On June 20th 2013, the ECJ ruled that a domestic law which provides for a substantial penalty where a taxable person failed to record on time its obligations affecting the calculation of VAT, is compatible with European Union law.
In the case at hand, a Bulgarian company ("Rodopi") deducted the VAT charged on a purchase invoice in its VAT return. Thereafter, this invoice was cancelled and the company - after the legal time limit - made an adjustment on its VAT return. The company remedied the deduction made in respect of that invoice by payment in full of the amount of VAT initially deducted for the cancelled invoice, together with interest.
Bulgarian tax authorities issued a fine equivalent to the amount of VAT stated on the invoice on the grounds that the company adjusted the input VAT after the legal time limit. The company argued that the penalty was contrary to the principles of fiscal neutrality and proportionality, set out in European Union law.
The European Court of Justice ("ECJ") ruled that these principles do not preclude such penalties, where a taxable person has fulfilled after the deadline its obligations affecting the calculation of VAT, even if the taxpayer has subsequently rectified the omission and paid all the taxes due. In particular, the ECJ took the view that the fine cannot be viewed as a double taxation of a transaction because it was not levied with respect to a particular transaction but because of the late adjustment of the input VAT. The fine is hence not contrary to the principle of neutrality. Regarding the principle of proportionality, the ECJ confirmed that it is for the national courts to determine whether, in light of the circumstances of the main proceedings, the amount of a penalty goes beyond what is necessary to ensure the correct collection of tax and to prevent evasion.
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