CJEU allows overpayment VAT refunds

According to experts, following a judgement by an EU court, companies may be in a position to fight the Polish tax authorities to recover unpaid VAT.

As a result of an EU court's ruling on the double taxation of chain transactions, tax experts assert that firms may be able to pursue legal action against Polish VAT overcharges.

It follows a ruling by the Court of Justice of the EU (CJEU) in a Polish case concerning chain transactions (C-696/20) on July 7.

The court determined that the National Revenue Administration (KAS) erred in applying a 46 percent double taxation rate on chain transactions. This breached the neutrality and proportionality requirements of EU VAT legislation implementation.

Robert Jaszczuk, partner for VAT advising and compliance at SSW Pragmatic Solutions, a legal and business services company in Warsaw, believes that a considerable number of double taxation chain transaction cases might be filed before Polish courts.

Local or European tax directors who had comparable situations in Poland might also try to recover VAT refunds that were improperly given to Polish tax officials, he explains.

“I would say the claims by companies could potentially be in the tens or even hundreds of millions of euros,” says Jaszczuk.

According to him, several examples involving this 46 percent VAT overpayment by firms have been highlighted in Polish media. In terms of extra fees, commentators did not anticipate that this problem would have such a significant impact on enterprises.

This decision demonstrates, according to Stefan Durina, CEO of Beneko, an eco-friendly marketplace and e-commerce company headquartered in the United Kingdom, that the tax office erred in double-taxing enterprises involved in chain transactions.

“Many [companies] will finally have peace of mind and have a high probability to now recover excess tax paid with interest and lost profit,” says Durina.

Linked transactions

The present issue originates from a lawsuit brought by EY on behalf of "business B" – the participants to the action have not been disclosed – which operates in Poland and sold items to a German company.

Company B functioned as a middleman between company A, the supplier, and the German receiver.

As firm A had a Polish VAT number and the eventual recipient of the products was EU VAT-registered in Germany, there was no element of fraud in the transaction.

Michal Goj, partner in tax controversy at EY in Warsaw, asserts that KAS essentially held that firm B was had to pay 23 percent VAT twice, without the ability to offset input costs.

“If you have to pay 46% VAT then you are probably left with no profit margin or you’ve made a loss, depending on the profitability of the business,” says Goj.

The director of KAS determined further that firm B erred by omitting to apply VAT to deliveries made to its German contractors. It determined that the transactions should also be liable to VAT in Germany, the final destination of the products.

According to Article 25(2) of the Polish law on VAT (Law of 11 March 2004 on Value Added Tax), a Polish VAT-registered firm is required to pay this additional 23 percent VAT charge in Poland for intra-Community acquisitions of goods.

In essence, KAS argued that all transactions in the chain should be subject to VAT, meaning that the Polish business was liable to a 46 percent double taxation.

The CJEU ruled in favour of business B, determining that the acquisition of goods should not be taxed twice in a member state where the products are supplied by the entity obtaining them, company B, from another VAT-registered corporation. This was consistent with Article 41 of the VAT Directive (2006/112/ECneutrality )'s and proportionality standards.

In its judgement, the CJEU recognised that member states may establish legislation to combat VAT leakage, such as Article 25(2) of the Polish statute on VAT, but that such legislation should not violate the neutrality and proportionality rules by imposing a 46 percent VAT penalty.

CJEU clarification

Tax administrators have praised the CJEU's decision as giving much-needed clarification and paving the way for the eventual recovery of unpaid VAT.

Dennis Appelhoff, tax manager at Metro Markets, an online marketplace located in Düsseldorf, believes the judgement provides enterprises with security and certainty about cross-border chain transactions.

“The position of the CJEU is that tax neutrality of VAT is the main driving force and the core element,” says Appelhoff.

As long as firms do not commit fraud, he argues, this judgement reinforces the faith placed in them and prevents tax officials from double-taxing them.

According to Durina, the judgement helps to settle a number of older instances in which VAT was imposed twice in chain transactions.

“This ruling very much helps in bringing clarity on tax proportionality and neutrality,” says Durina.

According to him, some of the legacy instances currently under investigation for double taxation date back to 2013.

“It means the companies were right and tax offices were wrong in charging VAT several times in chain transactions instead of charging it only once,” says Durina.

According to him, the judgement also requires member states to assess the entire transaction chain and cooperate with foreign tax authorities, as opposed to focusing just on the domestic portion of a transaction.

Quick fixes

Nonetheless, some firms are concerned that the judgement might raise the compliance burden, since they may be required to present more documentation to tax authorities to justify their choice of a certain kind of VAT treatment.

“It [the judgment] adds to the documentation that needs to be presented to tax authorities to prove that the parties had a common understanding of VAT treatment and that this is the reason why they chose a specific course of action,” says Appelhoff.

Despite these concerns, the EU has attempted to resolve intra-Community trade challenges.

This was accomplished by Directive 2018/1910, the so-called "rapid solutions" for VAT that went into effect in the EU bloc in January 2020.

“Naturally, quick fixes are helpful because they gave some clarity on the proper classification of transactions within chain transactions,” says Jaszczuk.

“But at the end of the day, it is important to properly classify transactions and to see if it is either local or an intra-Community,” he adds.

Hands full

This judgement offers clarity for enterprises and protects them from being double-taxed by a member state without the ability to deduct the input tax.

It also leaves the door open for member states to impose strict restrictions on taxpayers under the pretence of combating VAT fraud, such as Article 25(2) of the Polish VAT statute.

The question now is how other member states will interpret this judgement and when tax authorities will offer double-taxed enterprises with tax relief.

Almost certainly, the Polish tax authority, KAS, will have its hands full for some time attempting to offer overcharged enterprises with financial relief.

By fLEXI tEAM