KPMG's Tax News outline and highlight legislative changes and trends in the area of tax.
The fifth issue in 2015 discusses a judgment of the Court of Justice of the European Union on the right to refund VAT assessed by the Bulgarian tax authorities.
The Bulgarian VAT legislation does not provide for a mechanism by which suppliers could adjust the VAT due on their supplies and pass it on to the recipients of the supplies where the VAT in question has been assessed by the tax authorities. Neither does it set out a procedure enabling recipients to deduct the VAT on purchase transactions assessed to their suppliers. The judgment of the Court of Justice of the European Union (ECJ or “the Court”) in case C-111/14, GST – Sarviz analyzes the principle of VAT neutrality in the context of the Bulgarian VAT rules.
In the case at hand, a German entity, GST Service AG, Germany, rendered certain services to its Bulgarian related party. The transactions consisted of supplies of services of technical and consultancy nature, as well as of rent of scaffolding and materials. Considering that the supplier was not established for VAT purposes in Bulgaria, the recipient accounted for the VAT due on the supplies under the reverse-charge mechanism, i.e. it self-charged the tax due and, at the same time, deducted it as an input VAT credit.
The tax authorities, however, took the view that the supplier had a fixed establishment in Bulgaria and that the supplies in question were rendered through this establishment. As a result, the authorities registered ex officio the supplier for VAT in Bulgaria and assessed VAT liabilities and penalty interest to the German entity for the services rendered to its Bulgarian counter-party. The German entity remitted the sums assessed to the state budget.
Since the VAT on the supplies was assessed with a VAT audit act, the supplier was not able, under the Bulgarian VAT rules, to adjust the initial invoices and pass on the amount of VAT assessed by the tax authorities to the recipient. Nevertheless, the recipient claimed the VAT amount for refund directly from the tax office on the basis of the VAT audit act of the supplier. This claim for reimbursement of the recipient was rejected by the tax authorities as it was not supported by a valid invoice for the purposes of the VAT deduction. Following the rejection of the recipient’s claim, the supplier in turn filed a claim for refund of the VAT assessed by the tax authorities following the national procedure for refund of overpaid or unduly paid taxes. This claim was disallowed by the tax authorities as well, on the grounds that the VAT was assessed by means of a valid administrative act and, thus, the tax could not be regarded as undue.
Against this background, the Bulgarian Supreme Administrative Court referred several preliminary questions to the ECJ, the key one being whether or not the principle of VAT neutrality precludes the application of the national rules in question.
At the outset, the ECJ dismissed the possibility that the application of the reverse-charge mechanism by the recipient could relieve the supplier from its obligations as a VAT liable person.
Whether or not the activities of the supplier were actually carried out through a fixed establishment in Bulgaria within the meaning of the VAT Directive (i.e. whether or not the supplier was actually liable for VAT in Bulgaria) was not among the questions referred by the Bulgarian court and, hence, this was taken for granted by the ECJ.
Turning to the central preliminary question, the ECJ found that the refusal to refund the VAT to the supplier is tantamount to the supplier effectively bearing the fiscal burden of the tax, which is contrary to the principle of the neutrality of VAT.
The Court argued that the disallowance of the supplier’s claim for refund of the tax was not justified by reasons of ensuring the correct levying and collection of VAT and the prevention of tax evasion, since the risk of any tax loss had been wholly eliminated with the rejection of the recipient’s refund claim. Referring to its earlier case-law, the Court stated that where the risk of tax loss had been fully eliminated, the taxpayer is to be allowed to adjust the VAT amount initially invoiced, without this adjustment being dependent on the discretion of the tax authorities. The implicit conclusion in the reasoning of the Court is that if the Bulgarian legislation provided for an adjustment mechanism in cases where the tax is assessed to the taxpayer by the tax authorities, this unusual situation of the supplier claiming refund of assessed output VAT would not have arisen.
This ECJ judgment could be particularly useful to taxpayers appealing against rejection of VAT refund under similar circumstances, where the risk of loss of tax revenues has been fully eliminated. Furthermore, recovery of VAT may be sought where suppliers failed to charge output VAT to a recipient, entitled to full input VAT deduction, and the tax was assessed by the tax authorities – for Member States whose legislation, as is the case in Bulgaria, does not provide for an adjustment mechanism under similar circumstances.
In Bulgaria, a legislative change laying down detailed rules for adjustment of the VAT where the tax authorities have issued a definitive tax audit act to the supplier would be appropriate.
If you were rejected VAT refund under similar conditions or are in doubt as to whether the judgment in the GST – Sarviz case could be used to support your position on VAT refund, the tax litigation team of KPMG in Bulgaria will be glad to assist you.
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