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29 March 2018 Bulgaria receives preliminary ruling from CJEU on addressing double taxation with VAT The Court of Justice of the European Union (CJEU) has rendered a preliminary ruling1 in the form of an order on case C-314/17 (Geocycle). The CJEU's decision addresses situations where Value Added Tax (VAT) remains as a cost to a purely business to business supply chain due to the fact that the national legislation, in this case Bulgaria's national legislation, does not allow for the correction of invoices after a tax audit is completed. The claimant (Geocycle Bulgaria) purchased and subsequently sold by-product to a third party for the production of cement. Each of the suppliers issued an invoice and charged 20% Bulgarian VAT on the supplies. Each of the customers deducted VAT on the purchase. The Bulgarian tax authorities qualified the product as waste subject to a domestic reverse-charge by the customer but disallowed the VAT deduction on the reverse-charge because the claimant had already deducted input VAT on the invoice issued by the supplier. According to the CJEU, if the local legislation does not allow for the correction of invoices, a recipient to a supply should have the right to deduct input VAT if the supply is subject to reverse-charge, even if the recipient has already deducted input VAT on an invoice containing VAT issued by a supplier. Thus, the claimant should have the right to deduct VAT credit both on the reverse-charge as well as on the invoice issued by the supplier as the local legislation does not allow corrections of invoices after a tax audit is completed. Although the facts of the case may seem applicable to limited cases of domestic reverse charge, in fact the nature of the case (double taxation with VAT) is common for a number of similar situations. The CJEU's decision changes a practice which was consistently followed by the Bulgarian tax authorities as it allows the deduction of input VAT even when no correction of the invoices is made. It allows for the claiming back of historical VAT that ended up as a burden to either party while it normally would be neutral. Even if no legislative changes are undertaken, the decision allows for direct application for cases which remain unresolved. Examples where the decision can have significant impact are situations where foreign enterprises create fixed establishments (not registered on time) that intervene in the supplies and should charge VAT accordingly on the sales made through them while the supplies have already been reverse-charged by the customers. Also, the decision is expected to impact situations where VAT is seen as chargeable by the supplier but a VAT deduction is disallowed on the side of the recipient (where the supply is seen as VAT exempt) or in situations where VAT is collected as due both by the supplier and by the recipient (as in the instant case). Where a business has any "trapped" VAT in closed tax audits, even with decisions of the courts, taxpayers should revisit the amounts at stake to determine whether a claim is possible. As the statute of limitations is running, this may imply timely action. If during a future tax audit, the transactions are challenged and treated differently at both ends of the supply, building a defense position in this respect may avoid lengthy disputes. 1 The preliminary ruling request was made by the Bulgarian Supreme Administrative Court (SAC). Background on the ruling request is available on the SAC's website. Document ID: 2018-5482 |
