The CJEU has concluded that a Member State must allow Bad Debt Relief and that a Member State’s ability to derogate must be proportionate.
This case concerns Italy’s Bad Debt Relief (BDR) rules. In Italy BDR could only be claimed at the conclusion of unsuccessful insolvency or enforcement proceedings, when it has become certain that the debt will not be honoured. This can take more than ten years and may be an uneconomic process for smaller debts. The taxpayer argued that these rules contravened EU principles of proportionality, effectiveness and neutrality. The Court of Justice of the European Union (CJEU) has followed the Advocate General (AG), concluding that a Member State must have a BDR scheme so that neutrality is respected. The Court also concluded that the derogation in Article 90(2) of the VAT Directive allows a Member State to set conditions to reflect the uncertainty of non-payment, but they must be proportionate.
The earlier AG, found that the Italian rules were not compatible with the Directive. The most interesting part of this case concerns the scope of the permitted derogation from Article 90 in cases of total or partial non-payment. The earlier AG opined that this derogation does not allow for a “complete exclusion of the possibility of correction” of the taxable amount.
The CJEU has agreed with the AG, concluding that the tax authorities cannot collect an amount of VAT exceeding the tax the taxable person has received as part of the consideration. Article 90(1) of the VAT Directive requires a Member State to reduce the amount of VAT payable whenever part or all of the consideration is not received, after the time at which VAT has been declared on the original agreed price. However, a Member State can also derogate from that rule under Article 90(2). The Court adds that power to derogate is there because, unlike where a supply is cancelled, non-payment may be difficult to establish, or may only be temporary. The power to derogate cannot however, go beyond that uncertainty. So for instance, a Member State cannot have no BDR scheme. Neutrality requires that a taxable person should be relieved of the burden of VAT due or paid in the course of his taxable economic activities.
By making a taxable person wait up to a decade or more for BDR in Italy went beyond the objective of the derogation and subjected taxpayers to a disadvantage by comparison with competitors in other Member States, and with suppliers who are paid at time of supply and have no bad debts, or who make supplies where the customer accounts for the VAT. That objective would be achieved by allowing BDR once the taxpayer had demonstrated a ‘reasonable probability’ of non-payment, while requiring the relief to be repaid if payment was subsequently received from the customer, or a third party.
There are some Member States that have no BDR at all. Earlier CJEU decisions have implied this is permissible, however Di Maura is clear that it is not. There are other Member States which, like Italy, apply quite onerous conditions. The decision does not however, clarify at what stage a taxpayer might be viewed as having demonstrated a reasonable probability of non-payment beyond saying that having to wait more than ten years is too long.
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