Indirect Tax alert: Incorrect invoiced VAT (ENG)
Correction of incorrect invoiced VAT allowed even though VAT assessment was final – CJEU 2 July 2020, C-835/18 (SC Terracult SRL). This recent case shows that material circumstances for VAT liability can be more important than the formal requirements
SC Terracult SRL (“Terracult”) is established and VAT registered in Romania. Terracult supplied goods to a business customer established in Germany. Terracult initially qualified the supply of goods as intra-Community supplies subject to the 0% VAT rate. Terracult was however not able to prove that the goods had left Romania. The Romanian tax authorities therefore qualified the supplies as local supplies and imposed a VAT assessment for local Romanian VAT. The VAT assessment was not disputed formally by Terracult and became final. Terracult corrected the invoices accordingly, but afterwards it appeared that the supply of goods should indeed have been subject to 0% VAT with application of a local reverse charge mechanism. Terracult corrected the invoices once again and reclaimed the incorrect invoiced VAT through its VAT return.
The Romanian tax authorities however argued that the VAT assessment was already final, with a rejection of the VAT reclaim as a result.
Directive 2006/112 (EU VAT Directive) does not contain any provisions relating to the adjustment of VAT that has been invoiced incorrectly. As a first principle, it is a prerogative of the Member States to lay down the conditions under which incorrect invoiced VAT may be adjusted.
The European Court of Justice (CJEU) considered in this case that a supplier cannot be held liable for the payment of VAT if VAT is not due from the supplier. Suppliers who determined the VAT consequences of their supplies incorrectly, resulting in invoicing and paying VAT incorrectly, are in principle entitled to receive the VAT back. The EU VAT system must be neutral and aims to relieve taxable persons entirely of the burden of VAT in the course of its economic activities (e.g. VAT should in principle not be a cost for taxable persons that have activities subject to VAT).
In order to ensure neutrality of VAT, Member States may allow the correction of incorrect invoiced VAT if the issuer of the invoice (for convenience: the supplier) shows that the supplier acted in good faith. Further, where the supplier eliminated the risk of any loss of tax revenue in an adequate timeframe, the principle of neutrality requires that incorrect invoiced VAT can be corrected, irrespective of whether the supplier acted in good faith. Suppliers are of course not entitled to a VAT refund if they act fraudulently, in which case they can also not rely on the EU VAT Directive and EU law.
Further, the principle of effectiveness – another fundamental principle of the EU VAT system – requires that Member States set a reasonable timeframe to ensure legal certainty. The principle precludes national legislation or administrative practices that make it excessively difficult to exercise the rights conferred by EU law, such as the correction of incorrect invoiced VAT.
The CJEU attaches high importance to the fundaments of the EU VAT system: the principle of neutrality and the principle of effectiveness. As earlier case law has already demonstrated, formal rules do not always ‘win’. Also this CJEU case enhances the development that material circumstances can be more important than the formal requirements. Please note that such material circumstances should be supported by clear, objective information and documentation. This case shows even more that it is essential to determine the VAT position of a business and keep such position updated in combination with recording business decisions and keeping a detailed administration.
- Bart Matthijssen (NL)
- +31 (0)6 10 35 27 02
- Ramona Burduja (RO)
- +4 072 4072915