ECJ on technical errors in the input VAT refund procedure

Facts

Harry et Associés Sarl (hereinafter: Harry), a company based in France, had submitted an application for a refund of Italian VAT via the French portal. The French tax authority duly forwarded the application to the Italian authority responsible for VAT refunds, the COP. Due to a technical error, for which Harry was not responsible, the COP was unable to open the electronic file. The COP did not decide on the refund application and did not respond to enquiries from Harry. Harry then brought an action before the competent Italian court, which found that Harry was entitled to the VAT refund sought. The COP subsequently paid the VAT amount.

However, Harry lost his case at the second and third instances: although Italian law (in accordance with Article 23 of Directive 2008/9) contains a provision whereby refund applications not decided upon within the prescribed time limit are deemed to have been rejected, against which a judicial remedy is then possible. The courts, however, ruled that the refund application was to be regarded as non-existent because it could not be opened. Consequently, the failure to issue a decision could not constitute a tacit rejection, meaning that Harry’s claim was already inadmissible. The COP then demanded that Harry repay the VAT.

Harry again challenged the recovery notice before the court of first instance, which referred the case to the ECJ for a preliminary ruling. The court essentially sought to know whether it would be contrary to EU law if, in a case such as the present one, the application was regarded as non-existent, thereby cutting off the applicant’s legal recourse and causing him to lose his right to a refund. A further problem was that the judgment of the court of last instance was already final and binding, and the Court of First Instance was bound by it when dealing with the same legal issue again.

General Court ruling

The ECJ first noted that there was no evidence to suggest that mandatory information was missing from the refund application. Consequently, the principle of VAT neutrality required that Harry be refunded the VAT. The general principle of sound administration required the tax authority to examine all relevant aspects carefully and impartially. It follows that the authority must notify the applicant if it is unable to open a file due to a technical error. This also follows from Article 20 (1) of Directive 2008/9, under which the authority may request additional information if it considers that it does not have all the necessary information to decide on the application. This provision would be rendered meaningless if an authority could simply assume, in the case of a file that could not be opened, that no application had been submitted. This would also be contrary to the principle of proportionality. The Italian authority should therefore have regarded the application as having been submitted and should have requested Harry to send a new, undamaged file.

The Italian provision, under which a judicial remedy is available if the authority fails to decide on the application within the prescribed time limit, satisfies in itself the requirements of Article 23 of the Directive. However, an interpretation whereby a refund application that cannot be opened is regarded as non-existent is contrary to EU law.

The principle of res judicata must not lead to courts being bound by decisions that are contrary to EU law. In the present case, the ECJ further assumed that the first instance proceedings had only ruled on the admissibility of an appeal, but not on the substantive claim for reimbursement, so that res judicata did not extend to the latter.

Analysis

Why did the Italian authority not simply inform the applicant that it could not open the file? It would have been a simple matter and would have spared all parties years of litigation.

It is easy to imagine this kind of case happening in Germany too – one sometimes gets the impression that the Federal Central Tax Office, which is responsible here, is heavily focused on formalities. For example, in the Y-GmbH case (judgment C-346/19 of 17 December 2020), the authority rejected a claim for reimbursement because the claimant had not entered the sequential invoice number on the form, but instead a different number to which the invoice referred. The ECJ intervened to correct this situation in this case as well. Its case law is guided by the principle that a taxpayer must not be denied something to which they are entitled (as is clearly evident to the authority) on the basis of formalities. 

It is therefore always worthwhile for those affected to carefully review rejected refund applications and any corresponding appeals – if necessary, with the assistance of a tax adviser – and, where appropriate, to take legal action.

Author: Nadia Schulte