Executive summary

The Supreme Administrative Court of Lithuania (SACL) filed, in 2016, a request for preliminary ruling (case C-387/16) from the Court of Justice of the European Union (CJEU), with respect to the reduction of the late payment interest, payable on the tax receivable amount to Nidera B.V. (Nidera).¹

Specifically, the SACL referred to the CJEU the question of whether Article 183 of Council Directive 2006/112/EC (the Directive), read in conjunction with the principle of fiscal neutrality, shall be interpreted as precluding a reduction in the interest that is normally payable under national law on a Value Added Tax (VAT) overpayment (excess), which was not refunded (set off) in due time, due to circumstances other than those resulting from the actions of the taxable person himself.

On 5 October 2017, Advocate General Maciej Szpunar (AG) issued his opinion on the case in favor of Nidera, to which the CJEU also concurred.

On 28 February 2018, the CJEU issued its judgment that Article 183 of the Directive on the common system of VAT, read in the light of the principle of fiscal neutrality, must be interpreted as precluding a reduction in the amount of interest normally payable under national law on overpaid VAT which was not refunded in due time for reasons connected to circumstances not attributable to the taxable person, such as the high amount of that interest when compared with the amount of the overpaid VAT, the period of time during which the overpayment was not refunded and the underlying reasons for this, as well as the losses actually incurred by the taxable person.

Detailed discussion

Facts

In 2008, Nidera (established under the laws of Netherlands) acquired goods from Lithuanian manufacturers and incurred a significant amount of input VAT. In turn, the Lithuanian tax authorities started a tax investigation and denied the right of Nidera to recover the incurred input VAT because Nidera was not registered for VAT in Lithuania at the moment of the respective transactions. The tax dispute reached the CJEU (C-385/09 Nidera).

In October 2010, the CJEU released its judgment and stated that a taxable person, who meets the substantive conditions for the right of deduction and who identifies himself as a taxable person for VAT purposes within a reasonable period following the completion of taxable transactions, shall have a right to recover the incurred VAT.

In December 2010, the Lithuanian tax authorities refunded the respective VAT amount to Nidera. Later, Nidera claimed the interest from the Lithuanian tax authorities starting from the date of the tax investigation. The rate of interest established under the national law at the time was equal to the rate of late payment interest and was equal to 0.03-0.05% per day (approx. 11-18% annually). The Lithuanian tax authorities agreed on the payment of interest starting from the date of the CJEU judgment in 2010. This tax dispute came before the SACL and the national court decided to stay the proceedings and refer the respective question to the CJEU for a preliminary ruling. The main reasons for the referral were: (i) the amount of interest (approx. €1.1 million) as compared to the VAT refunded (approx. €3.4 million); and (ii) the fact that the interest payable may exceed the actual loss suffered by the taxable person.

The CJEU judgment

As a preliminary point, the CJEU noted that the referring court decided that it is necessary to calculate the default interest due to Nidera on the amount of the overpaid VAT refunded from the expiry of the 30-day period after submitting the refund application, referred to in the national law. The referring court therefore asked the Court for a ruling solely on the possibility of reducing the amount of such interest.

The CJEU noted that the autonomy of a European Union (EU) Member State to implement the right to a refund of overpaid VAT is circumscribed by the principles of equivalence and effectiveness. It therefore follows from the Court's case law that certain specific rules (conditions) must be complied with, interpreted in the light of the general context and principles governing VAT. The rules cannot undermine the principle of fiscal neutrality by making the taxable person bear the burden of the VAT in whole or in part. In particular, such conditions must enable the taxable person to recover the entirety of the credit arising from that overpaid VAT. This implies that the refund should be made within a reasonable period of time and that, in any event, the method of refund adopted should not entail any financial risk for the taxable person.

In that regard, when the refund to the taxable person of the overpaid VAT is not made within a reasonable period, the principle of fiscal neutrality of the VAT system requires that the financial loss due to unavailability of the sums of money at issue be compensated through the payment of default interest to the taxable person. In the absence of EU legislation on VAT, it is for the internal legal order of each Member State to lay down the conditions under which default interest must be paid, particularly the rate of that interest and its method of calculation, while nevertheless observing the principle of fiscal neutrality.

In response to the referring court's position that:

• Where a particularly late refund of a VAT overpayment results in a long period of unavailability of funds, such a calculation could lead to an amount of compensatory interest that is disproportionate to the loss actually incurred by the taxable person.
• In those circumstances, the criteria of reasonableness and fairness entitle both the tax authorities and the national courts to reduce that amount for the reasons mentioned in the question referred for a preliminary ruling, which are not related to the conduct of the taxable person.

The CJEU replied that:

• Such a reduction has never been applied by the national courts (according to the reply of the Lithuanian Government to a question put by the Court at the hearing).
• A reduction in that amount, which is motivated solely by its significance in comparison with the principal amount to be refunded would imply for the taxable person the risk that the payment of default interest does not cover the entire period during which the principle of fiscal neutrality requires that the unavailability of the sums in question be compensated by the payment of default interest.
• The duration cannot in itself justify a reduction in the default interest. Moreover, the possibility of reducing the amount of the interest due on account for the period of non-payment could mean that the tax authorities would not be encouraged to refund the overpaid VAT as soon as possible, which also creates a financial risk for the taxable person contrary to the principle of fiscal neutrality.
• The request for the CJEU judgment also does not justify a reduction in the amount of default interest. Moreover, from the perspective of the taxpayer, there is no material difference between a refund delayed because a claim was dealt with administratively after the expiry of the periods and one delayed by administrative measures which unlawfully preclude the refund and are subsequently annulled by a ruling of the CJEU.
• The possibility for a national court to reduce the amount of interest in order to take account of the losses actually incurred, implies that it is for the taxable person to demonstrate the real financial losses which he has incurred by reason of being deprived of those funds. However, if national legislation, such as that at issue in the main proceedings, provides for the payment of such default interest at a flat rate, it cannot, at the same time, provide for the possibility of excluding the payment of such default interest and merely compensating actual loss on the basis of the criteria of reasonableness and fairness, as contrary to the principle of fiscal neutrality.

Implications

The CJEU judgment will result in greater legal certainty for the VAT recovery procedure on the national level (e.g., faster audits in the light of pending interest).

Taxable persons that have been deprived the right to fair interest until the release of this judgment may enter into relevant discussions with the Lithuanian tax authorities.

The judgment may be a trigger event for the Lithuanian Government to reconsider either the rate of interest or the current regulations on tax audits and tax refunds. In the light of imminent SAF-T reporting and e-audit procedure, the latter is more likely.

Finally, the judgment may also affect other Member States if their local laws or practices on interest or tax audits are similar to those in Lithuania.

———————————————
ENDNOTE

¹ The taxpayer was represented by EY Lithuania.

———————————————
CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young Baltic UAB, Vilnius

• Irmantas Misiunas
  irmantas.misiunas@lt.ey.com

———————————————
ATTACHMENT

PDF version of this Tax Alert