Tax alert 34 – Case C-101/16 Paper Consult

On 19 October 2017, the Court of Justice of the European Union (CJEU) released its decision in this Romanian referral concerning whether national rules which deny VAT deduction on the purchase of goods and services from taxpayers declared ‘inactive’ on the Tax Authority website is in line with EU law.

Taxpayers may be declared ‘inactive’ in one of three situations: (i) where they do not fulfil any of the statutory reporting obligations for a period of six months; (ii) where they evade tax supervision by declaring a registered office identification that does not enable the tax authorities to identify it; or (iii) where the tax authorities have established that they do not pursue their activity at the registered office or declared tax domicile.

The Romanian Tax Authorities expect businesses incurring Romanian VAT to routinely check whether suppliers are listed as ‘inactive’ on its website before doing business with them. Persons acquiring goods and/or services from taxable suppliers established in Romania who have been registered as ‘inactive’ are not entitled to deduct expenses and VAT on those purchases. In the current case, the supplier was listed on the Tax Authority website as ‘inactive’ as a result of failure to submit tax returns.

In agreement with the Advocate General, the CJEU held that the questions referred essentially concern the balance, on the one hand, of the right to deduct, and on the other hand, of the fight against tax evasion.

Considering the right to deduct, the CJEU noted that this is a fundamental principle of the EU VAT system and cannot, in principle, be limited. The right to deduct is subject to compliance with both substantive and formal requirements and according to settled case law, the principle of VAT neutrality requires deduction of VAT to be allowed if the substantive requirements are satisfied, even if a taxable person has failed to comply with some of the formal requirements.  The position is only different if non-compliance with formal requirements prevents the production of conclusive evidence that the substantive requirements have been met or if it is established that the right to deduct is being invoked fraudulently or abusively.  Which has not been established in this case.

As regards the national rules at issue in the main proceedings, the CJEU considered that these have the objective of combating VAT evasion.  However, whilst the pursuit of such an objective is allowed, The CJEU concluded that the measures go beyond what is necessary to attain the legitimate objective pursued by the VAT Directive.

The Judgment refers to an amendment to the Romanian Tax Code, effective from 1 January 2017, which allows any taxable person who made purchases from an operator who was declared ‘inactive’ to deduct the VAT on purchases relating to the transactions completed during the period of inactivity of that operator, where the operator subsequently regularises its situation.  This judgment suggests that a business may be able to deduct VAT related to purchases from inactive operators even if the operator does not re-register for VAT purposes, provided that it is able to prove, with objective evidence, that during the inactive period the operator (supplier) was a taxable person and the substantive conditions for the deduction (in general) were met and there were no indications of fraud.  (The domestic provisions effective from 1 January 2017 therefore appear to be more restrictive than the position presented by the judgment).

Any businesses which have been refused Romanian VAT deduction historically on purchases as a result of its suppliers being declared ‘inactive’, may wish to consider submitting claims to the Romanian Tax Authorities.

Author: Ramona Stefan – Indirect Tax Manager

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