On non-payments and VAT, new judgment of the ECJ

In its judgment today, 11-6-2020, C-146/19, SCT, has returned the ECJ on the always controversial issue of VAT recovery in cases of clients insolvency.

It is described that SCT proceeded, in April 2014, to a VAT regularization for the unpaid credits that it held against two companies that had been the subject of bankruptcy proceedings, definitively concluded in June 2013.

The Slovenian tax authorities found that SCT had not declared those claims in the corresponding bankruptcy proceedings, and that, pursuant to the art.296 of the Bankruptcy Act, those claims had been extinguished. Based on such circumstance, they concluded that the requirements for a VAT reduction were not met.

In particular, it was pointed out that, according to national regulations, the taxable person will only have the right to reduce the declared VAT on the basis of a final resolution that ends an bankruptcy proceeding if he has declared his claim against its insolvent debtor. It is through this statement that the taxpayer demonstrates that the credit continues to exist, which is especially important when it comes to credits against related entities, as is the case. By having certain doubts about the interpretation of EU law in this case, in particular, given the lack of declaration of the corresponding claims in the insolvency proceedings, the question was raised by the national Court.

The first question analysed by the ECJ has been, essentially, the determination of whether article 90.2 of the VAT Directive opposes a regulation of a Member State according to which a taxable person is denied the right to reduce VAT paid corresponding to a bad debt when he did not declare said credit in the bankruptcy proceedings initiated against his debtor, even if the taxable person demonstrates that, if he had declared the said credit, he would not have collected it, or that there were reasonable reasons for not declaring the concerned credit.

The ECJ has begun by recalling the general principle, according to which the cases of cancellation, termination, total or partial non-payment or reduction of the price, after the moment in which the operation is formalized, lead to the modification of the VAT tax base and the recovery of VAT by taxable persons, thus specifying, and in these cases, the principle of neutrality.

Exceptionally, and in cases of non-payment, EU Member States have the option to exclude this modification. This possibility, it has been recalled, is based on the idea that, in certain circumstances, the non-payment of the consideration may be difficult to verify or merely provisional (judgment of 22-2-2018, T-2, C ‑ 396/16, and cited case-law).

On the contrary, the cases of definitive non-payment cannot be classified as "non-payment" for these purposes, and therefore, the reduction of the VAT tax base must be enabled when the taxable person can demonstrate that, definitively, the credit that he holds against the debtor is uncollectible (order of 24-10-2019, Porr Építési Kft., C‑292/19).

This was the case in the controversial case. In effect, in accordance with national bankruptcy regulations, in the absence of a declaration of such claims in bankruptcy proceedings, said claims are extinguished, for which reason said omission represents a definitive reduction of the latter's obligations vis-à-vis SCT. It is not disputed that the aforementioned bankruptcy proceedings had been definitively concluded and that SCT's claims against its debtors had not been collected at the end of such proceedings.

From the foregoing, the ECJ has concluded that the controversial situation did not constitute an event of non-payment that would fit into art.90.2 of the VAT Directive, so the exception included therein was not applicable.

Regarding the requirement of declaration in the bankruptcy process of uncollected credits, included in the national regulations, which were intended to be compatible with articles 90 and 273 of the VAT Directive, the ECJ has stated that they, in principle, give the EU States a certain margin of appreciation, in particular regarding the formalities that taxpayers must comply with in order to reduce the tax base.

However, the measures thus adopted can only constitute an exception to the rules on the tax base within the limits strictly necessary to achieve the specific objective of the fight against tax fraud, and should affect the objectives as little as possible the principles of the VAT Directive and, in particular, that of neutrality. Therefore, it is necessary that the requirements thus established to enable taxpayers to reduce the VAT tax base are limited to proving that, after having agreed to a transaction, part or all of the consideration has not been definitively received.

In the application of these criteria, extracted from the judgment of 6-12-2018, Tratave, C‑672/17, to the requirement of declaration of credits in bankruptcy proceedings, the ECJ has concluded that this can, in principle, contribute both to guarantee the exact collection of VAT and to avoid fraud and eliminate the risk of loss of tax revenue, as also indicated in the judgments of 26-1-2012, Kraft Foods Polska, C ‑ 588/10, and of 12-12-2018, Tratave, C ‑ 672/17.

Both elements have been additionally nuanced.

Thus, with regard to the prevention of tax fraud, the ECJ has stated that, despite the fact that a requirement such as the one at issue may prevent prejudices to the State when the passivity of the taxpayer who has not claimed his credit in bankruptcy proceedings is of actions that reveal the collusion between said taxpayer and his debtor, the application of said requirement has the effect of a systematic denial of the right to reduce the tax base in case of non-declaration, which constitutes a general presumption of fraudulent action that it goes beyond what is necessary to achieve the objective of preventing fraud (judgment of 7-9-2017, Eqiom and Enka, C‑ 6/16, and cited jurisprudence).

It seems, then, that assumptions or general requirements defined in such a way that they do not admit, on the part of the taxpayers, the accreditation that they have acted diligently, or that they have not acted fraudulently (although in this case the accreditation would rather correspond to the tax authorities), should be discarded in this context. Perhaps it is not superfluous to remember that the general principle, from which to start, is that of the modification of the taxable base in the cases of annulment, rescission, total or partial non-payment or reduction of the price, any exclusion of the above should be configured. as an exception to be interpreted in strict terms (judgments of 3-7-1997, Goldsmiths, C-330/95, and of 23-11-2017, Di Maura, C-246/16, both relating to non-payments).

As for the elimination of the risk of loss of tax revenue, insofar as the non-declaration of the credit in the bankruptcy procedure implies, as already mentioned, the extinction of said credit, the taxable person necessarily loses the opportunity to obtain even partial recovery of your credit, which translates, where appropriate, to the detriment of the concerned Member State.

However, it has been added, when the taxable person shows that, even if he had declared his credit, it would not have been collected, the fact of excluding the reduction of the tax base and forcing him to bear an amount of VAT that he has not received exceeds the limits strictly necessary to achieve the objective of eliminating the risk of loss of tax revenue (judgment of 8-5-2019, A-PACK CZ, C‑127/18). Indeed, in that case, the declaration of the credit could not have prevented additional prejudice to the State.

From these last considerations, two relevant comments raise, the first of which refers to the moment in which VAT can be recovered in cases of non-payment.

Indeed, if such recovery should be admitted in cases of definitive loss of credit, the question arises as to when the taxable person will find that it is so.

This issue has already been analysed by the ECJ in its judgment of 23-11-2017, Di Maura, C-246/16, cited above. As much as recovery is admitted in cases in which the civil procedure can last more than 10 years, in other cases, with a more agile operation of justice, the question arises as to whether the taxable person should wait for the confirmation of the definitive loss of the credit or not, especially in cases in which the recovery through the procedure provided for mere defaults has not been successful. At the same time, the discussion is opened as to whether, having not been feasible the recourse to the ordinary procedure for recovery in cases of non-payment, there is a “second round” once the definitive nature of the non-payment is confirmed, as the today’s case seems to suggest.

On the other hand, it seems that the ECJ assumes that the impossibility of collection by the taxable person makes any type of collection action that could be carried out by the tax authorities impossible, an assumption that I do not think should necessarily be accepted without further ado.

Be that as it may, it has been concluded by declaring that art.90.1 and 273 of the VAT Directive are contrary to a legislation of a Member State under which a taxable person is denied the right to reduce the VAT paid corresponding to a claim uncollectible if said taxable person did not declare that credit in the bankruptcy proceeding filed against his debtor, even if said taxable person demonstrates that, if he had declared it, that credit would not have been collected.

Additionally, the consequences that would have to be drawn from the hypothesis that a requirement such as the one described above were contrary to article 90.1 of the VAT Directive have been raised before the ECJ.

As expected, the ECJ has answered this question recalling that the national judge is obliged to interpret EU law as far as possible in light of the wording and the purpose of the concerned directive (judgment of 6-7-2017, Glencore Agriculture Hungary, C‑254/16). When it is not possible to interpret national regulations in accordance with the requirements of Union Law, what will proceed is to refrain from applying any national provision contrary to a provision of Union Law with direct effect (judgment of 19-12 2019, Deutsche Umwelthilfe, C-752/18, and cited case-law).

Additional information about some of those topics can be found in the book "ECJ case-law on VAT", also available electronically and whose link is attached:

https://www.efl.es/catalogo/manuales-juridicos/ecj-case-law-on-vat