In the joined cases of Sole-Mizo Zrt and Dalmandi Mezo gazdasagi (C-13/18 and C-126/18), the Advocate General had to consider whether simple interest, set at Hungary's central bank base rate, provided adequate compensation for the taxpayers' financial loss caused by Hungary's failure to fulfil its obligations under the Principal VAT Directive.
The taxpayers' claim arose from previous decisions of the ECJ which had determined that Hungarian VAT rules that denied taxpayers a refund of excess input tax if and to the extent that the input tax had not been paid in the relevant period, were in breach of article 183 of the Principal VAT Directive, which requires immediate credit for input tax incurred. Hungary applied two rates of interest to compensate for its failure to repay input VAT sufficiently quickly. Both rates were based on the central bank base rate.
The Advocate General opined that in order to compensate fully for the deprivation of timely repayment of input tax, it was necessary to apply a rate of interest that reflected the cost of borrowing that amount on a short-term loan, including the margin usually applied by credit institutions. Applying the central bank rate would not, suggests the Advocate General, comply with that requirement as that would not be a rate actually available to an ordinary taxpayer to borrow the necessary funds to alleviate cash flow problems caused by late repayment. The Advocate General also opined that it was necessary to compensate for the erosion of monetary value caused by inflation since the date when the damage accrued, suggesting that compound interest should be paid. Commenting on the Littlewoods decision (C-591/10), the Advocate General said that while the Court had said it is for Member States to lay down rules regarding payment of interest, the intention was not to depart from the principle of full reparation but rather to refer to the precise rate to be applied – the one amounting to full compensation.
DLA Piper Comment: It remains to be seen whether the Court will support the Advocate General's view but it seems that if it does, it may re-open the question, considered closed by many jurisdictions, of whether simple interest can ever be an adequate remedy.
In Herst s.r.o., (C-401/18) the Advocate General looked at which transaction in a cross-border supply chain with multiple transactions is to be regarded as the exempt intra-community supply if there is only one physical movement of goods. The taxpayer owned filling stations and used its own vehicles to transport fuel from other Member States to the Czech Republic. During transport, the ownership of the goods was transferred between different entities, creating a chain of transactions between taxpayers. In many cases, the taxpayer not only transported the goods, but eventually also became the owner of the goods at the end of the supply chain. In other cases, the taxpayer sold fuel on to its own customers. The referring court asked about the case where the goods were bought for a specific customer to fulfil an existing order, where the taxpayer did not physically handle the goods itself because the buyer agreed to arrange the transport of goods from their origin.
The Advocate General opined that the crucial factor in deciding which supply in a chain is the exempt supply effecting transport of the goods, with a resulting taxable acquisition, is that which bears the risk for accidental loss during the cross-border transport of the goods. Other factors such as legal ownership, physical control and excise duty clearance were not decisive. The fact that the taxpayer assumed the transport costs in the particular circumstances being considered was merely an indicator that it acted on its own behalf as supplier. What mattered was whether the taxpayer had already acquired the power to dispose of the fuel before its cross-border transport such that it bore the risk for its accidental loss. It was for the referring court to assess this.
DLA Piper Comment: The topic of intra-community supply chains is fraught with difficulty and has been before the Courts many times. Great care is needed to get this right so that input VAT recovery is not challenged. The rules are soon to change in 2020 and 2021 with the EU VAT Package.
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