CJEU assessed whether a penalty imposed by the tax authority was proportionate

Background

A Polish company Grupa Warzywna Sp. z o.o. acquired an immovable property which was occupied for more than two years. The sales price of the building was agreed as a gross amount including VAT. The seller issued an invoice showing the amount of VAT applied on the transaction and the mentioned company deducted this VAT in its VAT return.

The tax authority found that the supply of the property was in principle VAT exempt and that the contractual parties had not submitted a waiver of exemption. The company proceeded with correction of the VAT return based on the findings of the tax authority. Compared to the VAT return originally filed, the declared excess VAT deduction was significantly lower.

The tax authority imposed a penalty in the amount of 20% of the amount by which the excess VAT deduction was decreased.

Question whether the imposed penalty was proportionate

CJEU dealt with a question of whether the penalty was proportionate, considering that it was imposed:

- on a taxable person who has incorrectly classified a VAT exempt transaction as a supply on which VAT was applicable and who claimed deduction of VAT wrongly invoiced by the seller,

- irrespective of the nature and seriousness of the infringement, with no indication that the error constitutes tax evasion and where no tax revenue was lost.

CJEU's arguments

EU member states may adopt measures to ensure the correct collection of VAT and to prevent evasion. In particular, in the absence of provisions of EU law on that matter, the EU member states have the power to choose the sanctions which seem to them to be appropriate in the event that conditions laid down by EU legislation for the exercise of the right to deduct VAT are not observed.

However, the sanction must not go beyond what is necessary to attain the objectives of ensuring correct collection of VAT and to prevent evasion. In order to assess whether a penalty is consistent with the principle of proportionality, account must be taken of, inter alia, the nature and the degree of seriousness of the infringement which that penalty seeks to sanction, and of the means of establishing the amount of that penalty.

In this case, the penalty was intended to have a preventive effect. It is intended to encourage taxable persons to complete their tax returns correctly and with due care, and, in the event of incompliance, to correct them in order to achieve the objective of ensuring the correct collection of VAT.

As regards the method of determining the amount of the penalty in the present case, it should be noted that, where it is set at 20% of the amount by which an unduly claimed excess VAT deduction was overstated, that amount of penalty cannot be, with certain exceptions, reduced depending on the specific circumstances of the case.

It is apparent in the case at hand that the amount of penalty does not reflect the fact that the incompliance stems from an incorrect VAT assessment of the transaction by the contractual parties who incorrectly assumed that VAT was applicable on the supply of the building. It is also apparent that the penalty applies without distinction in a situation in which the incompliance results from an error, where there is no evidence of tax evasion and which did not lead to any loss of tax revenue, and in a situation where such specific circumstances worth of consideration do not exist. This method of determination did not therefore enable the tax authorities to adjust the amount of the penalty according to the specific circumstances of the present case.

It follows that the method of determining the penalty, applied automatically, does not enable the tax authorities to individualize the penalty imposed in order to ensure that that penalty does not go beyond what is necessary to attain the objectives of ensuring correct tax collection and prevention of tax evasion.

CJEU holds incompatible with EU law a penalty imposed to a taxable person who has incorrectly classified a VAT exempt transaction as a supply on which VAT was applicable, equal to 20% of the amount by which an unduly claimed excess VAT deduction was overstated, in so far as the penalty is applied without distinction:

(i) in a situation where the incompliance stems from an incorrect VAT assessment of the transaction by the contractual parties as regards its taxable nature, provided that there is no evidence of tax evasion and no loss of tax revenue, as well as

(ii) in a situation where such specific circumstances do not exist.