Analysis: “Partial Refund of ‘Uncontested’ VAT in the Agrobet case” by Darya Budova
On May 14, 2020 the Court of Justice delivered its ruling in the case C-446/18, Agrobet. In this judgment the Court has ruled on whether it is possible for the tax authorities to make a partial refund of excess VAT requested by a taxable person, when only one part of such VAT is under review in a tax inspection procedure and there is ‘uncontested’ VAT. The Court has established that this is possible and, more interestingly, has provided a specific procedural road map for the national tax authorities when facing this kind of refund.
Agrobet CA, s.r.o., a Czech undertaking engaged in the import and export of agricultural products, has submitted VAT returns reporting an excess of VAT (deductible VAT was higher than the VAT due in that period). According to the Czech legislation, in principle, this excess VAT should have beenrefunded within 30 days.
However, the tax authorities opened an inspection procedure as they suspected that certain purchases and sales of rapeseed oil covered by these returns were fictitious. If that proved to be true, the deduction of the related VAT would be denied and, thus, the VAT refund would be lower than that requested by Agrobet. At the time of the hearing before the Court (after three and a half years) the investigation had not yet been concluded. During that time the excess VAT refund requested by Agrobet was withheld, even though the transactions under review made up only for a small part of the excess VAT refund requested.
Agrobet claimed the immediate refund of the ‘uncontested’ remainder of the excess VAT. That was refused on the ground that the excess VAT was indivisible and related to the tax period as a whole. Agrobet submitted applications against the inaction of the tax authorities, which were dismissed and further appealed on points of law before the referring court (Nejvyšší správní soud, Supreme Administrative Court, Czech Republic). In this context the following question was referred to the Court: ‘Is it consistent with European Union law and in particular with the principle of VAT neutrality for a Member State to adopt a measure which makes the assessment and payment of part of a VAT deduction claimed conditional on the completion of a procedure applying to all taxable transactions in a given tax period?’
According to the Court, the partial refund of undisputed excess VAT is possible
The Court of Justice ruled that it is in fact possible to distinguish between disputed and undisputed amounts of excess VAT and to carry out a partial refund accordingly. The reasoning of the Court leading to this conclusion is, essentially, the following:
- The VAT is materially due for each transaction. The fact that the taxable person has to determine the VAT amount for a given tax period by a difference between the ‘total amount’ of the VAT due and deductible (Article 179 of the VAT Directive) is a formal aspect of the deduction mechanism and does not entail that this global amount is a monolith for all purposes.
- The fact that Member States may choose whether to carry forward or refund the excess VAT (Article 183 of the VAT Directive) does not in any way allow for the withholding of undisputed excess VAT.
- Further, withholding an undisputed amount of excess VAT would undermine the principle of neutrality, as it would mean that the taxable person bears the burden of the VAT, at least partially.
Procedural road map to be followed in such refunds
Interestingly, the Court analyses with a great deal of detail certain procedural aspects to be followed by the national tax authorities in such cases.
The Court recalls its case law on several points regarding the excess VAT refund procedures: (i) the extension of the period for refunding excess VAT to carry out a tax investigation should not go beyond what is necessary for the successful completion of the investigation; and (ii) an economic disadvantage of being deprived on a temporary basis of funds corresponding to the excess VAT, can be compensated for by payment of interest. Additionally, the Court recalls that it is settled case law that the prevention of tax evasion, avoidance and abuse is an objective recognised and encouraged by the VAT Directive and that EU law cannot be relied on for abusive or fraudulent ends and thus, holds the Court, the tax authorities should not only check the transactions concerned but also make sure that the possible wrongdoing does not go beyond what they suspect.
The Court also brings up the right to good administration. According to the Court’s case law, the principle of good administration covers the right of any person to have his or her affairs handled impartially and within a reasonable period of time, for the tax authorities to conduct a diligent and impartial examination of the contested measures, so that it has at its disposal, when adopting the final decision, the most complete and reliable information possible for that purpose; and to have his or her pleadings duly examined. The Court considers that the fact that the Czech regulations do not allow the taxable person to submit evidence of the claim regarding an undisputed part of the excess VAT undermines such a right.
In this context, the Court sets out a road map to be followed by the national tax authorities in the cases of such claims and establishes that it is to a national court to determine whether the tax authorities:
- identified or should have identified before the end of an inspection procedure in a clear, precise and unequivocal manner an existence of an uncontested VAT excess, namely, a difference between the due and deductible VAT for the transactions not under review;
- have determined or should have determined – taking into consideration all the facts and documents of the case as well as pleadings submitted by a taxable person- that this VAT excess would subsist whatever the result of the tax inspection is (amount that can be lower than the one corresponding to the uncontested transactions).
If the tax authorities could not confirm such circumstances, the Court concludes that they cannot be blamed for denying a partial assessment before the end of the tax inspection.
Darya Budova is a practicing attorney in law specialised in tax disputes and EU tax law, with expertise in taxation in international trade.