Recent Irish and Court of Justice of the European Union Cases
Indirect Tax Matters August 2020
An update and our view on some recent CJEU decisions regarding VAT related cases
Europe – CJEU cases
C‑547/18 - Dong Yang Electronics sp. z o.o. v Dyrektor Izby Administracji Skarbowej we Wrocławiu - 7 May 2020
Dong Yang Electronics (a Polish company) supplied manufacturing services to LG Display Co. Ltd. (a Korean company) for the assembly of printed circuit boards. The raw materials were provided to Dong Yang by a Polish subsidiary of the Korean company.
Under the general B2B place of supply rule for services, no VAT was charged by Dong Yang. The Polish tax authorities took the view that the Polish subsidiary of LG qualified as a fixed establishment of the Korean company in Poland and that as a result Dong Yang Electronics should have charged Polish VAT on the services provided.
The Polish court referred the case to the CJEU and asked the CJEU to consider firstly, whether the mere presence of a local subsidiary is sufficient for a supplier to conclude that a non-EU customer has a local fixed establishment receiving the service, and secondly, if not, whether a supplier is required to examine the contractual relationship between a parent company established outside the EU and its EU subsidiary to determine whether or not a fixed establishment exists.
In delivering its judgment, the CJEU starts with the general principle that in order to locate B2B services for VAT purposes, the most appropriate, and, therefore, the primary point of reference for determining the place of supply of services is the location at which the taxable person has established their business. Only where that place of business does not lead to a rational result, or creates a conflict with another member state, may another establishment come into consideration.
The CJEU confirmed that a subsidiary may qualify as a fixed establishment of its non-EU parent where the subsidiary is characterized by a sufficient degree of permanence, together with a suitable structure in terms of both human and technical resources to enable the foreign entity to receive and use the services supplied to it for its own needs. This must be determined based on the commercial and economic reality.
From a service supplier perspective, the Court considered that they initially must consider the nature and use of the service, the contract, order forms and VAT numbers used. Where the answer remains unclear, the place of supply is, by default, the business establishment. The supplier is not required to investigate the contractual relationship between the customer and its subsidiaries to determine where the customer is established from a VAT perspective.
The CJEU did not completely rule out the existence of a fixed establishment for LG in Poland, but confirmed that such an establishment could not be inferred merely from the existence of a Polish subsidiary. Furthermore, Dong Yang could not, as a service provider, be expected to enquire into the contractual relationships between different LG group entities to determine to which establishment the services were supplied.
C-276/19 - Commission v United Kingdom - 14 May 2020
This case relates to infringement proceedings brought by the European Commission against the United Kingdom, relating to its’ extension of the scope of the zero-rate of VAT for certain commodities traders.
The CJEU ruled against the UK and determined that it had unlawfully extended the scope of the original derogation it had agreed with the commission in the 1970’s. The Court considered that the UK has added a number of commodities markets to the scope of the zero-rating which were not covered by the original order granted and that it had failed to seek authorisation for their inclusion through an application to the Commission.
Case C‑43/19 - Vodafone Portugal — Comunicações Pessoais SA v Autoridade Tributária e Aduaneira - 11 June 2020
Vodafone concludes contracts with customers, some of which include special promotions subject to conditions, which tie those customers in for a predetermined minimum period (‘the tie-in period’). Under those terms and conditions, customers commit to maintaining a contractual relationship with Vodafone and to using the goods and services supplied by that company for the tie-in period, in exchange for benefiting from advantageous commercial conditions, usually related to the price payable for the contracted services.
The tie-in period may vary according to those services, and its purpose is to enable Vodafone to recover some of its investment on equipment and infrastructure, and on other costs, such as the costs related to service activation and the award of special benefits to customers. Failure by customers to comply with the tie-in period for reasons attributable to themselves results in them paying the amounts provided for in the contracts. Those amounts seek to deter such customers from failing to comply with the tie-in period.
In 2016, Vodafone self-assessed VAT on amounts received from customers in respect of non-compliance with the tie-in period. In 2017, it then filed an administrative appeal challenging that VAT self-assessment, because it considered those amounts were not subject to VAT.
The CJEU held that the amounts received by Vodafone after an early termination of a service contract that requires a customer to comply with a tie-in period, are considered as remuneration for a supply of services and therefore subject to VAT. This is also the case where the early termination charge is less than the amount that the provider would have received if services would have continued for the remainder of the contract.
C-276/18 - KrakVet Marek Batko sp. K. v Nemzeti Adó- és Vámhivatal Fellebbviteli Igazgatósága - 18 June 2020
KrakVet, a Polish established company, supplies products for animals, which it sells via its website. KrakVet had several customers in Hungary.
During 2012, it offered online customers the possibility to conclude a contract with a transport company established in Poland for the purposes of delivering the goods marketed by it, without itself being a party to that contract. Where necessary, the goods in question were delivered by that transport company to the warehouses of two courier companies established in Hungary, which then distributed them to Hungarian customers.
KrakVet has neither an office nor a warehouse in Hungary, and it is not disputed by the Hungarian tax authorities that it has no establishment for VAT purposes.
Since it was uncertain as to the Member State responsible for collecting the VAT relating to its activities, KrakVet applied to the Polish tax authority for a ruling. The Polish tax authority took the view that the place where KrakVet’s transactions were carried out was in Poland and that KrakVet had to pay VAT in Poland.
In addition, the Hungarian tax authority carried out an inspection of KrakVet and assigned it a technical tax identification number; it also raised an assessment for VAT, interest and penalties for failure to meet obligations to register with the Hungarian tax authority. Upon appeal to the Hungarian Courts, they sought a referral from the CJEU to confirm the applicable place of supply rules for distance sales in particular in the case where the customer, a private individual, is free to choose the transport provider.
In its judgement, the CJEU ruled that, in applying the distance sales rules, even a supplier’s mere recommendation of a transporter on its website can constitute “transport by or on behalf of the supplier”. Consequently, the supplier must pay VAT in the customer’s country, rather than in its own.
C‑835/18 - SC Terracult SRL v Direcţia Generală Regională - 2 July 2020
The Romanian tax authorities assessed Terracult SRL for VAT as it could not provide evidence that it had dispatched rapeseed to Almos GmbH in Germany. Terracult corrected the position not by challenging the assessment but by issuing a VAT invoice to Almos, which then mentioned that the rapeseed had never left Romania. It therefore became clear that Terracult had been correct not to charge VAT (albeit for the wrong reasons) as the supply was subject to a domestic reverse charge.
The CJEU ruled that Terracult had been entitled to issue a further invoice correcting the position and crediting the VAT, even though it had not challenged the original assessment. Member States must provide taxpayers with the ability to adjust tax that has been improperly invoiced, and where there is no risk of tax loss (as in this case) it would be a breach of the principle of neutrality to make a refund conditional on the taxpayer’s good faith or subject to the discretion of the tax authorities.
C 374/19 – HF v Finanzamt Bad Neuenahr-Ahrweiler - 9 July 2020
In 2003, HF constructed a cafeteria in an annex to its’ operated retirement home, which was accessible to visitors through an outside entrance and to residents of the retirement home via the home’s dining room.
HF initially stated that it would use the cafeteria in question exclusively for taxable transactions since it was intended for use by external visitors and not by residents of the retirement home, who were supposed to remain in the home’s dining room. Following an audit carried out in 2006, the Tax Office agreed, in essence, with the applicant’s statement, but took the view that it was unlikely that absolutely no residents at all visited and used the cafeteria with their visitors. The parties therefore agreed to assume tax-exempt use of the cafeteria at 10%. This led to an adjustment of VAT deducted.
Following a second audit, the Tax Office found that, from 2009 to 2012, HF no longer carried out sales transactions in the cafeteria and that in February 2013 the business had been removed from the commercial register. That finding led the Tax Office to make a further adjustment to VAT deducted for those years since the cafeteria was no longer used at all for transactions giving rise to the right to deduct input VAT.
The taxpayer appealed the adjustment assessment claiming that, although the cafeteria, which forms part of the company’s assets without the possibility of private use, is no longer used for taxable purposes, there has been no change in the use of the cafeteria capable of leading to an adjustment. In support of this view, the taxpayer outlined that access to the cafeteria was blocked for reasons of safety and there had been no increase in use of the cafeteria for a VAT exempt use. As such, the fact the cafeteria was not being used should be understood to be the result of a bad investment and not a change in use to a fully exempt activity.
In the CJEU’s view, given that during the period from 2009 to 2012 taxed transactions had ceased, the cafeteria, being an integral part of the retirement home operated as a VAT exempt activity, was therefore used from then on exclusively for the solely exempt transactions of the company. As such, an adjustment to VAT under the capital goods scheme was required.
C‑424/19- Cabinet de avocat UR v Administraţia Sector 3 a Finanţelor Publice prin Direcţia Generală Regională a Finanţelor Publice Bucureşti - 16 July 2020
In 2015, UR, a law firm established in Romania, requested the Public Finance Authority to remove it, with effect from 2002, from the register of taxable persons for VAT purposes and to reimburse the VAT collected by that authority during the period 1 January 2010 to 31 December 2014, on the ground that it had been entered in that register in error.
UR appealed against the Romanian Authority’s failure to grant the request. In support of its appeal UR sought to rely on the authority of a judgment of 30 April 2018 in which the Court of Appeal in Bucharest upheld that a taxpayer such as UR which practises the profession of lawyer does not engage in any economic activity and, consequently, cannot be regarded as carrying out transactions for the supply of goods or services, since the contracts concluded with its clients are contracts for legal assistance and not contracts for the provision of services.
The CJEU confirmed in its judgement that a person practising the profession of lawyer must be regarded as a ‘taxable person’ within the meaning of the VAT Directive.
Secondly, the CJEU was asked to consider whether EU law must be interpreted as meaning that a national court, in a dispute relating to VAT, may not apply the principle of the authority of res judicata (the legal principle that a matter that has been adjudicated by a competent court may not be pursued further by the same parties) where the application of that principle would prevent that court from taking into account EU legislation on VAT.
The CJEU held that EU law precludes a national court, in a dispute relating to VAT, from applying the principle of res judicata where that dispute does not relate to a tax period identical to the one which was at issue in the dispute which gave rise to the judicial decision having the authority of res judicata, does not have the same subject matter as that dispute and where the application of that principle would prevent that court from taking into account EU legislation on VAT.