Stricter conditions for demonstrating the right to a deduction?

In one of our previous articles, we informed you about tax and court proceedings concerning the additional assessment of VAT in the event that it is not possible to identify the actual supplier and customer by means of evidence, which is, contrary to general understanding, quite common in practice. If it is not possible to identify the actual supplier and the customer, it is not possible to demonstrate the fulfilment of the substantive conditions, for example, for

(i)                  the exercise of the right to a VAT deduction (e.g., to demonstrate that the supplier of the domestic taxable supply is a taxable person registered for VAT as a payer) or

(ii)                the exercise of an exemption for the intra-Community supply of goods (e.g. to demonstrate that the buyer of intra‑-Community supply of goods is a taxable person for whom the intra‑-Community acquisition of goods is subject to VAT and which should communicate its VAT number to the supplier for VAT purposes).

In practice, it is quite common that the goods are handed over from the subcontractor directly to the end customer while the goods are invoiced through a distributor who invoices them to the final customer. In these cases, all delivery or other transfer documents are signed directly between the subcontractor and the end customer while the means of proof for the delivery of the goods by the subcontractor to the distributor and subsequently by the distributor to the end customer are absent. The given problem is far from applying to just the buying and selling of goods but also similarly applies to services. You have certainly seen, in your practice, a number of cases where a service is invoiced to you by a particular provider, however the documents on the provisioning or delivery of the service are signed with another entity, typically a subcontractor who objectively performed the service. The lack of evidence needed to identify the actual supplier leads to a loss of the right to a VAT deduction. For more information on this topic, we refer you to our article "A new spectre for VAT payers - the identification of the supplier and the customer" published in the June 2022 issue.

However, in the case of goods, the topic of identifying a supplier or customer is a fundamental issue for reasons other than those mentioned above, as it is increasingly being examined in practice to whom the right to act as if owner is transferred from the point of view of VAT. As already mentioned, the goods are very often supplied directly to the end customer by a subcontractor, with the delivery documentation being signed between these entities. In such cases, it is difficult in practice to prove whether distributors involved in a given transaction have at all become owners of the goods from a VAT point of view. Although this is not a new topic, as the Court of Justice of the EU (hereinafter the ’CJEU’) already addressed these issues many years ago, it is only now possible to encounter this issue more frequently in practice, particularly as a result of the discussion initiated by the CJEU decision in case C-235/18 Vega International (hereinafter the ’Decision’).

The subject of the Decision was the delivery of goods between petrol stations, an issuer of fuel cards (hereinafter the ’Card’) that acted as a fuel distributor (hereinafter the ’Card Issuer’) and the Card holders who are refuelling at selected petrol stations (hereinafter the ’Customer’). In a particular case, the CJEU came to the conclusion that the petrol station supplies the goods directly to the Customer since only the latter is free to decide on the quality, quantity, type of fuel as well as the time of purchase and method of use of fuel taken directly from the petrol station. The topic is currently being addressed by the European Commission which confirmed the general validity of the CJEU's conclusions and did not agree with the idea that the CJEU was dealing with a very specific case that is not transferable to normal business practice from a VAT point of view. Proof that ownership in the sense of VAT has been transferred to a distributor is often defended on the level of private law agreements without showing whether a given distributor objectively has or does not have the ownership rights (e.g. the Card Issuer can prevent the customer from leaving the petrol station after refuelling the vehicle or prevent another subject from driving away with the vehicle). Proving the objective transfer of the ownership rights to individual members of chain supply is very complicated from a VAT point of view and, in the absence of appropriate documentation, almost untenable.

The topic has become increasingly subject to tax controls and may have fatal consequences for those who are unprepared. We therefore recommend that you familiarise yourself with the topic of identifying suppliers and customers in more detail.

Author: Petr Drahoš, Senior Tax Manager