In Kreuzmayr GmbH v Finanzamt Linz (Case C-628/16), the Court of Justice of the European Union (CJEU) has found that the Austrian tax authority was entitled to deny input tax recovery when it emerged that VAT should not have been charged in the first place.

Background

BP Marketing GmbH (BP), a German company, sold petroleum products to BIDI Ltd (BIDI), an Austrian company. BIDI agreed to transport the goods to Austria. BP zero-rated its sales regarding them as exempt intra-community supplies in accordance with Article 138, Council Directive 2006/112/EC (Principal VAT Directive). BIDI charged Austrian VAT when it resold the goods to Kreuzmayr GmbH (Kreuzmayr), an Austrian company.

Without informing BP, BIDI also agreed that Kreuzmayr would arrange the transport of the goods from Germany to Austria. This meant that a different VAT treatment should have applied. BP should have charged German VAT, and BIDI should have zero-rated its supply.

The Austrian tax authority initially allowed Kreuzmayr’s deduction of input tax. However, in the course of a tax audit, it emerged that BIDI had neither declared nor paid the invoiced amounts of VAT. Following the audit, BIDI amended the invoices, showing that no VAT was due on the supplies to Kreuzmayr. However, BIDI became insolvent and Kreuzmayr did not recover the VAT paid to BIDI. On the basis of the amended invoices, the Austrian tax authority formed the view that Kreuzmayr had no right to deduct the input VAT.

The Austrian tax authority concluded that the acquisitions by Kreuzmayr were not local purchases of goods, but rather an intra-community acquisition of goods and they should not have been subject to Austrian VAT. Kreuzmayr disagreed and the matter was referred to the CJEU.

The issue before the CJEU was the correct interpretation of Article 32, Principal VAT Directive, which provides that where goods are dispatched the place of supply is deemed to be the place where the goods are located at the time when dispatch or transport of the goods to the customer begins.

CJEU judgment

The CJEU confirmed that the second supply of goods (between BIDI and Kreuzmayr) qualified as a VAT exempt intra-community supply of goods. Kreuzmayr was therefore not entitled to input tax recovery.

The CJEU observed that where two successive supplies of the same goods, effected for consideration between taxable persons, give rise to a single intra-community transport of those goods, that transport can be ascribed to only one of the two supplies.

The CJEU was of the view that paragraph 1, Article 32, Principle VAT Directive, had to be interpreted as applying to the second of two successive supplies of goods which gives rise to only one intra-community transport. As Kreuzmayr was the owner of the goods before the intracommunity transport took place, Article 32 applied to the supply to Kreuzmayr.

Where the second supply in a chain of two successive supplies involving a single intracommunity transport is an intra-community supply, the principle of legitimate expectation must be interpreted as meaning that the person ultimately acquiring the goods (in this case Kreuzmayr) who wrongly claimed a right to deduct input VAT, may not deduct, as input VAT, the VAT paid to the supplier solely on the basis of the invoices provided by the intermediary operator which incorrectly classified its supply.

The CJEU considered that the fact BP had characterized the supply chain incorrectly (and therefore faced having to account for VAT in Germany without being able to recover it from BIDI) was not relevant to the Austrian VAT treatment.

Comment

The judgment demonstrates the practical difficulties surrounding the application of the 0% VAT rate in chain transactions.

The judgment also highlights the importance of correctly establishing which chain in a chain transaction is VAT exempt and the importance of parties involved in supply chains meeting the relevant requirements that may “protect” them against the effects of possible non-compliance of other businesses in the chain.

A copy of the judgment is available to view here.