German tax court decision: No obligation to correct incorrect invoices if tax revenue is not jeopardised
In December 2022, the Court of Justice of the European Union (CJEU, judgement of 8 December 2022 - C-378/21 P GmbH) ruled that VAT incorrectly shown on an invoice does not lead to a tax liability without jeopardising the tax revenue. In a recent judgement (Tax Court Cologne, judgement of 27.05.2023, 8 K 2452/21), the Cologne Tax Court has now applied this interpretation of Art. 203 of the VAT Directive in conformity with EU law to Section 14c para. 1 German VAT Act for the first time in Germany.
KEY TAKEAWAYS
The decision of the Cologne Tax Court extending sec. 14c para. 1 of the German VAT Act to other persons not entitled to deduct input VAT is a novelty. In the recently decided case, the Tax Court not only includes for the first time another group of persons apart from consumers who are also not entitled to deduct input VAT, but also denies the application of Section 14c (1) of the German VAT Act if the invoicing party is acting in good faith. The decision of the Tax Court is thus the logical application of the above-mentioned CJEU case law and makes it clear that the German VAT Act does not adequately protect companies in the absence of a risk to the tax revenue and in the case of good faith on the part of the invoice issuer.
The Tax Court ruling has the important consequence for companies that invoices do not have to be corrected if there is no tax risk. However, it should be noted that the invoice issuer must provide evidence of the lack of risk. If, in addition to persons not entitled to deduct input VAT, such as consumers, businesses for VAT purposes are also among the service recipients, this proof will be difficult to provide. In this case, a distinction would at least have to be made by way of estimation, according to Advocate General Kokott in her Opinion of 8 September 2022 on the above-mentioned CJEU ruling. However, an “infection concept”, according to which the part of the invoices to persons not entitled to deduct input VAT could be “infected” by further invoices to traders entitled to deduct input VAT, is alien to VAT law.
While an appeal against the judgement of the Cologne Tax Court is pending before the Federal Tax Court under case no. V R 16/23, this does not concern the legal assessment of the interpretation of Section 14c German VAT Act in conformity with the Directive, but rather the question of whether the tax exemption under Section 4 no. 11b German VAT Act is also applicable to discounted and postal delivery order services that are cleared via data processing as so-called services under the general terms of conditions.
BACKGROUND
In the facts of the CJEU ruling on which the current judgement of the Cologne Tax Court is based, the plaintiff operated an indoor playground as a limited liability company (GmbH) under Austrian law. The plaintiff charged VAT at the standard rate for the services provided and also reported this in small-value invoices issued to consumers.
Contrary to the legal opinion originally held by the plaintiff, however, this was a service to which the reduced tax rate was applicable. The invoices issued by the plaintiff therefore overstated the VAT. The plaintiff corrected this incorrect tax statement via the VAT return for the year in dispute and applied for a refund of the overpaid VAT from the tax office. The competent tax office refused the correction because, according to the national (Austrian) implementation of Art. 203 of the VAT Directive, the taxable person owes the overpaid VAT and this debt is only cancelled by correcting the invoices. However, it was de facto impossible for the plaintiff to correct the low value invoices of all customers solely due to the lack of knowledge of the identity and thus also with regard to any contact details of the customers. The Administrative Court of the Federal Ministry of Finance of Austria therefore referred the question to the CJEU as to whether VAT overstated on the invoice is owed if there is no risk to the tax revenue due to the lack of the recipient's right to deduct input VAT.
In the resulting preliminary ruling, the CJEU clarified the interpretation of Art. 203 of the VAT Directive. According to this, the taxable person is not liable for the VAT overstated on the invoice if there is no risk to the tax revenue. In principle, there is no risk to the tax revenue if the recipient is not authorised to deduct input VAT. In the case to be clarified, it was assumed as a “premise” for reasons of simplification that the plaintiff provided services exclusively to private consumers, so that it was ensured for the small-value invoices issued that no input tax deduction would be claimed by the recipients of the service.
In Germany, Art. 203 of the VAT Directive has been implemented in Section 14c of the German VAT Act. When applying Section 14c German VAT Act, the German Federal Tax Court (BFH) has so far assumed that a tax liability arises solely from the incorrect or unauthorised disclosure of tax on an invoice, irrespective of whether the invoice recipient is entitled to deduct input VAT. According to the BFH's opinion, the tax liability arising from the incorrect disclosure of VAT could therefore only be reduced if the invoice was corrected and the overpaid VAT was refunded to the invoice recipient.
CURRENT DECISION OF THE COLOGNE TAX COURT ON SECTION 14C (1) GERMAN VAT ACT
Facts of the case
In the case to be decided by the Cologne Tax Court, the plaintiff provided universal postal services, specifically formal deliveries exclusively to authorities, courts, bailiffs and arbitrators. Universal postal services are generally exempt from VAT, section 4 no. 11 lit. b German VAT Act. However, the plaintiff had a binding information from the tax office from 2010, which stated that the plaintiff was providing a service subject to VAT. The plaintiff then issued all invoices with VAT. The BFH ruling on the question of the tax exemption of postal delivery order services as universal postal services (BFH, judgement of 06.02.2020, V R 37/19 (V R 8/16) and judgement of 06.02.2020, V R 36/19 (V R 30/15)) revealed that the services provided by the plaintiff are also VAT-exempt services pursuant to Section 4 no. 11 lit. b German VAT Act.
Due to the subsequent categorisation of the sales as tax-free, the invoices were incorrectly issued with VAT in the 2016 year of dispute. The question in dispute was therefore also whether the VAT shown by the plaintiff on the invoice was owed to the tax office.
Legal assessment by the Cologne Tax Court
The Cologne Tax Court followed the opinion of the CJEU in the P GmbH case (judgement of 8 December 2022 - C-378/21), according to which the incorrectly collected VAT was not to be paid to the tax office by the plaintiff - not even via Section 14c German VAT Act or Art. 203 of the VAT Directive. The Cologne Tax Court thus extends this CJEU case law to other recipients who are not authorised to deduct input VAT and affirms the plaintiff's claim for reimbursement against the tax office.
The recipients of the services provided by the plaintiff were authorities, courts, bailiffs and arbitrators. In principle, they are not entitled to deduct input VAT, meaning that there was no risk to tax revenue. In the opinion of the Cologne Tax Court, a repayment of the incorrectly collected VAT to the recipient or a correction of the invoices by the taxable person was also not necessary in the present case within the framework of the interpretation of Section 14c para. 1 German VAT Act in conformity with the Directive. If interpreted in accordance with the Directive, the repayment as a correction requirement of sec. 14c para. 1 German VAT Act already lacked a legal basis. In cases in which no correction is required, the repayment therefore does not constitute a correction requirement.
Another aspect that the Cologne Tax Court also took into account in its decision is the plaintiff's good faith on the basis of the binding information provided to it in 2010. In the 2016 year in dispute, the plaintiff was not yet aware of the subsequently established infringement of Union law and thus the lack of binding effect of the binding information provided to it.
DLA Piper's tax law team will be happy to answer any further questions you may have in this context.
