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The ECJ on the requirements for adjustments of input VAT

31 October 2012

Two recent rulings of the Court of Justice of the European Union (“ECJ” or “the Court”) in cases C-550/11 PIGI and C-234/11 TETS Haskovo analyze the EU rules for input VAT adjustments in the context of VAT assessed under the Bulgarian rules. Although the findings of the Court shed some light on the VAT treatment to be applied, some important questions remain unanswered.

Background of the cases

Both judgments concern cases where the tax authorities found grounds for subsequent adjustments of the input VAT deducted by the taxpayers upon the acquisition of inventories and fixed assets.

TETS Haskovo demolished some of the buildings that it had acquired with the aim of modernizing its thermal power station. The taxpayer argues that no adjustment of the initial VAT deduction is to be performed as the old buildings were demolished in order to create new buildings that would be used for taxable transactions.

In PIGI the authorities established that there was a shortfall in the taxpayer’s stock caused by a theft in the company’s premises. The theft was reported to the police but the perpetrator was not identified. The taxpayer argues that the theft of stock should be viewed as force majeure, as it could not have been foreseen, and therefore no input VAT adjustment is to be made.

In both cases, the arguments put forward by the taxpayers were dismissed by the higher tax authorities.

Against this background, the ECJ was asked by the Varna Administrative Court, among other things, to give a ruling on whether or not the Bulgarian rules regulating the input VAT adjustment are compatible with the relevant provisions of the EU VAT Directive 2006/112/EC (“the VAT Directive”).

The judgments

In both cases, the ECJ recalls that the right to deduct VAT is exercised at the time of the purchase. However, if any changes take place in the use of the acquired goods or more broadly in the factors used to determine the VAT amount to be deducted, an adjustment to the initial deduction of VAT is to be subsequently made as provided for in Article 185 (1) of the VAT Directive. In that regard, in both cases, the Court goes on to examine whether or not such a change in the factors has occurred.

In TETS Haskovo, the Court unsurprisingly concludes that there is no change in the factors used to determine the initial VAT deduction where buildings are destroyed with the view of modernizing power production facilities. The acquisition and the subsequent destruction should be regarded as a series of linked transactions for the purposes of future taxable transactions.

Although the outcome is positive for the taxpayer, the ruling does not give a clear-cut answer as to whether, under different circumstances, the destruction of property should lead to such a factor change. As per Article 185 (2) of the VAT Directive, no adjustment is to be made in the case of destruction or loss of property. However, the Court does not reach the point of analyzing the case from the perspective of the exceptions of Article 185 (2). It seems that adjustments to deductions in the event of destruction of assets will need to be analyzed on a case-by-case basis.

In contrast to TETS Haskovo, in PIGI the Court finds that the theft of stock has lead to a change in the factors used in determining the deductible VAT amount – the stolen goods could not be used in the taxable activity of the taxpayer anymore. That is why the Court goes on to examine if, in the circumstances of the case, the exceptions of Article 185 (2) requiring no adjustments should be invoked. One of the general exceptions in this provision concerns the theft of property, duly proved or confirmed. However, a special derogation allows Member States to require adjustments in all cases of theft. On this basis, the ECJ concludes that the Bulgarian State has availed itself of this option and an adjustment to the VAT deduction may be required in the event of theft irrespective of the circumstances surrounding the theft. The Court also makes it clear that the theft is not an occurrence caused by force majeure.

The implications

The main thing to be taken away from both judgments is that, when analyzing whether or not an input VAT adjustment should be performed under the EU rules, taxpayers should first consider if there is a change in the factors used to determine the initial VAT deduction. In TETS Haskovo – due to the link of the destruction with the future taxable activity – the Court concludes that no such a factor change occurred and stops its analysis there.

By contrast, in PIGI the ECJ finds that a change in the factors determining the VAT deduction took place and, as a next step, proceeds to analyze the exceptions of Article 185 (2) of the VAT Directive. The specific outcome in PIGI follows from the fact that it concerns theft and Members States are allowed to require input VAT adjustment in cases of stolen goods. It will remain to be seen, for cases where the destruction or loss of the property is caused by different reasons, if the exceptions of Article 185 (2) would allow taxpayers not to make adjustments.

If you are interested in further exploring the implications which these ECJ judgments may have on your business, please, do not hesitate to contact us.

 

For Information

Kalin Hadjidimov
Partner, Tax & Legal
Tel: + 359 (2) 9697 700
Fax: + 359 (2) 9697 878
khadjidimov@kpmg.com

Arkadiusz Mierzejewski
Partner, Tax
Tel: + 359 (2) 9697 700
Fax: + 359 (2) 9697 878
arekmierzejewski@kpmg.com

Ivan Vargoulev
Director, Indirect Taxes
Tel: + 359 (2) 9697 700
Fax: + 359 (2) 9697 878
ivargoulev@kpmg.com

In this issue

Background of the cases

The judgments

The implications

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