Grupa Warzywna (C-935/19)
GRUPA WARZYWNA
This article will look at the decision the European Court of Justice (ECJ) handed down in the Grupa Warzywna (C-935/19) case on April 15, 2021. This case was about the long-running debate about VAT penalties. After setting out the facts and judgement of this case, firstly, this article will critically discuss if the judgment is consistent with previous practice in the ECJ. Secondly, it will examine if the judgment is consistent with the conduct of the CJEU. Third this article examines how the ruling affects Member states and EU law generally. The limitation of this study is that it has used information from legal blogs, because the limited amount of the academic discussion in relation to this judgment is in Polish.
Facts
Grupa Warzywna, a Polish company, bought a property and utilised it for almost two years. The property seller submitted a VAT invoice, and Grupa requested a VAT refund on the property. The application was denied, on grounds that the sale of real estate was VAT free. As such, the tax authorities contended that VAT was not deductible. Nonetheless, Grupa reduced its deductible VAT amount, while the tax office assessed a 20% penalty on the purchase VAT, claiming the previous VAT deduction was unjustified. The referring court judged the punishment punitive rather than preventative, given the nature and intensity of the offence, and the fact that the State Treasury had not lost tax revenues, and further, the evidence suggested that there was no intent to commit tax fraud.[1] This penalty also applies when no specific conditions exist. Thus, the Polish tax authorities cannot consider all the circumstances in the case.[2] The corporation objected to the authorities' approach and asked the national court if a penalty imposed by the Polish authorities was compliant with EU law.[3]
The Wroclaw Provincial Administrative Court (the Referring Court) decided to ask the CJEU for a preliminary question on Polish rules. The Referring Court examined if the Polish VAT Act's provisions allowing for extra an 20% VAT penalties for filing a corrected tax return are consistent with the VAT Directive and the EU Treaty, and in particular with the proportionality principle. Article 112b (2) of the Polish VAT Act, allows tax authorities in Poland to apply further VAT penalties even if taxpayers rectified their tax returns and paid the due taxes after an audit was completed. In such situation, the increased tax payment is equal to 20% (rather than 30%) of the underestimated tax liability or overstated tax refund.
Matesanz points out that of court’s decision focused on whether creating further tax liability of 20% of the amount of understatement of tax liability, abided by the proportionality principle as well as the VAT Directive 2006/112/EC. Article 112b (2) of the VAT Act highlights this sanction. It was questioned by the referring court whether these penalties being given automatically, were properly compatible with EU law without the ability to determine the effects of the breach and the taxable person's intent. In this case, no tax revenue was actually lost.[4]
Consistency with (ECJ) previous practice
The reasoning in Grupa can be considered a culmination of previous ECJ decisions, such as those in the following instances, which may be deemed to represent a consolidated body of law. In C-210/91[5] it was stated that in the absence of any community law, Member States may impose sanctions they deem appropriate on temporary importation of travellers' personal items under Art 169. This must be subject to Community law and its basic principles, including proportionality. Administrative measures or punishments must not go beyond what is absolutely required to achieve the goals, and sanctions must not be so disproportionate to the seriousness of the violation that they create a barrier to the Treaty's freedoms. Similarly in C-110/99[6] the Court of Justice already affirmed the potential of countering subsidy misuse in the Emsland-Stärke case. The outward processing method is subject to limits under Art.146(1) of the Customs Code, which precludes its abuse. In C-262/99[7] at paragraph 69 the court held:
‘[a]lthough overwhelming needs of enforcement and prevention may justify national law establishing penalties at a specific degree of severity, it is feasible that [such penalties] may prove to be ineffective.'
In the case C-183/14[8] it was held that levy surcharges following a tax audit, provided that the decision is based on clear and precise rules and that the authority's practice has not given rise to a prudent observer's doubts. Surcharges must thus adhere to the proportionality principle too. Similarly in C-564/15[9] it was held that the right to sue the taxing authority might be reserved for the person who filed the tax. However, if recovery is not possible, the principle of effectiveness demands that individuals who paid the tax incorrectly be able to recover it. Lastly in C-895/19[10] Poland's tax regulations allowed for repayment of interest and "interest on interest" if a request for declaration and refund of the overpayment is made before June 9, 2021. The Tribunal argued that the VAT Directive's concept of neutrality and proportionality had been violated by legislative measures like those in Poland since 2017.
Compatibility with the CJEU’s previous decisions
The CJEU stated that the penalty in question is in fact incompatible with the VAT Directive. In order to secure an accurate collection of VAT and effectively combat tax fraud, Member States may impose fines on taxpayers for mistakes made in settling tax. However, in order to determine whether the punishment conforms to the proportionality principle, consideration must be given to the type and degree of the violation that the penalty is meant to penalise. The automatic imposition of administrative penalties in all situations of VAT understatement or overstatement of VAT refunds is an insufficient approach of fighting tax fraud.[11] The CJEU noted that the automatic application of extra VAT fines precludes tax authorities from tailoring the punishment imposed on taxpayers to ensure that it does not go beyond what is essential for guaranteeing adequate tax collection and avoiding tax fraud.[12] The CJEU questioned the automaticity of sanctions, making it hard to identify whether tax settlement anomalies are the product of a mistake or fraud. The concept of connecting the severity of penalties to whether or not VAT anomalies resulted in an actual depletion of the State Treasury was also underlined.[13]
Favourability toward business
The Court's decision is favourable to Polish businesses as a basis for repealing decisions. In the case of VAT settlement anomalies, the Court stated that member states had the ability to impose administrative consequences on taxpayers. However, the regulations controlling how such sanctions are applied, must be consistent with EU legislation and general principles, and therefore within the proportionality principle. Maciej Kozub says the CJEU want sanctions for anomalies in VAT settlements must take into consideration all circumstances. They cannot be used if the detrimental repercussions of an activity are unknown and where the taxpayer's intentions are unknown. Penalties are meant to deter fraudsters and tax evasion, not to crush free enterprise.
While the tax administrator is required to incorporate the CJEU's ruling into its administrative practise as of the date of its publication, The Ministry of Finance is already working on an adjustment to the SLIM VAT 2 package that would have been relevant in this scenario. It is a solution to the problem of the statement of intention to charge VAT on the supply of structures, which may be included into the notarial deed and serve as a sufficient basis for the resignation from the exemption without the need to submit a separate notification. This is the proper option; as all notarial deeds of real estate disposition are already filed with the tax authorities (due to other taxes), thus there is no need to add further formalities.[14]
Impact on EU law and Member States
Member states
The amount of the punishment should be adaptable by the tax authorities to the unique circumstances on a case-by-case basis considering all the circumstances. The Court's ruling might be used to overturn previous tax judgments and reopen cases that were previously closed due to the finding of an increased tax burden.[15] The CJEU's ruling should therefore be admired. There is little question it will be a potent argument in tax disputes for taxpayers who tried to remedy errors in tax settlements and were hit with a VAT penalty.[16] In reality, however, these results emerging from the stated ruling may enable taxpayers to recover sums of excess tax burden paid as a consequence of VAT assessment mistakes. In light of the decision, it is also possible to infer that there are grounds that the judgment's findings may be applied to the 15% punishment imposed under Art.112b paragraph 2a of the VAT Act.
The EU has extended the tax exemption for equipment purchased to fight the coronavirus pandemic until the end of 2021. The potential exemption also applies to imports into the Czech Republic, according to the General Financial Directorate's website in early May. As a result, the above-mentioned judgement may have a substantial impact on administrative practises in the Czech Republic.[17]
The preceding judgement is equally significant for real estate asset sales. It should mitigate the adverse tax effects in the event that the selected tax treatment is questioned by the tax authorities.[18]
Wider effect on EU Law
The decision makes clear to all other Member State tax authorities, that before imposing a penalty, member states must take into account the all the circumstances, on a case by case basis. This means including the behaviour of the taxable individuals and whether there has been good or bad faith on the part of the taxable persons. Fernando Matesanz argues that regarding the penalties within the realm of VAT, the ECJ provides a set of parameters that member states must operate inside of. If these punishments are administered without regard for these limitations, they will be questioned more and more.[19] Secondly, he argues that when it comes to penalties in the realm of VAT, the ECJ specifies a number of parameters within which all member states must operate.[20] If these sanctions are administered without regard to these limitations, they will be called into question more and more. Member’s states laws should constantly take these limitations into consideration in order to prevent costly and time-consuming judicial processes for taxable people.
The attempt to harmonise
Nil rate VAT has been a compromise solution and a temporary and transition system of tax because all Member States have different amounts of domestic VAT on goods. Without a doubt, it is not feasible to talk about harmonisation in the sphere of sanctioning legislation at the current time, and realistically, it is doubtful that such complete harmonisation will be achieved in the foreseeable future. Fernando Matesanz argues according to the diverse ECJ case law, however, one may discern some form of "soft" harmonisation, which is shown in the protection of two fundamental VAT principles: the concept of VAT neutrality and the principle of proportionality (which are not mutually exclusive).[21] Each member state's sanctions system must always take into consideration both of these two factors. It is controversial whether or not this occurs in practise[22].
Conclusion
The CJEU's decision should be praised. Grupa Warzywna highlights that laws that impose arbitrary fines without regard for the taxpayer's behaviour or guilt in respect to how the mistake happened may conflict with the proportionality principle and may be successfully contested. It will undoubtedly become a compelling case in tax disputes for taxpayers who corrected inaccurate tax settlements in good faith and were penalised by tax authorities who issued VAT penalty. The Tribunal ruled in favour of the Company, finding the Polish laws incompatible with Article 273 of the VAT Directive and the proportionality principle. However, the punishment is applied without differentiating between scenarios where: first the irregularity originates from a mistake in the taxable nature of the supply, with no evidence of fraud and a decrease in state revenues, and second there are no such unique conditions.
Bibliography
Cases
C-210/91 Commission of the European Communities v Hellenic Republic v Greece: ECJ 16 Dec 1992
C-110/99 Emsland-Stärke GmbH v. Hauptzollamt Hamburg-Jonas
C-262/99 Paraskevas Louloudakis v Ellinko Dimosio
C-183/14 Salomie and Oltean
C-564/15 Farkas
C-895/19 Wyrok
Legal Blogs
Michela Merz, ‘CJEU – Poland – Penalties for inaccurate tax settlement must be proportional to the infringement’ Tax Knowledge Blog, April 16, 2021 at https://michaelamerz.org/2021/04/16/poland-tax-fines-must-fit-the-crime-top-eu-court-rules/ Advicero Nexia | TAX NEWS | May 2021 at https://www.advicero.eu/en/advicero-nexia-tax-news-may-2021/
Maciej Kozub, ‘The 20% sanction in the VAT is incompatible with EU regulations – CJEU judgment in case C-935/191, VON ZANTHIER & DACHOWSKI Blog, 13 May 2021 at https://blog.vonzanthier.com/en/the-20-sanction-in-the-vat-is-incompatible-with-eu-regulations-cjeu-judgment-in-case-c-935-19/
Tomáš Brandejs, VAT News [May 2021], Deloitte.dReport at https://www.dreport.cz/en/blog/vat-news-may-2021/
Autorzy,Marta Pabiańska, Tomasz Pabiański, Paulina Nawrat, Wojciech Gede , ‘CJEU | Imposing a VAT sanction without distinguishing whether the taxpayer's error is due to fraud or not is incompatible with EU law’ [2021] PWC at https://studio.pwc.pl/aktualnosci/english/insights/imposing-a-vat-sanction-without-distinguishing-whether-the-taxpayers-error-is-due-to-fraud-or-not-is-incompatible-with-eu-law
Fernando Matesanz, ‘VAT penalties and the principles of proportionality and neutrality’, International Tax Review at https://www.internationaltaxreview.com/article/b1tz2d2gbjsxqj/vat-penalties-and-the-principles-of-proportionality-and-neutrality.
Footnotes
[1] Maciej Kozub, ‘The 20% sanction in the VAT is incompatible with EU regulations – CJEU judgment in case C-935/191, VON ZANTHIER & DACHOWSKI Blog, 13 May 2021 at https://blog.vonzanthier.com/en/the-20-sanction-in-the-vat-is-incompatible-with-eu-regulations-cjeu-judgment-in-case-c-935-19/
[2] Wolters Kluwer Polish sanction for incorrect VAT qualification in violation of EU law, April 15, 2021, at https://www.taxlive.nl/nl/documenten/vn-vandaag/poolse-sanctie-bij-onjuiste-btw-kwalificatie-in-strijd-met-eu-recht/?utm_medium=email&utm_source=WKNL_TAXLIVE_TUESDAY_FRIDAY_VERSIE_EM_1_V2&utm_campaign=WKNL_Taxlive_Dinsdag_tm_Vrijdag%20%28Prodflow8AM%29%2FNLTAA-18-OUT-9868&utm_source_system=Eloqua&utm_econtactid=CWOLT000007130457
[3] ECJ 15-04-2021 Grupa Warzywna C-935/19, VAT JURISPRUDENCY, April 15, 2021 at https://btwjurisprudentie.nl/hvj-15-04-2021-grupa-warzywna-c-935-19/
[4] Fernando Matesanz, ‘VAT penalties and the principles of proportionality and neutrality’, International Tax Review at https://www.internationaltaxreview.com/article/b1tz2d2gbjsxqj/vat-penalties-and-the-principles-of-proportionality-and-neutrality
[5] C-210/91 Commission of the European Communities v Hellenic Republic v Greece: ECJ 16 Dec 1992
[6] C-110/99 Emsland-Stärke GmbH v. Hauptzollamt Hamburg-Jonas
[7] C-262/99 Paraskevas Louloudakis v Ellinko Dimosio
[8] C-183/14 Salomie and Oltean
[9] C-564/15 Farkas
[10] C-895/19 Wyrok
[11] Maciej Kozub, ‘The 20% sanction in the VAT is incompatible with EU regulations – CJEU judgment in case C-935/191, VON ZANTHIER & DACHOWSKI Blog, 13 May 2021 at https://blog.vonzanthier.com/en/the-20-sanction-in-the-vat-is-incompatible-with-eu-regulations-cjeu-judgment-in-case-c-935-19/
[12] Michela Merz, ‘CJEU – Poland – Penalties for inaccurate tax settlement must be proportional to the infringement’ Tax Knowledge Blog, April 16, 2021 at https://michaelamerz.org/2021/04/16/poland-tax-fines-must-fit-the-crime-top-eu-court-rules/
[13] Ibid.
[14] Advicero Nexia | TAX NEWS | May 2021 at https://www.advicero.eu/en/advicero-nexia-tax-news-may-2021/
[15] Maciej Kozub, ‘The 20% sanction in the VAT is incompatible with EU regulations – CJEU judgment in case C-935/191, VON ZANTHIER & DACHOWSKI Blog, 13 May 2021 at https://blog.vonzanthier.com/en/the-20-sanction-in-the-vat-is-incompatible-with-eu-regulations-cjeu-judgment-in-case-c-935-19/
[16] Michela Merz, ‘CJEU – Poland – Penalties for inaccurate tax settlement must be proportional to the infringement’ Tax Knowledge Blog, April 16, 2021 at https://michaelamerz.org/2021/04/16/poland-tax-fines-must-fit-the-crime-top-eu-court-rules/
[17] Tomáš Brandejs, VAT News [May 2021], Deloitte.dReport at https://www.dreport.cz/en/blog/vat-news-may-2021/
[18] Autorzy,Marta Pabiańska, Tomasz Pabiański, Paulina Nawrat, Wojciech Gede , ‘CJEU | Imposing a VAT sanction without distinguishing whether the taxpayer's error is due to fraud or not is incompatible with EU law’ [2021] PWC at https://studio.pwc.pl/aktualnosci/english/insights/imposing-a-vat-sanction-without-distinguishing-whether-the-taxpayers-error-is-due-to-fraud-or-not-is-incompatible-with-eu-law
[19] Fernando Matesanz, ‘VAT penalties and the principles of proportionality and neutrality’, International Tax Review at https://www.internationaltaxreview.com/article/b1tz2d2gbjsxqj/vat-penalties-and-the-principles-of-proportionality-and-neutrality
[20] Ibid.
[21] Fernando Matesanz, ‘VAT penalties and the principles of proportionality and neutrality’, International Tax Review at https://www.internationaltaxreview.com/article/b1tz2d2gbjsxqj/vat-penalties-and-the-principles-of-proportionality-and-neutrality
[22] Ibid
