Recently, the Court of Justice of the European Union issued a judgment concerning the settlement of VAT on Intra-Community Acquisitions of goods, as well as the importation of services and the supply of goods. This is a favorable judgment that allows businesses to adjust their settlements and apply for interest refunds. How has the VAT settlement for Intra-Community Acquisitions or the importation of services been handled up to now? What was the issue that led to the case being brought before the CJEU, and what does the judgment change?
The problem with VAT deduction
Since January 1, 2017, regulations have been in force stating that failure to report within the deadline the so-called reverse charge transaction, which includes intra-Community acquisitions of goods, importation of services, and supply of goods where the purchaser is liable for tax, resulted in the entrepreneur losing the right to deduct the VAT incurred in the same month in which the tax is due. VAT can only be deducted on a current basis at the time of correcting the input tax.
Furthermore, the right to deduct input VAT is lost by the entrepreneur if they fail to report the transaction within three months after the end of the month in which the obligation to pay tax arose regarding the purchased goods or services. Unfortunately, in practice, capturing these transactions at the appropriate time and within the specified timeframe has proved to be quite a challenge.
Delays in reporting often arise from reasons beyond the taxpayer’s control. Late reporting of transactions can result in the accumulation of tax arrears, which in turn necessitates the payment of interest. This led to situations where taxpayers, due to delays in receiving invoices from foreign contractors, were forced to adjust the VAT due on Intra-Community Acquisitions retrospectively, during the period when the obligation to pay it arose. Input VAT, on the other hand, was accounted for in the current declaration, leading to arrears in the payment of the tax due and the imposition of interest on taxpayers who were innocent in the entire situation.
Landmark judgment of the Court of Justice of the European Union
The existing provisions have been the subject of many disputes that have been resolved through litigation. However, no dispute has led to the development of a uniform line of case law. For this reason, the Regional Administrative Court in Gliwice decided to refer a preliminary question to the Court of Justice of the European Union (CJEU). The CJEU then assessed the compatibility of the relevant provisions with EU law. On March 18, 2021, a groundbreaking judgment was issued, which proved to be pivotal for many entrepreneurs. The CJEU held that the EU provisions stood in the way of applying the existing national provisions in Poland. In its reasoning, the Court stated that the national regulation, which does not allow for the systematic deduction of VAT due on Intra-Community Acquisitions in the same period in which the same amount of tax should be accounted for, without the possibility of considering relevant circumstances and the good faith of the taxpayer, goes beyond what is necessary for the proper collection of VAT and the prevention of tax fraud. Although the preliminary question only concerned Intra-Community Acquisitions, experts believe that the judgment applies to all transactions covered by the reverse charge mechanism, as the provisions concerning all these transactions are almost identical.
The Court’s acceptance that input VAT and output VAT should be accounted for by taxpayers at the same time leads to the conclusion that no arrears arise on the part of the taxpayer and that no interest payments should be due to the tax authorities.
What does the judgment give to taxpayers?
This favorable judgment allows taxpayers to recover improperly paid VAT interest on Intra-Community Acquisitions. Furthermore, there is also the possibility of reopening tax proceedings if such settlements were subject to disputes with the authorities. The VAT settlement model for Intra-Community Acquisitions proposed by the CJEU also significantly simplifies taxpayers’ current obligations by streamlining the process of monitoring transaction timing, invoice receipt, and settlement adjustments. It’s worth noting that even before the judgment, the government was planning to remove questionable provisions regarding the importation of services (Slim VAT 2 package). In the final version of the package, provisions regarding Intra-Community Acquisitions are likely to be removed as well. However, taxpayers do not have to wait for this. They can already adjust their settlements and recover interest.