Reduction of value added tax (VAT) paid in the case of outstanding claims

On 8 May 2019, the Court of Justice delivered a preliminary ruling by the Supreme Administrative Court of the Czech Republic. The Supreme Administrative Court of the Czech Republic considered that the condition set out in Section 44 (3) of the VAT Act (in effect from 1 April 2019 in Section 46 (3) (h)), under which the debtor must be a taxpayer, if the payer wishes to make a correction, is contrary to Article 90 of Council Directive 2006/112/EC of 28 November 2006 on the Common System of Value Added Tax (the "Directive"). The Supreme Administrative Court of the Czech Republic found that this condition is inconsistent with EU law because it may prevent the correction of the tax base on the part of the creditor, without this being justified by the uncertainty as to whether the default is definitive.

The Court of Justice held that Article 90 (1) of the Directive, in conjunction with the Court's settled case law, imposes on Member States the obligation to reduce the taxable amount (and hence the amount of VAT) each time a taxable person does not receive part or all of the consideration after the transaction is closed. This is a fundamental principle of the Directive, according to which the taxable amount consists exclusively of the consideration actually received and thus does not allow the tax authority to recover the amount of VAT in excess of the amount received by the taxable person.

The Directive allows Member States to derogate from this rule in the event of total or partial non-payment of the price of performance, since in certain circumstances the non-payment of the consideration may be difficult to verify or may be temporary. However, such a derogation must be justified, must not undermine the objective of tax harmonization or allow Member States to completely exclude the reduction in the VAT base.

However, the requirement of the Czech VAT Act stipulated in Section 44 (3) or Section 46 (3) (h) in the wording in force from 1 April 2019 does not fulfil these conditions for application of the derogation.

To paraphrase the other parts of that judgment, the Court reiterated and emphasized that the Member States could not extend their powers (and simplify their work under the pretext of increasing the efficiency of tax collection) contrary to the purpose and scheme of the legislation which attributes these powers to them. This is another decision that makes clear that public authority can be exercised only within the limits set by law and that overstepping this can be defended via the courts.

In conclusion, let us also ask whether following the proliferation of similar faults and violations of these principles, which the public must defend at the cost of expensive and lengthy processes, it is now time to revise the state liability rules for the damage caused thereby. We believe that the correct regulation of this institute could be a very effective preventive tool that will ultimately benefit everyone.