Another Czech case before CJEU: is there entitlement to VAT deduction if the supply provider is unknown?

The Supreme Administrative Court (SAC) referred two prejudicial questions to the Court of Justice of the EU (CJEU) concerning entitlements to VAT deductions. In the case in question, the taxable supply recipient failed to support who had provided them with advertising services on which they subsequently deducted VAT. On these grounds, the SAC refused to acknowledge the taxpayer’s entitlement to deduct VAT.

In a tax inspection of the taxable periods of 2010 and 2011, the tax administrator challenged the VAT deduction on advertising services received. The service provider given in the tax document stated that they were not aware of having rendered the services; the provision of the services itself, however, was not challenged. On these grounds, the tax administrator assessed additional tax for each of the periods, including sanctions.

CJEU case law implies that to claim entitlement to VAT deduction, the taxable supply recipient must be a taxable person that used the supply received within their business activity, while it is also necessary that the taxable supply was provided by another taxable person. If these conditions are met, it is virtually impossible to deny the entitlement to deduction. CJEU case law also implies that it is the taxpayer who must prove compliance with the conditions for VAT stipulated by the substantive law; the tax administrator, on the other hand, bears the burden of proof if involvement in tax fraud is suspected.

The SAC based its decision on previous CJEU judgements: although the condition of the supply recipient proving that the taxable supply had been rendered to them by a taxable person was not met, it still is appropriate to acknowledge their entitlement to deduct VAT, as the taxpayer’s involvement in tax fraud was not proven. This, however, would lead to the conclusion that a taxpayer claiming VAT deduction does not have to prove compliance with one of the conditions for VAT deduction stipulated by substantive law. According to the SAC, such an approach would render tax fraud virtually unpunishable. The SAC also noted that to prove involvement in tax fraud, the tax administrator must have at least basic information about the chain; in a situation where it cannot be proven who had provided the taxable supply, the tax administrator has in effect no chance to prove tax fraud.

In this respect, the SAC’s extended panel of judges referred the following prejudicial questions to the CJEU:

Is it compatible with the EU directive that claiming entitlement to VAT deduction is conditional upon the taxable person - supply recipient proving that the supply was provided to them by another taxable person?

If so, and if the taxable person fails to meet this condition, is it possible to deny them the entitlement to deduct input VAT without it being proven that the taxpayer knew, or could have known of their involvement in tax fraud?

The CJEU’s answers to these questions may provide certain guidance on how to proceed with VAT deduction in similar cases in the future.

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