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European Court of Justice Explains Rules on VAT Refunds

Nov. 18, 2021, 8:01 AM

The Court of Justice of the European Union (CJEU) decided in the case Wilo Salmson France (C-80/20) that EU law precludes the rejection of a value-added tax (VAT) refund in a certain period merely because this VAT became due in an earlier refund period while a VAT invoice was issued in the later period.

The Court also decided in the CHEP Equipment Pooling case (C-396/20) that the Hungarian tax authorities are not allowed to reject a VAT refund in a case of discrepancies in the request without asking for further information before rejection.

Those two decisions are not only important for nonresident businesses requesting VAT refunds but also for VAT registered businesses that face similar issues.

Background

Under the EU VAT rules, a business/entrepreneur (VAT payer) may in principle deduct input VAT insofar as the costs are incurred for the purposes of its business activities. The purpose of the right to deduct VAT is to relieve businesses of any VAT costs (the neutrality principle of VAT for business), and that right in principle may not be limited.

A purchaser can immediately deduct input VAT when the output VAT becomes payable for the seller, on the condition that the customer is in possession of a proper VAT invoice.

The CJEU has stated in its case law that input VAT deduction should be allowed if the substantive requirements for VAT deduction are satisfied, even when some formal requirements are not fulfilled.

VAT registered businesses can deduct VAT on their regular VAT returns. Businesses that are not obliged to register for VAT can apply for a VAT refund using a procedure applicable for non-VAT registered businesses, hereafter referred to as “nonresidents.” Different rules apply for nonresidents who are established in one of the EU countries (hereafter “EU businesses”) and for nonresidents who are not established in any of the EU countries (hereafter “non-EU businesses”).

An easier process is possible for EU businesses, who can submit an online claim in their own country, i.e. data only and copies where required. This process is also called the 8th Directive procedure.

Non-EU businesses may be able to recover any VAT incurred using the so-called 13th Directive procedure, under which the claim is submitted directly to the tax authorities of the EU member state where the VAT costs are incurred. These claims are subject to the specific rules applicable in the particular EU member state.

However, VAT refund requests are subject to strict limitation periods; thus businesses should take care that they submit their requests within those time limits. If the deadline is missed, the tax authorities of the EU member state may not accept the claim.

It is possible to appeal the decision of the tax authority or make corrections in the claim application within time limits, following certain procedural rules.

Facts of Wilo Salmson France Case

A French company, Wilo Salmson France SAS (“Wilo Salmson”), purchased goods in Romania from ZES Zollner Electronic SRL (ZES). The goods stayed in Romania and therefore Romanian VAT was due on the sale.

In 2012, the legal predecessor of Wilo Salmson had submitted a so-called 8th Directive (2008/9) VAT refund request to the Romanian tax authority which was, however, denied on grounds related to the documents accompanying the application, and the fact that the attached invoices apparently did not meet formal requirements. According to the Romanian tax authority, there was no proof of payment of the invoices submitted, which was still a requirement under the law in force at the time.

ZES canceled the invoices initially issued in 2012 and issued new invoices in 2015, based on which Wilo Salmson submitted another 8th Directive VAT refund request to the Romanian tax authority in 2015.

The tax authority refused this request as unfounded, stating that the applicant had not complied with Romanian law requirements for the refund and had already applied for a refund for the invoices.

After Wilo Salmson appealed, the tax authority stated that the VAT referred to in the refund application had already been the subject matter of a different refund application and that the transactions for which the VAT refund application had been submitted concerned 2012, not 2015.

Questions Raised to the CJEU

The CJEU was asked to clarify whether:

  1. the right to deduct VAT may be exercised where no (valid) VAT invoice has been issued for purchases of goods;
  2. an application for a refund may be made in respect of VAT which became chargeable prior to the “refund period” but which was invoiced during the refund period. More specifically, whether it is possible to obtain a refund in 2015 of input VAT paid on purchases made in 2012, if the invoices initially issued by the seller in 2012 were found not to meet certain formal requirements by the tax authority and were therefore canceled (annulled) by the supplier and reissued in 2015;
  3. in the event of the annulment by the supplier of the invoices initially issued for the purchase of goods, and the issuing of new invoices by that supplier at a later date, the right of the buyer for a refund of the input VAT is to be linked to the date of the new invoices, in a situation where the annulment of the initial invoices and the issuing of the new invoices is not within the recipient’s control but is exclusively at the supplier’s discretion;
  4. national legislation may make the refund of VAT conditional upon the chargeability of the VAT in a situation where a corrected invoice is issued during the application period.

CJEU Response

  • Question 1

EU law precludes national regulations which link the refund period solely to the time in which the VAT becomes chargeable. It is also necessary to hold an invoice showing the payable VAT amount, even if the invoice does not fulfill all the formalities specified in Article 226 of the EU VAT Directive.

The right to deduct VAT may only be exercised where a (valid) VAT invoice has been issued for purchases of goods. It is only when a document is so flawed that it does not provide the tax authority with the information to support a claim for a refund that it can be considered that such a document is not an “invoice” within the meaning of the EU VAT Directive, as amended by Directive 2010/45.

The CJEU has, in its previous case law, stated that an invoice meets substantive requirements when it includes:

  • information on the supplier;
  • the recipient of the supply;
  • the goods or services supplied;
  • the price; and
  • the VAT amount payable.

All formal requirements for obligatory information on the VAT invoice do not have to be complied with fully for the VAT to be deductible, and a VAT invoice meeting all requirements may be provided at a later date (i.e., corrected retroactively).

  • Questions 2 and 4

EU VAT law precludes the rejection of the VAT refund in a certain period (e.g., for 2015) merely because it became due in an earlier refund period (e.g., in 2012), while a VAT invoice was issued in this period (2015).

  • Question 3

The unilateral cancellation of an invoice by a supplier—after the EU member state of refund has rejected the VAT refund—and the issuance by that supplier in a subsequent refund period of a new invoice for the same supplies, has no effect on the existence of the right to a VAT refund already exercised, nor on the period for which that right is to be exercised.

This means that the (new) refund request is subject to a limitation period applicable to the VAT refund under the national law. If the initial invoice met the substantive requirements, then the right for VAT deduction has arisen in an earlier period when the initial (canceled) invoice was issued.

As the CJEU has always noted in its case law on corrected invoices, the member state may deny their retroactive effect if the correction (or completion of the documents) was made “after a refusal decision was adopted.”

That also applies where an invoice is not only corrected but is canceled in its entirety and reissued after the refusal decision was adopted.

Instead of agreeing to the cancellation of an invoice and filing a new request on the basis of a new invoice, the company should have submitted an appeal of the denial of the refund (within time limits under national law) or made use of opportunities to make corrections in the initial request according to the rules provided by national law.

Facts of CHEP Equipment Pooling Case

CHEP Equipment NV (CHEP), based in Belgium, bought pallets in Hungary which it leased to other group companies. As it was not registered for VAT in Hungary, it submitted an 8th Directive claim.

The Hungarian tax authority, after requesting and reviewing the purchase invoices, paid only part of the claim. The balance partly related to invoices that had already been claimed or invoices which showed less VAT than CHEP had included on its refund application, and CHEP agreed with these adjustments.

However, the tax authority did not adjust the claim upwards where the invoices showed more VAT than CHEP had included on its application.

Questions Raised to the CJEU

The CJEU was asked to clarify whether a clear discrepancy between the amounts stated in the refund request and the invoices, that is to the disadvantage of the applicant, is not information on which the tax authority must request additional information before making a decision in respect of the refund.

CJEU Response

EU law precludes a tax authority from refunding VAT only up to the amount specified in a refund application when an invoice attached to the application shows that there is a right to a higher amount of refund.

The CJEU found that the discrepancy in the claim was capable of rectification and the principle of sound administration required that the Hungarian tax authority give CHEP an opportunity to correct its application.

Since the tax authority had obtained sufficient information that the VAT indicated in the invoices attached to the application for the refund was higher than the amount indicated in the refund application, it was not allowed to make the refund of the VAT only in the amount corresponding to the latter amount, without first, in line with due diligence and by most appropriate means, requesting the taxpayer to correct its application for the refund.

Simply paying the reduced claim was consequently a disproportionate response by the Hungarian tax authority to errors made by CHEP.

Practical Consequences

  • The right of VAT deduction/refund is in the period when a valid VAT invoice is issued even if this invoice relates to an earlier refund period.

In the Netherlands, the policy of the tax authority is already largely in line with the CJEU decision in the Wilo Salmson case. For example, if a U.K. trader receives an invoice in which the supplier mistakenly does not include Dutch VAT in 2019, and then in 2021 receives an additional invoice including the Dutch VAT which the supplier did not initially charge, the right for a VAT refund arises in 2021, not in 2019, because the correct VAT invoice including the Dutch VAT was only issued in 2021.

In the Netherlands, it is possible to submit a claim relating to the last five years (without right of appeal if the earlier deadlines provided by the EU Directives are not met) and this right to receive a refund in a later period is less important than in most other EU member states, where only the minimum periods provided by the EU Directives apply.

  • The CJEU decisions should make VAT refunds easier in the member states where refund is only possible up to the strict deadline contained in the EU VAT Directives.

EU Directives, for example, contain a minimum time limit of nine months for nonresident EU businesses and six months for nonresident non-EU businesses. If a VAT refund request was refused because the invoice did not meet certain minimum “substantive requirements,” or if it was not possible because the supplier did not issue a (valid) invoice on time, then the business has a right to request the VAT refund in a later period when it is in possession of a correct VAT invoice, although this VAT became chargeable in an earlier VAT refund period.

This would potentially diminish possible discrimination between registered and non-VAT-registered businesses, insofar as resident companies have, under the national legislation of member states, a limitation period of five to six years within which to apply for a refund of VAT, whereas nonresident EU businesses have a period of only nine months and non-EU businesses only a period of six months for exercising that right.

  • Refusal decisions of the tax authority may not be overturned by the subsequent cancellation and reissuing of the invoices.

If an invoice meeting “substantive requirements” for VAT deduction is canceled and a new invoice is issued for the same supply, the business cannot file a (new) refund request using this new invoice after a refusal of refund by the tax authorities for the canceled invoice. The business should appeal the decision (within time limits) or use opportunities to make corrections in the initial request according to the rules provided by national law instead.

It is important to follow the procedural requirements for appeals and stay in legal limitation periods when submitting refund requests.

  • The tax authority may not reject a VAT refund if it has not asked for further information before rejection.

If there are inconsistencies in the VAT refund application, the tax authority is not allowed to reject a refund if it has not requested further information before rejection.

Planning Points

  • Businesses should ensure that their purchase invoices meet at least minimum “substantive requirements” when they exercise their right to deduct input VAT and that they also obtain (retroactively) correct VAT invoices meeting all requirements.
  • Refusal of a VAT refund may not be overturned by subsequent cancellation and reissuing of the invoices.
  • It is important to follow the procedural requirements and stay in legal limitation periods when submitting refund requests because otherwise the VAT refund may be refused even if the substantive conditions for the VAT deduction are met.
  • The tax authorities are not allowed to refund VAT only up to the amount specified in the refund application when an invoice attached to the application shows that there is a right to a higher amount of refund.
  • The tax authorities are not allowed to reject a VAT refund in case of discrepancies in the VAT refund request if they have not asked for further information before rejection.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Aiki Kuldkepp is Senior Manager, Tax, with Grant Thornton Netherlands.

The author may be contacted at: aiki.kuldkepp@nl.gt.com

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