Refunding undisputed retained excess VAT deduction confirmed by CJEU
In a case involving a Czech entity, the Court of Justice of the EU (CJEU) confirmed that EU law does not preclude refunding an undisputed portion of a retained excess VAT deduction, under certain conditions. This should also be reflected by an advance for a refund of an excess deduction, to be introduced by the amendment to the Tax Procedure Code following the recent Constitutional Court judgement.
The issue of refunding an undisputed portion of excess VAT deduction went through turbulent developments: starting at the Regional Court in Ostrava, through the Supreme Administrative Court (SAC), and ending with the Constitutional Court. The Constitutional Court concluded that retaining an undisputed portion of an excess deduction was an unconstitutional infringement on ownership rights. In the court’s opinion, the absence of regulation providing for the possibility to issue a partial payment order does not prevent such an order from being issued. Legislators have responded to this by preparing an amendment to the Tax Procedure Code introducing an advance for a refund of an excess tax deduction. Because of a prejudicial question referred by the SAC in the Agrobet case (C-446/18), namely whether refunding an excess tax deduction shall be conditional upon closing all proceedings regarding any taxable supplies in the taxable period, the issue was finally also dealt with by the CJEU.
The CJEU concluded that the impossibility to refund an undisputed portion of an excess VAT deduction would be incompatible with the tax neutrality principle. The court also commented on the conditions under which a portion of an excess deduction is deemed undisputed. The court admitted that usually it will only be possible to determine the undisputed portion of an excess deduction during the course of a tax inspection. The tax administrator must ensure, firstly, that their suspicions, should they prove valid, will not affect the portion of the excess deduction that seems undisputed, and, secondly, that they will not extend the scope of the inspection to all or some supplies not originally covered by it. The taxpayer must get the chance to prove that a part of the excess deduction is undisputed, and the tax administrator must get the chance to decide on such portion. The CJEU also opined against ‘cherry-picking’ individual deductions – an undisputed portion of a deduction is only relevant where an excess deduction is reported for the whole taxable period.
The CJEU’s conclusions have set the limits for refunding an undisputed portion of a retained excess deduction, and they will be crucial for the practical application of the new concept – an advance for a tax refund, which is to be introduced by the amendment to the Tax Procedure Code, currently in preparation.