Court of Justice of the European Union (hereinafter – CJEU) has enacted a preliminary ruling on 11th of December, 2014 after analyzing the right of taxable persons to deduct the VAT when effecting intra-community acquisition of goods. CJEU has admitted that a right to VAT deduction is a fundamental principle of the common system of VAT established by EU legislation and even if the taxable person has failed to comply with some of the formal requirements this cannot result the loss of the right.
In order to ensure neutral tax effect regardless to the number of transactions, taxable persons may deduct VAT that they have paid to another taxable person from their payable account, following the principle that VAT is paid by the final purchaser. The common system of VAT consequently ensures neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT. If taxable person uses goods and services he purchased for his economic activities, he has a right to deduct VAT in the member state, where he carries out his activities. Right for VAT deduction is set out in article 17 of the Sixth VAT directive.
CJEU has verified the correct application of the reverse charge procedure, i.e. when the purchaser must count ant pay VAT for goods and services he purchases and has a right for VAT deduction. CJEU excluded the substantive requirements of the right for deduction from formal ones developed for control and also indicated the substantial requirements consist of base and scope of the right (Article 17 of the Sixth VAT Directive) whereas the formal requirements for that right, by contrast, regulate the rules governing its exercise and monitoring thereof and the smooth functioning of the VAT system, such as the obligations relating to accounts, invoicing and filing returns. (Articles 18 and 22 of the Sixth VAT Directive). Moreover, CJEU emphasized the right to deduct arises at the time at which the VAT becomes chargeable, that is to say, not after the formalities laid down for the exercise of that right have been completed, but, in principle, at the time at which the assignment of property or provision of services occurred. CJEU declared the right for Member States to lay down formalities in respect of the rules governing the exercise of the right to deduct. However, CJEU assured that taxable person retains the right to VAT deduction if the substantive requirements are satisfied and the failure by the taxable person to fulfill the formal obligations required for the purposes of the exercise of that right cannot result in the loss of the right itself, where it is proven, including by other means, that the sum payable was in fact paid and the components of the right to deduct are not disputed.
According to the case Italian company Idexx Laboratories Italia Srl (hereinafter – Idexx) performed intra-Community acquisitions from France and Netherlands companies, without fulfilling the formal obligations required under national law, Idexx failed to record some invoices on VAT register issued by France and Netherlands companies. After conducting an inspection the Italian tax administrator took the view that those transactions were on which VAT was to be charged and subject, as such, to the reverse charge procedure. In that context, the tax administrator sent to Idexx a tax assessment for VAT and for a sum equivalent to 100% of the tax, by way of a penalty for the failure to comply with the obligations.
The deduction system thus established is meant to relieve the taxable person entirely of the burden of the VAT payable or paid in the course of all his economic activities. Where the reverse charge procedure applies, the provision of the Sixth Directive allows Member States to lay down formalities in respect of the rules governing the exercise of the right to deduct. For instance Article 22 of the Sixth Directive provides for the imposition of certain obligations on the taxable persons liable for that tax, such as the obligations to keep accounts and to submit a VAT return. Under Article 22 part 8, Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of fraud. However, the formalities thus laid down by the Member State concerned, which must be complied with by a taxable person in order for the latter to be able to exercise the right to deduct VAT, should not exceed what is strictly necessary for the purposes of verifying the correct application of the reverse charge procedure, such measures however must not go further than is necessary to attain such objectives and must not undermine the neutrality of VAT. Consequently CJEU stated that the failure to fulfill the formal obligations required for the purposes of the exercise of the right to VAT deduction (as on the circumstance of the proceedings) cannot result a loss of the right itself forasmuch as substantive requirements had been satisfied by taxable person.
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