The European Court of Justice has recently issued an important judgement (Di Maura C-246/16) with regard to VAT and specifically to the interpretation of the provisions of the VAT Directive (Directive 2006/112/EC) for bad debts.
European Court of Justice release new VAT judgement
The Court ruled that, the Member States may not make the reduction of VAT taxable amount, in the event of total or partial non-payment, subject to the condition that insolvency proceedings have been unsuccessful, when such proceedings may last longer than 10 years. In its ruling the Court made some very important findings in respect to the interpretation of the VAT Directive that might call for changes in the way the directive has been implemented and applied in some of the Member States.
According to the general rule laid down by article 90 par. 1 of the VAT Directive, the taxable amount, for VAT purposes, in case of refusal or total or partial repayment or when the price is reduced after the supply takes place, shall be reduced accordingly. According to the Court and its case law, that provision embodies the principle of neutrality of VAT which requires that the taxable amount, for VAT purposes, is the consideration actually received by the trader and the amount of VAT collected by the authorities should not exceed the tax which the taxable person has himself received.
However, article 90 par. 2 of the VAT Directive, gives to each Member State the power to derogate from the general rule in case of total or partial non-payment. As it was stated by the Court, the objective of such a power given to the Member States, is to take account of the inherent uncertainty of the definitive non-payment of an invoice and with the consideration that the situation of non-payment of the purchase price does not of itself restore the parties to their original situation, unlike cancellation or refusal of payment. As a result it is for the Member States to decide whether each case shall lead to an entitlement to have the taxable amount reduced or whether such reduction shall not be allowed. Nonetheless, it is underlined that the exercise of the power to derogate from the general rule should be justified so that the measures taken do not undermine the objective of fiscal harmonisation pursued by the VAT Directive.
In any case, it is clearly stated at the ruling of the Court that Member States do not have the power to exclude the correction to the taxable amount altogether in case of a total or partial repayment. Such power would be against the principle of neutrality of VAT which, as already described, requires that the trader as tax collector should not be brought in a position to bear the burden of tax due or paid in the course of his economic activities.
Moreover, according to the principle of proportionality, one of the general principles of EU Law, the measures taken in order to accomplish the objective of the derogation from the general rule, should be appropriate to achieve the objectives stated in that measure and not go beyond what is necessary. In this respect, it was judged that the derogation from the right to reduce the taxable amount altogether might not be the only effective means towards that direction and mainly it might not be the less onerous for the taxable person who pre-finances the VAT by collecting it on behalf of the State.