According to two milestone decisions in September 2016 of the EU Court of Justice (Senatex, case C-518/14 and Barlis 06, case C-516/14) formal invoice requirements for input tax deduction have been eased. Taxpayers should not, however, relax their invoicing procedure and/or invoice checking efforts. Below we will go into the details of two specific areas, while suggesting an appropriate action list to be undertaken.
The Barlis case related to formal invoice requirements of the description of the services provided
In the case of Barlis, the Portuguese tax authorities rejected input tax deduction on the basis that the description on the invoices of the services provided by the supplier as well as the identification of the time periods when the services were rendered were insufficient.
The Portuguese tax authorities, arguing that the original invoices were defective and the defects could not be subsequently remedied, still denied the input tax deduction when the taxpayer substantiated the services in question with additional information.
However, according to the court, noncompliance with formal VAT invoice requirements itself does not necessarily result in non-deductibility of input VAT paid by the taxpayer (while the court confirmed the tax authorities’ stance that a mere generic description of the services – such as “legal services” rendered – would generally not suffice for input tax deduction).
Furthermore, according to the court, provided that the substantive requirements for a deduction of input tax are fulfilled, the tax authorities are required to take into account additional information provided by the taxpayer so as to specify the services rendered, which will thereby allow the input VAT deduction.
On the basis that services have been continuous supplies, invoices mentioning a specific start date until the date of the invoice meet the invoicing requirements for the description of when the services have been carried out, whereas a missing start date would not meet these formal conditions.
Bottom line: Under specific requirements, the tax authorities must not refuse the taxpayer's right to deduct input VAT on the basis that an invoice does not comply with all of the formal invoicing requirements when all of the substantive conditions of the deduction are met.
The Senatex case related to formal invoice requirements regarding missing tax/VAT ID numbers
In the case of Senatex GmbH, the German tax authorities refused the taxpayer's claim for an input VAT deduction on the basis that the invoices in question did not bear the supplier's tax/VAT identification number.
The German tax authorities allowed, however, the input tax deduction upon a correction of the related invoices for the tax year in which the invoices have been corrected (without retroactive effect). The tax authorities have hence assessed interest for late payment of taxes.
The court specifies that missing formal invoice requirements, such as the mentioning of the VAT ID, can (i) be corrected so as to allow the deduction of input VAT and (ii) the correction can be carried out with retroactive effect to the time when the VAT was charged.
The retroactively corrected invoice then allows input VAT deduction in the year of initial issuance of the invoice.
There was no doubt in this case that the invoices had been properly corrected. Accordingly, the CJEU confirmed that German VAT law, which only allows deduction at the time of correction, was contrary to the VAT Directive.
Tax authorities, in cases such as this, are not allowed to assess interest for late payment of taxes for the time period between first issuance of the invoice and the correction of the invoice.
The German tax authority argued that its application of the law was, in effect, a penalty for the taxpayer's failure to comply.
The CJEU countered this by stating that: while a penalty may be imposed for non-compliance, this could not be achieved by refusing the taxpayer the fundamental right of deduction.
This is specifically relevant in countries with high interest rates on late payment of taxes, such as Germany (currently at 6% per annum).
A correction of invoices should be possible (at least until the tax authorities have issued a final decision) in a pending objection proceeding.
Previous case law (Terra Bauberdarf-Handel, case C-152/02) distinguished that, on the basis that the taxpayer never held an original, albeit incorrect, invoice at the time, it received the supply. The only invoice Terra received was correct, but it was not received until a later date, whereas Senatex, at the time of exercising its right to deduct, held an (incorrect) invoice.
Bottom line: Under specific requirements, the tax authorities must not only honor the taxpayer's fundamental right of deduction of input VAT, even though an invoice has not been complying with all of the formal invoicing requirements (when all of the substantive conditions of the deduction are met), they must also not inflict the penalty of assessing interest for late payment of taxes (penalties as such are not excluded).
- Taxpayers who have been denied input VAT deductions or who have been requested to pay VAT-related interest, each of which on the basis of formal insufficiencies of invoices, should examine their options.
- It may be possible not only to successfully appeal related tax assessments and claim the input VAT but also to object and reclaim interest for late payment of taxes.
- Taxpayers should not, however, relax their invoicing procedure and/or invoice checking efforts.
- This holds true as German and EU tax authorities are more and more strengthening their compliance requirements and because (due to the recent cases decided by the CJEU related to very specific formal invoice requirements) it remains to be seen how member states' tax authorities and tax courts will apply this case law to other formal invoice deficiencies.
- The burden of proof lies with the taxpayer in respect of invoice corrections/supplements and the taxpayer also risks that the former service supplier may no longer be available at the time when the invoice correction/supplement would need to occur.
- Invoice deficiencies should be corrected as soon as possible but not by way of a cancellation of the invoices; rather, addenda referencing the insufficient original invoice should be applied (otherwise a cancellation of the initial invoice may result in the non-applicability of the above-mentioned Senatex case law and hence an assessment of interest for late payment of taxes).