31 January received 30 May.

As the tax obligation arose not as it had assumed in February, but in January, 30 April the three-month period during which the tax due and charged in the same accounting period (January) could be included.

Therefore, the taxpayer is obliged to correct the tax due in the January declaration and to pay interest on 26 February until the date of payment of the outstanding tax. On the other hand, the tax charged will be chargeable in the declaration for May, submitted to 25 June.

In this case, the reason why the taxpayer did not show the transaction within a three-month period remains irrelevant.

Even if the circumstances were completely independent of it, such as the issuing of a wrong invoice by the counterparty or the issuing of a late invoice, the taxpayer loses the right to settle the tax due and charged in the same period.

In the light of the above, both the doctrine and the case law of the administrative courts indicate the non-compliance of the rules introduced Directive 2006/112 and the principle of neutrality[10] and proportionality 11 VAT.

Principle of VAT neutrality and proportionality

one of the fundamental principles of design tax on goods and services is the principle of neutrality. It is reflected in the total release of VAT taxable persons from the economic burden of this tax. VAT, as a consumer tax, added to the price of goods and services, should in principle charge the final purchaser – the consumer[12].

VAT neutrality is reserved for taxable persons who purchase goods and services used for taxed activities. It includes the possibility to reduce the tax due on sales of goods and services by the tax charged on purchases, and the possibility to obtain a refund of the excess chargeable tax.

The right to deduct from tax due input tax in previous marketing phases constitutes one the basic elements of the VAT design distinguishing it from other turnover taxes. Any restriction of this law which, by its nature, undermines neutrality, is exceptional and must have clear support in the legislation Article 167-192 Directives 112.

The key provision for input tax is already cited Article 86(1) the VAT Act

This provision is an equivalent Article 168 Directives 112, which states that ‘where goods and services are used for taxable transactions, the taxable person shall be entitled, in the Member State in which the transactions are carried out, to deduct the following amounts from the amount of VAT which he is obliged to pay (...).

The principle of fiscal neutrality has repeatedly been the subject of decisions of the Court of Justice of the European Union (hereinafter: the EU Court of Justice). It follows from this caselaw that the principle of neutrality is the foundation of the VAT structure. Consequently, the right to deduct cannot be regarded as a form of relief or a benefit of the taxpayer[13].

In one of its judgments, the TEU stressed that ‘the system of deductions aims to fully relieve an economic operator of the VAT burden payable or paid during the course of his business. The common VAT system thus ensures that all economic activities, regardless of their purpose or result, are taxed in a completely neutral manner, provided that such activities are subject to that tax." 14 .

The thesis of that judgment was repeated many times in other Court rulings[15]. Article 167 Directives 112 provides that the right to deduct arises when the tax to be deducted becomes chargeable. However, according to Article 168 „Where goods and services are used for taxable transactions, the taxable person shall be entitled, in the Member State in which the transactions are carried out, to deduct the following amounts from the amount of VAT which he is obliged to pay:

(a) VAT due or paid in that Member State on the goods and services which have been supplied to it or to be supplied to it by another taxable person (...)’.

Those provisions lay down the substantive grounds for the right to deduct VAT.

In order to exercise this right, the entity concerned shall:

• • rod first, must be a registered VAT taxable person,
• • rod second, there must be a physical supply of goods or services from a taxable person of tax occurring at an earlier stage of trade,
• • rod third, goods and services must be used by the taxable person at a later stage of trading to carry out taxed activities, to conduct business.

The formal grounds for the right of deduction are contained under Article 178 point (a) Directives 112, according to which: ‘In order to exercise the right of deduction, the taxable person must fulfil the following conditions: Under Article 168 point (a), in respect of the supply of goods or services, it must have an invoice drawn up in accordance with Chapter XI of Title XI 3 section 3-6 (…)”.

This understanding of the above provisions is confirmed by the case law of the CJEU. In the judgment cited above with 22 October 2015 The Court stated:

„As regards the material grounds for the right of deduction, the wording Article 17(2) point (a) sixth Directives[16] it follows that in order to exercise the right to deduct, after first, the entity is to be a taxable person within the meaning of that Directive, and after second, the goods and services to be the basis of that right should be used by the taxable person at a later stage of trading for the purposes of his own taxed transactions, and those goods and services should be supplied by another taxable person at an earlier stage of trading (see similar judgments: Centralan Property, C-63/04, EU:C:2005:773, point 52; Tóth, C-324/11, EU:C:2012:549, point 26; Bonik, C-285/11, EU:C:2012:774, point 29; and the order of Jagiełło, C-33/13, EU:C:2014:184, point 27).

As regards the formal grounds for the right of deduction, Article 18(1) point (a) sixth The directive provides that the taxable person must have an invoice issued in accordance with Article 22(3) this directive. Based on Article 22(3) point (b) In particular, the VAT identification number under which the taxable person has supplied the goods, the full name and address of the taxable person, and the quantity and type of goods supplied should be clearly mentioned in the Directive.’ 17 .

Similarly, the Court of Justice also held other judgments: 15 September 2016 Barlis 06 – Investimentos Imobiliários e Turísticos SA v Autoridade Tributária e Aduaneira 18 , or in the judgment of 15 September 2016 Senatex GmbH v Finanzamt Hannover-Nord[19].

In its rulings, the Court has repeatedly held that taxpayers retain the right to deduct input tax also in cases where the substantive conditions of the right of deduction are met, despite not meeting certain formal requirements. This view can be confirmed in the judgment of 1 March 2012 20 , or with 9 July 2015 21 .

In both of these judgments, the CJEU further indicated that the provisions to which Member States are authorised under Article 273 Directives 112, In order to ensure correct collection of taxes and to avoid fraud, they should not go beyond what is necessary to achieve those objectives and must not undermine the neutrality of VAT.

The TEU therefore referred to the principle of proportionality as a prohibition on imposing administrative obligations on taxable persons not provided for in that Directive which could prevent or significantly impede taxpayers from exercising the right to deduct.

The exception to this principle is the possibility of introducing rules aimed at combating fraud and fraud.

With regard to the issue covered by this study, the earlier judgment of the CJEU of 15 September 2016, Senatex GmbH v Finanzamt Hannover-Nord[22]. The purpose of the decision was the case of a German company which received invoices from its commercial representatives without the identification number indicated therein for VAT purposes.

As a result of the audit carried out, the tax authorities denied the company the right to deduct the input tax resulting from these documents. Therefore, the company adjusted the invoices by including the relevant tax numbers.

However, the tax authority denied the company the right to benefit from the retroactive deduction of input tax, arguing that the right could be exercised on an ongoing basis after the date of the correction.

The case was finally brought before Niedersächsisches Finanzgericht (financial court for Lower Saxony), who decided to suspend the proceedings and ask the TEU whether the correction of the invoice did not have retroactive effect, and thus the right to deduct does not apply to the year in which that invoice was originally issued but to the year in which the invoice was corrected. In its judgment, the Court held that the provisions requiring the payment of interest on late payment were incompatible with the principle of VAT incapacity, stating:

„Deduction system – as recalled Under point 27 the purpose of this judgment is to completely relieve the trader of the VAT burden due or paid in the course of his entire business. However, provisions of national law, such as those in the main proceedings, providing for interest on late payment on the amount of VAT which they consider to be due before the correction of the invoice originally issued, impose a VAT tax burden on that economic activity, although the common VAT system guarantees VAT neutrality for that activity.’

At the same time, the TEU pointed out that the transfer of the right to deduct without taking into account the circumstances of the correction of the invoice originally issued violates the principle of proportionality and cannot serve as a specific sanction.

Member States may introduce instruments other than a refusal to deduct for the year of issue of an invoice, such as the imposition of a fine or a penalty proportionate to the gravity of the infringement, in order to punish a taxable person.

In this context, it is worth reading in more detail the meaning of the justification of the TEU ruling. It's coming out of it. two essential conclusions. After first, where Member States wish to impose penalties on taxpayers for breach of formal requirements, those penalties must be proportionate to the seriousness of the infringement.

The consequence of this is to define the criteria that will allow for an assessment of the degree of misconduct. The gravity of the infringement must be adequate to the sanction imposed.

Therefore, it is important not only to identify the risk of fraud or fraud, but also to be intentional or not to behave as a taxable person and to be careful.

After second, Refusal of the right to deduct or shift it over time cannot be treated as punishment. If Member States wish to exercise the rights given to them by the Directive, they should use other measures taking into account the degree of breach of formal requirements.

In view of the above, it should be considered that the Polish legislature has infringed Community rules by imposing sanctions on taxpayers too far. Failure to comply with the formal conditions imposed by the Polish legislation requires the taxpayer to pay interest for late payment of tax dues.

As a result, VAT is no longer neutral for him. At the same time, these provisions do not in any way increase sanctions, taking into account not only the intention of the taxpayer to act to deceive tax authorities and undermine the tax obligation, but also whether there has actually been a breach of the State's interests.

Failure to disclose the tax due within three months does not always arise from circumstances which are dependent on the taxpayer's will. Even if the taxpayer wants to exercise due diligence, it is often the failure of the counterparty to comply with the deadline.

Application of the formal condition of the unknown directive 112 in circumstances which do not indicate a intention to abuse or tax fraud, it is contrary to the principle of proportionality, as it introduces a disproportionate deficiency to the objective pursued.

Therefore, these provisions should be assessed critically, as incompatible with the Directive and the principles of VAT neutrality and proportionality. It is also difficult to expect the outcome of the legislature to be achieved, since objective and independent factors determine the correct performance of its obligations.

Case law of Polish administrative courts

This issue was also the subject of decisions before the provincial administrative courts. In both judgments discussed below, the rulings were the result of complaints made by taxable persons for individual interpretations of the Director of National Tax Information, who held that the provisions introduced on the date 1 January 2017 do not restrict the right of taxable persons to deduct VAT[23]. However, the administrative courts were of a different opinion.

In the judgment of 29 September 2017 The Provincial Administrative Court in Krakow indicated that:

„In the light of the conclusions of the examination of the justification of the Senate judgment, as well as the well-established and widely accepted case law of the TEU on the application of the principle of neutrality and proportionality of VAT, Polish regulations the VAT Act as regards the provisions applicable in this case, and in particular Article. Article 86(10b)(10i) The laws must be considered to be contrary to the principles of Union legislation and the generally accepted way of interpreting it (...). So it is critical to assess Polish regulations concerning the transfer of the settlement deadline. They constitute an unjustified economic handicap for taxpayers, applied regardless of the gravity and scale of the breach of formal requirements, and regardless of the risk of fraud, extortion or the deliberate underselling of tax obligations in certain cases. These provisions do not give any possibility to moderate the scale of the infringement, the reasons for the infringement and to determine whether the taxpayer has contributed to or could have prevented it in any way. They do not therefore show a proportion to the objective of timely and fair compliance with tax obligations." 24 .

Similar conclusions were reached by the Provincial Administrative Court in Warsaw in judgment of 15 May 2018, in which he stated:

„Provisions of the Goods and Services Tax Act as in force since 1 January 2017 they automatically postpone the right to deduct and the resulting need to pay interest on late payment for purely formal reasons, regardless of the absence of any risk of tax fraud or informed fraud in the transaction.

According to the Court of First Instance, interest must fall within the scope of neutrality, since the obligation to pay it results in a financial burden on the taxpayer resulting from the tax settlement under certain conditions under Article 86(10b) and 10i the VAT Act The effect of the contested rules is not compatible with the principle of neutrality, but also with the principle of proportionality. The provisions of the Goods and Services Tax Act should be interpreted in such a way that the tax is not a burden on traders, both in terms of deduction and interest related to any default resulting from the failure to comply with the formal deduction requirements’ 25 .

It is to be expected that other formations ruling the administrative courts will follow these judgments. Interpretations introduced in the VAT Act provisions are incompatible with the Directive 112, in particular with the principle of neutrality and proportionality, which are highly highlighted in the case law of the EUSEU.

Summary

Entered on day 1 January 2017 in the VAT Act the provisions, in so far as they postpone in time the right to reduce the amount of tax due by the input tax resulting from intra-Community transactions in the acquisition of goods should be assessed critically.

The Directive allows Member States to introduce additional conditions to ensure correct tax collection and to prevent tax fraud. However, it seems that Polish legislation crosses the limit of what is necessary for the proper performance of the obligations imposed on taxpayers.

In the author's opinion, the postponement of the right to deduct input tax has a strict fiscal objective. It imposes on taxpayers an unwarranted economic sanction in the form of the need to pay interest on tax arrears, which is independent of the taxpayer's fault.

Therefore, these regulations are contrary to the rules Directive 2006/112.and.

A taxable person who has fulfilled all the substantive conditions for exercising the right to deduct and has not fulfilled (with due diligence, not his own fault or with the intention of extorting the tax) certain formal conditions must not be penalised by the obligation to pay interest on tax arrears, which arises from denying him the possibility to settle the tax due and charged during the same period.

Such rules are contrary to the principle of VAT neutrality and proportionality, imposing on taxable persons penalties inadequate in relation to their infringements.

_________________

1 Act of 11 March 2004 on tax on goods and services, i.e. Journal of Laws of 2017, item 1221 as amended, Next: the VAT Act 2 Directive 2006/112 to 28 November 2006 on the common system of value added tax, Official Journal of the European Union L, No. 347, p. 1 (Next: Directive 112).

3 It should be pointed out here that these provisions also apply to transactions in the import of services and domestic transactions for which the taxable person is the purchaser.

4 Subject Article 114, Article 119(4), Article 120(17)(19) and Article 124 the VAT Act 5 Look Article 86(10b)(2) and section 10g and 10h the VAT Act 6 Act of 1 December 2016 amending the Goods and Services Tax Act and certain other laws, Journal of Laws of 2016, item 2024.

7 Reasons for Article 1(4) amending act (Article 86(10b)(10i) the VAT Act), p. 9, http://orka.sejm.gov.pl/Druki8ka.nsf/0/7E779774C14B578BC125805A0048C94D/%24File/965.pdf 8 Act of 1 December 2016 on the amendment of the Goods and Services Tax Act, op. cit. [9] Ibid. 10 see T.

Michalik, VAT comment, Warsaw 2018, commentary on Article 86, thesis 421 and next, Legalis legal information system and J. Matarewicz, Tax Act on goods and services. Commentary, LEX/el. 2018. 11 see J. Zubrzycki, lexicon VAT , Wrocław 2017, p. 877.

[12] Article 1(2) Directives 112; in accordance with that provision: ‘The principle of the common VAT system is to apply to goods and services a general consumption tax that is precisely proportional to the price of goods and services, regardless of the number of transactions that take place in the production and distribution process preceding the stage of charge.

The VAT calculated from the price of the goods or services at the rate applicable to such goods or services shall be chargeable to each transaction, after deduction of the amount of tax directly incurred in the various cost components. The common VAT system shall apply up to and including the retail stage.’ 13 T.

Michalik, VAT comment, op. cit., comment on Article 86. 14 Judgment of the Court of Justice of 14 February 1985, D.A. Rompelman and E.A. Rompelman-Van Deelen v Minister van Financiën, C-268/83. 15 For example, in TEU judgments: 22 October 2015, PPUH Stehcmp sp. j. Florian Stefanek, Janina Stefanek, Jarosław Stefanek v.

Director of the Tax Chamber in Łódź, C-277/14 (thesis 27); on 15 September 2016, Barlis 06 – Investimentos Imobiliários e Turísticos SA v Autoridade Tributária e Aduaneira, C-516/14 (thesis 39).

16 VI Council Directive with 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, Official Journal of the European Union L, No. 145/1 as amended 17 Judgment of the Court of Justice PPUH Stehcmp sp. j.

Florian Stefanek, Janina Stefanek, Jarosław Stefanek v Director of the Tax Chamber in Łódź..., op. cit., thesis 28 and 29. 18 C-516/14, thesis 40 and 41. 19 C-518/14, thesis 28 and 29. 20 Judgment of the Court of Justice of 1 March 2012, Discovery Mine of Poland Trawertyn P. Granatowicz, M.

Wąsiewicz public company against the Director of the Tax Chamber in Poznań, C-280/10, thesis 40 And another. 21 Judgment of the Court of Justice of 9 July 2015, Radu Florin Salomie, Nicolae Vasile Oltean v. Direcția Generală a Finanțelor Publice Cluj, C-183/14, thesis 58 and 59. 22 C-518/14, op. cit.

23 Individual interpretation of the Director of National Tax Information from 15 May 2017, reference no. 2461-IBPP2.4512.190.2017.1.MS and the individual interpretation of the Director of National Tax Information from 12 April 2017, reference no. 1462-IPPP3.4512.39.2017.2.ISZ. 24 reference no. I Sa/Kr 709/17. 25 reference no.

III SA/Wa 2488/17.