On 18 March 2021 The Court of Justice of the European Union has ruled on the possibility of correcting an invoice where the amount of VAT has been wrongly shown. The judgment stresses the importance of neutrality for the VAT system and that, when the taxpayer acted in good faith, he should not bear the economic burden of that tax, even if he incorrectly identified the transactions and subsequently issued an invoice, incorrectly showing the tax due.
The case concerned a company based in Lithuania, which made fuel cards available to Lithuanian transport companies enabling these companies to supply fuel at certain fuel stations located in Poland.
Position of Polish authorities
The company misidentified its role in the transactions and considered that its commercial activity was to purchase fuel from Polish fuel stations in order to sell it to Lithuanian transport companies using fuel cards. Consequently, the company incorrectly issued fuel delivery invoices to these transport companies, showing the amount of VAT. At the same time, the company received invoices from petrol stations for purchased fuel and deducted the tax resulting from these invoices.
The tax authorities considered that the company could not be regarded as a taxable person who bought the fuel itself and then resold it to transport companies. The above was to be indicated, among other things, by the fact that it was the transport companies that decided on the fuel and how much they would acquire from the fuel stations.
The tax authority expressed its position in a tax decision issued to the company in which it determined its VAT tax liability and the amount of VAT to be paid under the scheme Article 108 VAT Act. The decision also pointed out, inter alia, that the company could not benefit from the right to deduct the VAT charged on invoices issued by the fuel stations for the purchase of fuel.
The company disagreed with the decision of the tax authority and brought an appeal against the decision taken.
The Board of Appeal annulled the decision of the Chief of the Tax Office on the ground that it had established the place of taxation of the applicant’s activities in the main proceedings in breach of the provisions of the VAT Act and, moreover, ruled on the substance of the case, setting out the tax obligations in VAT to the company.
The authority of the second instance confirmed, like the Chief of the Tax Office, that the company did not purchase and supply fuel in Poland.
In his opinion, the fuel was supplied directly by the Polish fuel stations to Lithuanian transport companies, which, using purchased fuel cards, supplied at these fuel stations with full freedom of choice, in particular as regards the quantity and type of fuel.
In the judgment of the Board of Appeal, the actual activity of the company was therefore to finance the purchase of fuel at these stations by Lithuanian transport companies using fuel cards. This activity therefore constituted a financial service exempt from VAT in Poland under the VAT Act.
Furthermore, since the invoices issued by the company did not reflect the actual course of business of the company, the second instance body also confirmed that the applicant was not entitled to deduct the input tax on invoices issued by the fuel stations. In addition, he considered that the sales invoices issued by the company give rise to the obligation to pay the amount of VAT referred to in the VAT Act. Article 108 VAT Act.
The case went to the Provincial Administrative Court and was subsequently presented to the Supreme Administrative Court, which decided to ask a preliminary question to the Court of Justice of the European Union (TEU).
The NSA recalled that, in accordance with the case law of the Court of Justice, in order to ensure VAT neutrality, the invoice issuer, who acted in good faith, should be able to correct the tax unduly shown on the invoice in accordance with the procedure laid down by the Member State concerned.
Since Polish law does not provide for such a procedure in case of initiating a tax proceeding against the company concerned, it was not possible to correct the tax unduly shown on invoices issued to Lithuanian transport companies.
In addition, what is important if transactions between fuel stations, a company and Lithuanian transport companies were correctly taxed VAT, these transport companies would not receive invoices issued by the company that show unduly VAT, but invoices issued by fuel stations for the supply of fuel, showing a VAT equivalent to the amount indicated on invoices issued by the company.
As the NSA notes, the correct settlement of these transactions by participants would also entitle Lithuanian transport companies to apply for a refund of the VAT shown on invoices issued by fuel stations, indicating that the company's issuing invoices that unduly show VAT does not entail a risk of loss of tax revenue by the State.
In addition, the NSA stressed that the application of Article 108 The VAT Act on invoices issued by the company, while the supply of fuel stations is also subject to VAT, results in a double VAT burden on the same transaction.
NSA asks the TSEU
The Supreme Administrative Court, in its appeal to the CJEU, therefore wanted to answer whether Union rules and the principle of proportionality should be interpreted as precluding the application of a national provision such as Article 108(1) VAT Act on invoices with unduly shown VAT issued by a taxable person acting in good faith where:
- the action of the taxable person did not involve tax fraud, but was due to a misinterpretation of the provisions of the law made by the parties involved in the transaction, based on the interpretation of the provisions presented by the tax authorities and a common practice in this respect at the time of the transaction, assuming that the issuer of the invoice supplies the goods, while he actually provides a financial intermediation service exempt from VAT; and
- the recipient of the invoice with the unduly shown VAT would have the right to request its refund when the taxable person actually supplying the goods to him has invoiced the transaction correctly.
The Court made it clear in the judgment in question that, while Member States are entitled to adopt provisions to ensure the correct collection of tax and the prevention of tax fraud, the national provisions of any Member State cannot be used in such a way as to undermine the neutrality of VAT, which is a fundamental principle of the common VAT system established by Union law in this field.
The Court therefore held that Directive 2006/112 it does not contain provisions for the issuer to make a VAT correction invoice wrongly shown on the invoice, and it is therefore for the Member States to determine the rules on which the VAT correction may be made wrongly shown on the invoice.
In addition, it was stressed that, in order to ensure VAT neutrality, it is for the Member States to establish in their internal legal systems the possibility of correcting all tax invoices which are unfounded if the issuer of the invoice demonstrates good faith.
In those circumstances, the TEU replied that EU rules and the principles of proportionality and neutrality of VAT should be interpreted as precluding national rules which, consequently, do not allow a taxable person acting in good faith to correct invoices with unduly shown VAT, even though the recipient of those invoices would be entitled to reimbursement if the transactions shown on these invoices were properly cleared.
The judgment in question forms part of the EU Court’s existing case law line, according to which the principle of VAT neutrality should take precedence whenever the taxpayer acted in good faith and this does not entail a risk of loss of tax revenue by the State. The judgment in question gives hope that national tax authorities will be more likely to allow corrections to the invoices to be applied Article 108 VAT Act and review or procedure has been initiated.
Author: Rafał Dąbrowski
Lawyer, tax adviser included on the list of National Tax Advisory Board and licensed restructuring adviser. At Russell Bedford in charge of the Department of Tax Advisory. Author of numerous tax-related articles published in the industry press.