VAT proportional adjustment is still possible after submission of final (annual) VAT declaration

By the end of April, the EU Court of Justice started working more intensively. In this case, a Portuguese company applied VAT exemption for two years without noticing that the law had been amended and the services were subject to VAT. The company paid VAT for these two years and asked for an adjustment to the proportion, but the administration disagreed. On 30 April, the EU Court of Justice decided[1] that in principle the prohibition on changing the deduction method (proportion) complies with the VAT Directive, when it has been declared as the final method (we declare it by the annual statement). However, there might be an exception when this fixed final proportion could be adjusted, namely, if:

  • an EU member state allows a taxpayer to apply proportional VAT deductions;
  • the taxable person was unaware, and acting in good faith, when choosing the deduction method, that a transaction which it regarded as exempt was in fact taxable;
  • the general limitation period for the purposes of adjusting deductions has not yet expired;
  • the change in the deduction method makes it possible to establish more precisely the proportion of deductible VAT.

So, this time the Portuguese tax administration will have to yield to the company, which does seem just and fair. For this reason, it is worth fighting on the basis of VAT neutrality and other fundamental principles if the administration applies adjustments on the VAT sales side, but disallows a simultaneous adjustment on the purchase side.

VAT in the fuel supply chain

This case[2] once again concerns the question: which transaction in a cross-border supply chain with multiple transactions is to be regarded as 0% VAT supply if there is only one physical movement of goods.

Czech company Herst carries on business of fuel wholesale and retail; by using its own vehicles, it transported fuel from several EU member states to their destination in the Czech Republic in order to sell the fuel to others (by the same transport). The sellers were intermediaries from the Czech Republic. Herst carried out fuel transportation from these EU states under the excise duty suspension arrangement. Herst did not receive remuneration for fuel transportation; it earned profit from the difference between the fuel purchase and sales prices. Herst becomes the fuel owner only after release of fuel for free circulation (for the needs of excise duty) in the Czech Republic.

Therefore, Herst considered that the fuel purchase place was located in the Czech Republic (and local VAT was applicable to purchases from Czech intermediaries). The tax administration considered that Herst made purchases in the member state where the fuel was located at the moment when it was loaded for the purpose of transportation to the destination in the Czech Republic (and the reverse was applicable). The tax administration denied entitlement to deduct local VAT for these purchases. In addition, involvement of several intermediaries in this chain is allegedly indirect proof of VAT fraud.

The EU Court of Justice indicated that the national court could take into account:

  • the fact that fuel was transported under the excise duty suspension arrangement cannot serve as the decisive element in determining to which purchase the transportation should refer among purchases made within the chain reviewed during the principal case;
  • likewise, the EU Court of Justice indicated that transfer of rights to handle property does not necessarily coincide with rights to dispose of property; on the other hand, transfer of ownership rights does not require that the property is physically held by the transferor; even physical movement of goods across borders is not a decisive criterion, it is rather the person’s rights to make a decision at the particular moment on resale of the goods; therefore, within a supply chain multiple sales transactions may occur, but transportation applies to only one of them ‒ but which one?
  • if Herst acquired the right to sell the goods in another EU country before they were transported, this Herst purchase is likewise subject to 0% VAT on cross-border transactions; thus, the Czech administration was right this time and Herst’s purchase from Czech intermediaries should not be subject to Czech domestic VAT; however, the Court pointed out that disposal of the goods thereafter during transport and other additional factors (Herst’s prepayment to the seller and the fact that transportation was not carried out as a separate service) may also influence this conclusion.

In VAT cases the national court cannot apply the constitutional principle in dubio mitius (which means a more lenient approach in case of doubt) – it must follow the VAT Directive as closely as possible. In essence, the EU Court of Justice wanted to stress that EU law should be prioritised in cases of VAT issues where constitutional principles and EU law collide.

Notably, the EU Court of Justice asked the Czech court whether it really wanted answers to these questions because the facts were very similar to another case[3]. As a result, the Czech court revoked a range of questions; so, if you have faced this kind of situation, you can take into account the findings of this other EU court case. In addition, together with the new (in force as from 1.1.2020) VAT Law amendments regarding transaction chains, and a range of other EU norms and EU case law, this area (transactions chains) seems to be sufficiently clear.

[1] C-661/18.

[2] C-401/18.

[3] C-414/17.