On March 18, 2021, the Court of Justice of the European Union (CJEU) issued a positive judgment in the Polish case C-895/19 held that the Polish provisions of the Polish VAT Act, which in a specific situation prohibits the recognition of output and input tax on intra-Community acquisition of goods (ICA) in the same settlement period, are inconsistent with the EU VAT Directive.
From May 1, 2004, Polish taxpayers, along with Poland’s accession to the EU, as well as in the other EU Member States, are entitled to deduct VAT on ICA for the period in which the tax obligation arose.
Pursuant to the principle expressed in art. 86 point 1 of the Polish VAT Act, which is an implementation of the principle of tax neutrality expressed in art. 1 point 2 of EU VAT Directive 112, to the extent that the goods and services are used to perform taxable activities, the taxpayer referred to in art. 15 of the Polish VAT Act, has the right to reduce the amount of output tax by the amount of the input tax.
As a rule, this right arises in the settlement for the period in which a tax obligation arose in relation to goods and services purchased or imported by the taxpayer (art. 86 point 10 of the Polish VAT Act).
In the legal status valid until December 31, 2016, in the case of ICA, it was created in accordance with art. 86 point 10 of the Polish VAT Act, provided that the taxpayer includes the amount of output tax in the VAT return in which he is obliged to settle this tax (art. 86 point 10b point 2 (b) of the Polish VAT Act) However, as a result of the amendment, the legislator introduced a strict deadline of 3 months to exercise the right under art. 86 point 10 of the Polish VAT Act.
As a result, from January 1, 2017, this right in Poland was significantly tightened in the VAT Act through a new condition consisting of a temporary limitation of the right to deduct.
It is true that taxpayers have the right to settle the input and output tax resulting from ICA transaction in the same VAT settlement period, provided that: they received the invoice for the purchased goods that constitute as ICA for this taxpayer during 3 months from the end of the month in which the tax obligation arose in relation to the purchased goods, and they included the amount of the output tax in respect of ICA in the tax declaration, in which they are obliged to settle this tax, no later than within 3 months from the end of the month in which the tax obligation arose in relation to the purchased goods.
As a consequence of the changes, exceeding the 3-month deadline for VAT settlement due to ICA, taxpayers are obliged to settle ICA payments – but also other transactions settled on the basis of a reverse charge, for example, import of services also – in the different periods i.e. the output tax in the period when the tax obligation arises (retrospectively), and the input tax in the current settlement (on an ongoing basis). This approach often creates tax arrears and interest which need to be paid to the tax authorities.
The tax authority’s approach
From the beginning, the described restriction raised doubts as to the compliance of the introduced solutions with the EU VAT Directive, in particular with the principles of tax neutrality and proportionality. Only the tax authorities’ representatives had no doubts.
In the opinion of the tax authorities and numerous of the individual tax rulings issued do not contradict EU VAT Directive 112 with the principle of tax neutrality and proportionality. They do not limit the taxpayer’s right to reduce the output tax, as it results from the very structure of the value-added tax. It is also emphasized that art. 178 of Directive 112 provides the possibility for EU Member States to introduce certain formalities for the right to deduct VAT, in the opinion of the tax authorities, is the requirement under art. 86 point 10b point 2 lit. b of the VAT Act, i.e. a 3-month period.
Another popular argument presented by the tax authorities is that despite exceeding the 3-month deadline, after which there is no possibility of settling the input tax and output tax due to ICA in one settlement period, the principle of neutrality is not violated because the deduction of input tax is due, however, at a later date than the settlement of output tax.
The tax authorities repeated the above arguments in its justifications without any detailed analysis of the facts. And yet, in addition to the discipline of the taxpayer, contributing to the fight against abuse of the law, there are situations in the business where the taxpayer is not able to meet the 3-month deadline, for example in particular in a situation not attributable to the purchaser, such as delays in issuing an invoice, in receiving an invoice, errors in its preparation and incorrect classification of transactions on the part of the purchaser. Therefore, showing the amount of the output tax later than 3 months, by means of an adjustment in the relevant declaration is not related to the abuse of law or the attempt to reduce the tax.
The taxpayers have repeatedly sought support for their arguments in the field of neutral settlement of ICA in courts. Despite the appearance of several positive judgments, for example, I SA/Kr 709/17 of the date on September 29, 2017, III SA/Wa 2044/18 dated on July 17, 2019, and III SA/Wa 141/19 dated on July 12, 2019 – today they are not final judgments), this did not lead to the development of a uniformed positive line of jurisprudence.
It is important to emphasize that the courts, sharing the taxpayers’ position, argued that the new regulations were in conflict with the principle of neutrality. The right to deduct input VAT arises if the material conditions are met, even if the taxpayers have failed to meet certain formal requirements. The court stated that the provisions also infringed another fundamental principle of the system, namely the principle of proportionality. Attention was also paid to the jurisprudence of the CJEU for example in case C-518/14 (Senatex). The judgment in Case C 590/13 (Idexx Laboratories) is equally important in this context.
The case C-895/19
In this context, the action taken by the Polish court in Gliwice was so important, as it had doubts as to the compliance of art. 86 point 10b point 2 lit. b of the VAT Act with EU law. The court suspended the proceedings and, by a decision dated November 4, 2019 (I SA/Gl 495/19), asked the CJEU for a preliminary ruling:
Is article 167 in connection with article 178 of VAT Directive 112 should be interpreted in such a way that it is contrary to national provisions which condition the the right to deduct input tax in the same settlement period in which the output tax is settled, in relation to a transaction constituting a intra-Community acquisition of goods, from showing the output tax on such transactions in the relevant VAT return, submitted within the strict deadline (in Poland 3 months) from the end of the month in which the tax obligation arose in relation to the purchased goods and services?
What is the CJEU’s opinion?
In individual theses or fragments of the CJEU, stressed that among others:
- The EU Member States may adopt, pursuant to art. 273 of the VAT Directive, measures to ensure the correct collection of tax and prevent tax evasion. However, these measures must not go beyond what is necessary in order to achieve those objectives and must not undermine the neutrality of VAT,
- the entitlement to deduct may only be made conditional on material conditions which are provided for in the VAT Directive and which, in relation to intra-Community acquisitions, are listed in art. 168 lit. c of this directive. However, it does not necessarily depend on the receipt of an invoice or the submission of a declaration or settlement of VAT due on such a purchase within a specified period,
- it would be contrary to this logic to temporarily burden the taxpayer with the burden of VAT due on the intra-Community acquisition, the more so as no amount is due to the tax authorities for such acquisition,
- provided that the material conditions for the right to deduct VAT are met, the examination of which is the responsibility of the referring court, the application of national legislation may not automatically prevent and due to a breach of the requirement to formally exercise the right to deduct VAT due on intra-Community acquisitions during the same period as the settlement of the same VAT amount without taking into account all relevant circumstances, in particular the good faith of the taxpayer,
- national legislation which systematically prohibits the exercise of the right to deduct VAT in connection with an intra-Community acquisition in the same period in which the same amount of VAT should be settled, without taking into account all relevant circumstances, in particular the good faith of the taxpayer, goes beyond what is necessary, firstly, to ensure the correct collection of VAT where, as it is clear from the case-law cited in paragraph 31 of this judgment, no amount of VAT is owed to the tax authority and, secondly, to prevent tax evasion.
The CJEU held that articles 167 and 178 of the EU VAT Directive must be interpreted as precluding the application of national provisions under which the right to deduct value-added tax (VAT) relating to an intra-Community acquisition of goods during the same tax period, to which VAT is due, depends on reporting the output tax in the VAT return, submitted within three months from the end of the month in which the tax obligation arose in relation to the purchased goods.
Effects and Opportunities
The CJEU judgment means that taxpayers have the opportunity and should:
• analyse settlements in terms of showing ICA in the different months, in order to correct them (from January 2017), leading to full ICA transaction neutrality,
• if the taxpayers are in arrears with interest in the field of ICA and it has been paid to the tax office, prepare argumentation and submit an application for reimbursement of the amounts paid in the form of overpayment or supplementary refund,
• apply for the reopening of proceedings, although the time is limited in this respect and counted from the date of publication of the operative part of the CJEU ruling in the Official Journal of the EU,
• decide whether to start neutral settlement of transactions on the side of input tax and output tax due to ICA now or to wait until the changes in the provisions of the Polish VAT Act.
Does the judgment also apply to the so-called non-transactional ICA, import of services, or other transactions that were or are settled on the basis of a reverse charge mechanism?
The judgment should, per analogiam, affect other transactions settled on the basis of the reverse charge mechanism, if only due to the principle of the identical mechanism of clearing these transactions.
In this regard, however, caution is recommended as it is not known whether the Ministry of Finance will approach this issue in a narrow manner.
Therefore, when applying for reimbursement of overpayment the amounts paid (arrears with interest), it is worth preparing for the purpose of potential tax audit in this regard by the tax authorities.
For more information, please feel free to contact us:
CEE VAT Compliance Director
VAT Compliance Manager