The Supreme Tax Court has referred a number of questions to the European Court of Justice in connection with the deduction of input tax on thermal power units where the supply did not take place and in connection with the adjustment of the deduction of input tax paid on a payment on account. The cases under review concerned supplies of good which did not take place due to fraud and the related adjustment of the input tax deduction.
Before making final decisions on the cases (V R 29/15 and XI R 44/14 of 21 September 2016) the Supreme Tax Court referred certain questions of EU law to the European Court of Justice (ECJ) for a preliminary ruling. In the opinion of the Supreme Tax Court no input tax deduction could be made on the payment on account for the future supply of a thermal power unit because at the time of the payment the future supply of the thermal power unit was uncertain.
In essence the questions referred were as follows:
1. In cases of fraud by the supplier, how is it to be established whether the supply really was uncertain? In particular, is the taxpayer entitled to a deduction of the input tax paid when the goods were not supplied due to a fraud committed on the side of the supplier?
2. Are there specific provisions in the VAT Directive which support the German provision that the deduction of input tax deductions is dependent on the refund of the payment on account.
The Advocate General has now issued his opinions and made the following recommendations:
Question 1 – uncertainty of supply
Where a taxpayer has made a payment on account for goods or services which were subsequently not delivered or supplied, the input tax deduction on the supply cannot be refused where the taxpayer did not know and could not have known that the supplier did not intend to meet his obligations under the contract. The Advocate General took the view that the fact that the date of delivery was not specified in the contract did not mean that that the fulfilment of the contract was uncertain. In fact the tax authorities may only refuse the input tax deduction if they had sufficient proof that the purchaser knew or must have known that the supplier had no intention of meeting his obligations under the contract from the very beginning.
Question 2 – adjustment of input tax deduction
National provisions according to which the adjustment of input tax is made dependent upon the refund of payments on account do not stand in contradiction to the relevant EU provisions (here Articlke 184 – 186 of the VAT Directive). The General Advocate considered the condition a legitimate measure: taking into consideration the notion of neutrality within the EU, the measure prevents the taxpayer from actually be able to enjoy an unjustified enrichment in a situation where the input tax remains deducted but payments made are refunded. If on the other hand the payment is not refunded, a taxpayer who is prepared to make a payment upon account does not have to bear any excessive risk where the supplier’s intention to deceive is not known and cannot be known.
Advocate General’s opinion of 30 January 2018 (joined proceedings C-660/16, Kollross and C-661/16, Wirtl).