Beside the basic principles I would also like to mention a recent Judgment of the Court of Justice in case C-385/09 Nidera which bears exactly on the right to VAT deduction for goods acquired before the VAT identification of a taxable person and which was mentioned in both of the abovementioned requests to the Bulgarian Supreme Administrative Court for preliminary ruling references to the Court of Justice of the EU.
The preliminary ruling reference made in the context of a dispute between Nidera Handelscompagnie BV („Nidera”) and the Lithuanian tax administration concerns the right of the taxable person to deduct the VAT paid fro goods (wheat) acquired and re-sold by Nidera before the date of its VAT identification.
In Nidera case the Court of Justice ruled that Nidera cannot be denied the possibility of exercising its right to deduct the VAT paid on the purchase of goods based on the fact that the taxpayer was not identified as a taxable person for VAT purposes before using those goods in his taxable activity because the company met the substantive conditions for the right of deduction and identified itself as a taxable person for VAT purposes within a reasonable period following the completion of the transactions giving rise to the right of deduction.
Thus, according to the Court of Justice the identification for VAT purposes is only a formal requirement for the exercise of the right of VAT deduction and the latter cannot be restricted only to VAT registered persons – a conclusion which was obviously accepted by the Bulgarian Supreme Court in its case No. 14721/2010.
The EU Court of Justice underlines the fact that if the right to VAT deduction was not limited in time the legal certainty would not be ensured. In fact the obligation on taxable persons to identify themselves for VAT purposes would be rendered meaningless if the Member States were not entitled to impose a reasonable time-limit in that regard. In the particular case, however, Nidera was identified for VAT purposes less than six months after having completed the transactions which gave rise to the right of VAT deduction, which was considered by the Court as a reasonable period of time.
ANALYSIS
It is evident from the SAC judgments in the abovementioned two court cases and from the Court of Justice case-law that the questions posed in the opening of this commentary concerning the compatibility of the Bulgarian VAT Act provisions with the EU law still do not have a clear answer. Nevertheless, the analysis of the Court of Justice’s judgments in different cases clearly shows the direction in which the jurisprudence and the legislation should evolve.
Limiting the right of VAT deduction to goods which are deemed assets for accounting purposes and which are available at the time of the VAT identification
I should start by pointing out that in Nidera case the Court of Justice does not question at all its authority to interpret provisions pertaining to the right of VAT deduction for goods acquired before the identification for VAT purposes. On the contrary, the Court ruled that the general provision of Art. 168, (a) of Directive 2006/112 is undoubtedly applicable to the right of VAT deduction for supplies made before the VAT registration despite the fact that the provision does not expressly stipulate so.
Moreover, from the facts in the case it is evident that the goods acquired by Nidera – wheat, is not at all an asset within the meaning of the relevant Bulgarian provision. Besides, at the date of the identification of the Lithuanian company for VAT purposes the goods is not already available with it because it has been sold and exported out of Lithuania.
Although the Court does not elaborate on the nature of the supply the VAT for which the taxable persons seeks to deduct, as this falls outside the questions referred to it, it is clear that the requirements as to goods and services acquired prior to the VAT registration should not be stricter than the requirements concerning the supplies under the general rules. Otherwise the taxable persons who bought goods or services before they were identified for VAT purposes would be discriminated against the persons who acquire goods or services in the course of their economic activity as registered persons.
Tying the right of VAT deduction to the identification for VAT purposes and the preparation of a registration inventory
It must be further emphasized that the Judgment of the Court in Nidera case makes it clear that the EU law precludes a national legislation which prohibits the deduction of VAT paid on the purchase of goods if the taxpayer was not identified as a taxable person for VAT purposes before using those goods in his taxable activity. The Judgment of the Court is very clear in this respect: the VAT identification is only a formal requirement and while the failure to comply with it may be subject to an administrative penalty, it cannot be penalized with denial of the right of deduction.
This applies with even greater force to the requirement to prepare an inventory of available assets which undoubtedly could be interpreted only as a formal requirement which should not affect in any way the exercise of the right of VAT deduction.
What is more, it is disputable whether the filing of such an inventory is necessary at all given that the taxable person fills out all the information for each acquired asset first in the inventory and then a second time in its purchase ledger where each supply is again described so that the details in the inventory and in the purchase ledger concur.
In my opinion, with a view to the above considerations, the provision of Art. 75 (1) of the VAT Act needs to be revised so that it is rendered compliant with the EU law and the courts are facilitated when reviewing similar cases in which they are torn between applying the express national provision and abiding by the Court of Justice case-law.
Here I should mention that legislative changes following Court of Justice judgments are not unknown to the Bulgarian legislature. The most significant amendment to the VAT deduction rules in case of the so called reverse-charge mechanism application was adopted following the Judgment of the Court of Justice in joined cases С-95/07 and С-96/07 Ecotrade SpA.
The Ecotrade case referred to the right of VAT deduction in cases of self-charging VAT when the recipient of the supply is the person liable to tax.
In its judgment the Court finds that the EU law does not preclude national legislation which lays down a limitation period for the exercise of the right to deduct provided that the principle of equivalence (which requires that limitation period applies in the same way to analogous rights in tax matters founded on domestic law and to those founded on Community law) and the principle of effectiveness (according to which the limitation period should not render virtually impossible or excessively difficult the exercise of the right to deduct) are respected.
The Court further finds that a reassessment and recovery practice which penalises noncompliance on the part of the taxable person with the obligations relating to accounts and tax returns by a denial of the right to deduct clearly goes further than is necessary to attain the objective of ensuring the correct collection of the tax and for the prevention of evasion since it may even lead to the loss of the right to deduct.
