Background of the case

The Provincial Administrative Court in Wrocław (the Referring Court) decided to refer the question for a preliminary ruling to the CJEU regarding the interpretation of Polish regulations. The Referring Court asked whether the provisions of Polish VAT Act providing for the possibility of imposing additional VAT sanctions in the amount of 20% in case of submitting a correction of tax return are compatible with the provisions of the VAT Directive and the Treaty on European Union, and in particular with the principle of proportionality.

More specifically, the judgement was related to the Article 112b sec. 2 of the Polish VAT Act according to which tax authorities are eligible to impose the additional VAT sanctions on taxpayers even if they filed a corrected tax return and paid the tax liability amount after the completion of a tax audit. In that case the amount of the additional tax liability shall be 20% (instead of 30%) of the amount by which the tax liability was understated or of the amount by which the tax refund was overstated.

Therefore, the above-mentioned provisions are related to the situation where the taxpayers voluntarily file a corrected tax return and the State Treasury is not depleted – the undue amount is returned by a taxpayer with the interest on tax arrears.

Given the above, the court has expressed uncertainty as to whether the application of such a sanction in a situation which, as a result of a misinterpretation of the provisions of the VAT Act, has not led to a loss of tax revenue, is consistent with the principle of proportionality.

The Referring Court stated that “In the form in which it has been introduced, the provision does not account in any way for the taxpayer’s intention, namely, whether the understatement of the tax was due to fraud or error.”. The Referring Court also indicated that “Life experience indicates that an actual fraudster would have no interest in revealing his activities by submitting corrections to his tax returns. Therefore, a penalty such as that provided for in Article 112b sec. 2 of the Polish VAT Act does not adequately fulfil the preventive function against potential fraudsters.”.

At this point it is worth to notice that the VAT sanction has already existed in Polish legal system until the end of 2007. It was abolished but nevertheless has been restored in the amount of 20% or 30% and in particular cases even in the amount of 100% from the beginning of 2017. Its reintroduction to Polish legal system was justified by the need of sealing the VAT system.

CJEU’s position

The CJEU stated that “the Article 273 of the VAT Directive and the principle of proportionality must be interpreted as precluding national legislation which impose an additional VAT sanctions on the taxpayer, who incorrectly classified a transaction exempted from VAT as a transaction subjected to this tax, in the amount of 20% of the amount by which the tax difference refund amount, to the extent to which this sanction applies without distinction both to the situations in which the irregularity is caused by an error in assessment made by the parties of the transaction as to the subject of taxation by the supply and there is no indications of committing a fraud and causing a damage in revenues to the State Treasury, and in a situation where there are no such particular circumstances.”.

The CJEU emphasized that the method of determining the additional VAT sanctions, which is applied automatically, does not allow the tax authorities to individualize the sanction imposed on the taxpayers in order to ensure that it does not go beyond what is necessary for achieving the objectives of ensuring proper tax collection and preventing tax frauds.

What does this mean for taxpayers?

The CJEU criticized the automaticity in imposing sanctions, which does not allow to distinguish whether the irregularities in tax settlements were caused by an error or a fraud. Another issue raised is the possibility of conditioning the level of sanctions on whether irregularities in VAT settlements led to a real depletion on the side of the State Treasury.

The CJEU’s judgment should be assessed positively. Undoubtedly, it will become a strong argument in the disputes with tax authorities for the taxpayers who adjusted the incorrect tax settlements in a good faith and – in consequence – were punished by tax authorities who imposed VAT sanctions.

For further information or in case of any questions please contact Robert Jaszczuk, robert.jaszczuk@pwc.com.

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