Judgement of the Court of the EU in case C-550-11 PIGI

PIGI appealed the tax assessment act before the administrative appeals instance arguing that the shortfall of the stolen goods was caused by force majeure and that, therefore, the input VAT deduction should not be adjusted.

When the administrative appeals instance dismissed the appeal, PIGI lodged an appeal with Varna Administrative court. In those circumstances, the Administrative court decided to stay the proceedings and to refer the case to the Court for a preliminary ruling and to ask the Court whether Directive 2006/112/EC3 must be interpreted as precluding national tax provisions, such as Articles 79 and 80 of the Bulgarian VAT Act, which require, where a shortfall of goods subject to VAT has been established, that an adjustment be made to the input tax deduction made at the time of acquisition of those goods where the taxable person has been the victim of theft of those goods and the perpetrator has not been identified.

As a starting point of the Court’s interpretation serves the decisive criterion for VAT deduction – the actual or intended use of the goods or services concerned for the purposes of the person’s taxable transactions. According to the Court the taxable person must enjoy his right to VAT deduction as long and insofar as there is a direct and close relationship between the right to deduct input VAT and the use of the goods and services concerned for taxable transactions.

Therefore, should any change to the factors which were taken into consideration for the determination of the amount of the VAT deduction occur subsequently, the neutrality of VAT should be restored by making the respective and corresponding adjustment to the initial VAT deduction. And theft should be generally considered as such a change that could give rise to adjustments, as the stolen property could be clearly no longer used for any taxable output transactions by the respective person.

At the same time Directive 2006/112/EC provides for an express derogation from the VAT deduction adjustment rule stating in its Art. 185 (2) that no adjustment is to be made, inter alia, in the event of ‘theft of property duly proved’. The important proviso, however, being that the derogation is made optional to Member States.