The sixth issue of KPMG’s Tax News in 2017 discusses the judgment of the Court of Justice of the European Union in the Enzo Di Maura case, C-246/16 regarding the VAT aspects of bad debt relief.
The Bulgarian VAT legislation does not provide for a mechanism for reduction of the VAT base in cases where a part or all of the taxpayer’s consideration remains unpaid. Thus, a supplier who has pre-financed the VAT due cannot decrease their VAT liability even where the client’s debt is definitely unrecoverable, let alone when there is still a chance, albeit a theoretical one, that the debt will be honored. However, the reasoning of the Court of Justice of the European Union (“ECJ” or “the Court”) in the Enzo Di Maura case, C-246/16, call into question the compatibility of these Bulgarian rules with the EU VAT law. Businesses having uncollected trade receivables should analyze the possibilities for decreasing their VAT liabilities related to outstanding clients’ debts.
The case referred before the ECJ concerns the right of an Italian taxable person, Mr. Di Maura (“the supplier”), to reduce his VAT taxable amount in relation to a trade receivable that has remained unpaid. The supplier made a VAT adjustment decreasing his VAT liabilities as one of his clients was declared insolvent and did not pay for certain supplies performed by Mr. Di Maura.
By virtue of the Italian VAT rules in force at the time, the Italian tax authorities rejected the reduction of the VAT base claiming that such an adjustment could be performed under the Italian law only if the insolvency proceedings were unsuccessful, i.e. once it is established that the debt would remain unpaid.
The supplier appealed the decision of the tax authorities before the competent Italian court, which decided to stay the national proceedings in order to ask the ECJ whether the Italian provisions in question were in line with the rules and principles governing EU VAT.
At the outset, the Court states that while the VAT Directive provides for a reduction of the taxable amount in cases of total or partial non-payment, Member States are in principle allowed to derogate from this rule.
The ECJ then recalls that the power of Member States to derogate is based on the notion that in certain circumstances and because of the legal situation prevailing in the jurisdiction concerned, non-payment of consideration may be difficult to establish or may only be of a short-term nature.
The Court thus accepts that it is relevant for the Member States to counteract the inherent uncertainty of whether or not a non-payment would be definitive or only temporary, which, as the ECJ notes, represents the principal objective of the derogation.
However, the Court finds that the derogation cannot extend to instances where such an uncertainty is not present, and thus cannot be construed as meaning that it is possible for Member States to exclude altogether the reduction of the VAT base in cases on non-payment. A contrary conclusion would, according to the Court, run counter to the principle of VAT neutrality.
The ECJ goes on to state that the mechanism for reduction of the taxable amount needs to respect the principle of proportionality. In that regard, the Court finds that the objective of the derogation could be achieved not only by (a) granting a VAT base reduction when the receivable is established to be unrecoverable, but also by (b) allowing the reduction where the taxable person could demonstrate a reasonable probability that the client’s debt will not be honored. In the latter case, the ECJ notes that it would be for the national authorities to determine (with due regard to the principle of proportionality and subject to review by the courts) the evidence for a probable extended period of non-payment which would need to be provided by the taxable person, according to the specific features of the applicable national law.
The following key points should, in our opinion, be highlighted:
If you have pre-financed the VAT due on trade receivables that remain outstanding and would like to better understand the implications of the Court’s judgment for your business, including by analyzing in further details the possibilities for potential reduction of the VAT base on the underlying supplies, the Tax & Legal professionals from KPMG in Bulgaria will be glad to assist you.
 Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax.
Bulgaria is among the Member States that have made use of this derogation.
The principle of VAT neutrality requires that that the trader, as tax collector of the VAT on behalf of the State, is entirely to be relieved of the burden of tax due or paid in the course of his taxable economic activities.
 The principle of proportionality states that the means employed for the implementation of the EU legislation must be appropriate to achieve the objectives of the respective measure and must not go beyond what is necessary in order to attain them.
 Coupled with a fallback rule providing for a subsequent increase in the taxable amount in the event that the consideration gets paid nonetheless in a following period.
 The judgments of the ECJ handed down in the preliminary ruling proceedings have a binding effect on the institutions of all Member States.
 See the judgment of the ECJ in case C-337/13, Almos Agrárkülkereskedelmi.
 In that regard, judgments of the Court in cases C-14/83, von Colson; T-237/08, Abadía Retuerta, para. 67; C-98/09, Sorge, para. 49 – 55.
 Insofar as the ECJ has not limited the temporal effects of the judgment. Generally, the judgments of the ECJ have a retrospective effect.
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