FOURTH SECTION Application no. 31651/08 by Alojzy FORMELA against Poland lodged on 3 June 2008 STATEMENT OF FACTS THE FACTS The applicant, Mr Alojzy Formela, is a Polish national who was born in 1942 and lives in Gdansk. A. The circumstances of the case The facts of the case, as submitted by the applicant, may be summarised as follows. 1. The taxable transactions with company K. In 2001 the applicant purchased goods from a company-k. ( supplier K. ). Both the applicant's company and company K. were registered under the Value Added Tax Act of 8 January 1993 ( the VAT Act ) and the transactions concerned taxable supplies under the said Act. The supplier issued invoices to the applicant's company, which the latter paid in full, including the VAT. The applicant recorded the purchase in his accounting records and filed his VAT return form with the tax office. The applicant kept the originals of all the invoices. The copies were left with the supplier. Apparently the copies were stolen from the supplier. On 22 May 2002 the supplier informed the tax authorities that the tax
2 FORMELA (II) v. POLAND STATEMENT OF FACTS AND QUESTIONS documentation had been stolen and promised to reconstruct all the missing paperwork. However, he failed to do so. It is not clear whether the supplier recorded all the sales in its accounting records as the relevant documents had gone missing. 2. The taxable transactions with company S. In 2002 the applicant purchased goods from another company S. ( supplier S. ). Apparently, at the time of the transaction only the applicant's company was registered under the VAT Act. The supplier issued invoices to the applicant, which the latter paid in full, including the VAT. The applicant recorded the purchase in his accounting records and filed his VAT return form with the tax office. The supplier (company S.), recorded all the sales in its accounting records, however it did not file its VAT forms as it was not a VAT-registered company. The applicant kept the originals of all the invoices. The copies were left with the supplier. In 2004 - on 29 April and 17 May after having registered under the VAT Act, the supplier voluntarily filed its outstanding VAT forms and paid the due amount of VAT in full. 3. The VAT audit In 2004 the tax authorities conducted a VAT audit of the applicant's company. In the course of the inspection a cross-check of the suppliers was conducted in order to ascertain whether they had properly reported and recorded the transactions in their accounting records. As a result the above-mentioned discrepancies were discovered. (a) Tax assessment regarding transactions with company K. The tax authorities were not able to check the accounting documents of company K. as the paperwork was missing. It was only possible to check the VAT forms which had been filed monthly by supplier K. with the tax office. The forms disclosed only the amount of VAT due and did not show the detailed records of every sale. Hence it was only possible to learn what VAT amount the supplier had paid each month and not to establish which transactions the VAT stemmed from. In four of the eighteen months that were checked, company K. declared a lower amount of VAT than the applicant. Hence, all the calculations submitted by the applicant were challenged. On 28 October 2005 the tax authorities in Kartuzy issued a tax assessment for the applicant for the following months: January to June 2001 and August to December 2001. It refused the applicant the right to deduct the VAT he had paid to his supplier, company K. ( the input VAT ), which amounted to 54,315 Polish zlotys (PLN), because the supplier had not kept copies of the invoices and had paid a lower amount of output VAT for four months (January 2001, April 2001, June 2001 and December 2001).
FORMELA (II) v. POLAND STATEMENT OF FACTS AND QUESTIONS 3 The authorities also pointed out that in February, March, April, May, June, August, September, October, November and December 2001 company K. had declared a lower amount of VAT than that calculated on the basis on various invoices it had issued to various other companies (not only the applicant's); hence it was found that the supplier - company K. - had breached the VAT Act regulations. The authorities established that the applicant was liable to pay the VAT on the received supply for a second time. Accordingly, they ordered the applicant to pay VAT in the amount of PLN 54,315 into the State budget, together with interest. The tax authorities pointed out that the supplier had stated that it had lost the copies and promised to reconstruct them, but had never done so. The tax authorities reasoned that the supplier had not met its obligations as imposed by the VAT Act and that in general a purchaser was liable for the illegal actions of the supplier. The VAT due was calculated for the applicant as shown below. January 2001 PLN 9,428 February 2001 PLN 4,736 March 2001 PLN 5,716 April 2001 PLN 7,805 May 2001 PLN 3,474 June 2001 PLN 6,574 August 2001 PLN 6,503 September 2001 PLN 5,077 October 2001 PLN 1,254 November 2001 PLN 1,478 December 2001 PLN 2,270 The applicant appealed on 30 November 2005. He submitted that all the transactions had been accompanied by VAT invoices issued in originals and copies and he had kept all the originals, which should have served as proof that the transactions had actually occurred. He also pointed out that he had fulfilled all his obligations under the VAT Act, namely, he had paid the VAT when purchasing the goods, stored the originals of the invoices and diligently filed all the VAT forms with the tax office. He also submitted that holding him liable for the mistakes or negligence of his business contractors would be against the spirit of law. On 19 April 2006 the Gdansk Fiscal Directorate upheld the first-instance decisions. The Directorate pointed out that under section 19 1 of the VAT Act, the registered company was entitled to reduce the output VAT by the amount of VAT paid when purchasing the goods (the input VAT). In an Ordinance dated 22 December 1999 (rozporzadzenie z dnia 22 grudnia 1999) the Minister of Finance had established the cases where it was impossible to deduct the input VAT. According to paragraph 50 (4)(2) of the said Ordinance, the originals of invoices could not serve as a basis for deducting the input VAT when not accompanied by the copies stored by the supplier. According to paragraph 50 (6), the above-mentioned provision did not apply when the supplier who had issued the invoice had recorded the sale in its VAT forms.
4 FORMELA (II) v. POLAND STATEMENT OF FACTS AND QUESTIONS In this case, the applicant had reduced the output VAT by the amount of the input VAT shown in the invoices, which were not confirmed by the copies stored by the supplier. It was not possible to verify whether the supplier had properly recorded all the sales as the paperwork had been stolen and not reconstructed. Moreover, in the months of January, April, June and December 2001 the output VAT declared by the supplier was smaller than the input VAT calculated on the basis of the original invoices stored by the applicant. Hence it must be presumed that paragraph 50 (6) did not apply, since the supplier had not recorded the sales. On 5 June 2006 the applicant applied for judicial review. He pointed out that only there were only four months where the supplier had declared the output VAT in a smaller amount than the input VAT declared by the applicant. Nevertheless, the authorities had used that fact as a justification for challenging all the calculations made by the applicant and refused him the right to deduct the input VAT in respect of the all his transactions with company K. He also stated that he could not be held liable for the non-reconstruction of the paperwork as that was not his fault and he himself had shown all the required diligence. Nevertheless he had been obliged to pay the VAT for a second time. He was being punished not for his own actions but for actions, or rather lack of action, on the part of the supplier, and he had no means of forcing the supplier to act in accordance with law. On 19 December 2006 the Gdansk Regional Administrative Court upheld the 19 April 2006 decision and on 13 March 2008 the Supreme Administrative Court dismissed a cassation appeal lodged by the applicant. The courts found that the decisions had been delivered in accordance with the law in force at the material time. The courts also reasoned that whether the transactions had actually occurred or the applicant had properly stored all the invoices was irrelevant as the law was very clear and did not provide for exceptions. (b) Tax assessment regarding transactions with company S. On 28 October 2005 the tax authorities in Kartuzy issued tax assessments for the months of March and June 2002. They refused the applicant's company the right to deduct the VAT it had paid to its supplier ( the input VAT ), amounting to PLN 2,706 (March 2002: PLN 836 and June 2002: PLN 1,870), because at the time of effecting the transactions the supplier was not registered for VAT, had not filed its VAT declaration and had not paid the output VAT. The tax authorities reasoned that the supplier was not registered, hence invoices issued by him could not serve as a basis for deducting the input VAT. The authorities concluded that the supplier had breached the provisions of the VAT Act and, as a general rule, a purchaser was liable for the illegal actions of the supplier. The applicant appealed against the tax assessments on 30 November 2005. He submitted that the supplier had eventually met his obligations and recorded all the transactions and had paid all the outstanding tax, hence the fiscal authorities had received the same VAT twice - once from the applicant following the challenged decisions and once from the supplier. The applicant also mentioned that those facts must have already
FORMELA (II) v. POLAND STATEMENT OF FACTS AND QUESTIONS 5 been known to the fiscal authorities themselves at the time of issuing the tax assessment. He pointed out that he himself had fulfilled all his obligations and that holding him liable for the negligence of his contractor would be against the spirit of law. On 19 April 2006 the Gdansk Fiscal Directorate upheld the first-instance decisions of 28 October 2005. The second-instance organ concurred with the first-instance organ's reasoning and added that even in cases where the purchaser acted in good faith, he was exposed to a risk stemming from the activities of his contractors. On 5 June 2006 the applicant applied for judicial review. On 19 December 2006 the Gdansk Regional Administrative Court upheld the decision of 19 April 2006. The applicant lodged a cassation appeal. On 13 March 2008 the Supreme Administrative Court dismissed that appeal. The court reasoned that the authorities had performed an audit covering a certain period and verified the existence and contents of the documents, and any later events could not play any role as the law was very clear. B. Relevant domestic law and practice 1. General information The VAT Act came into force on 5 July 1993. In general, VAT was charged on the price due for a supply of goods or services plus certain costs, taxes and charges not including the VAT itself. Most domestic supplies of goods and services were subject to the standard rate of twenty-two per cent VAT. VAT was generally reported and paid monthly. Monthly returns had to be filed with the tax office and monthly payments made by the twenty-fifth day of the following month. At the relevant time, VAT had to be paid by any person (legal or natural, resident or non-resident) who had a taxable turnover exceeding EUR 10,000 during the preceding taxing year. 2. The right to deduct the input VAT At the relevant time the input VAT was the amount of tax which a VAT-registered person had been charged under the VAT Act for receipt of a taxable supply of goods or services, or for imported goods, in a given tax period, and which the person in question had the right to deduct (section 19). At the relevant time, under the VAT Act, the recipient of a supply of goods could deduct the input VAT when the following conditions were fulfilled: a) the recipient of the supply on which VAT had been charged was a VAT-registered person; b) the VAT had been charged by the supplier, who was a VAT-registered person, at the latest on the date of issuance of the VAT invoice; c) VAT was chargeable on the supply in question; d) the goods or services received were used, were being used or would be used for VAT-taxable supplies; and,
6 FORMELA (II) v. POLAND STATEMENT OF FACTS AND QUESTIONS e) the recipient was in possession of a VAT invoice which met the statutory requirements. Further to the above, in respect of item (b), VAT was considered during the relevant period to have been charged where the supplier had: i issued an invoice which indicated the VAT amount; ii recorded the issuance of the invoice in its sales register; iii stored a copy of the invoice; iv entered the VAT charged in its accounting records as a liability to the State budget; and v declared the VAT charged in its VAT return filed with the tax authorities. 3. VAT Act of 8 January 1993 Section 19 1. A taxpayer is entitled to reduce the amount of output VAT by the amount of VAT calculated while purchasing goods and services in connection with taxable sales (input VAT). Section 27 4. Taxpayers... are obliged to keep records of: the amounts referred to in section 20, the data necessary to establish the subject and basis of the tax, the amount of output VAT, the amount of input VAT offsetting the output VAT, and the amount to be paid to the tax office or to be returned from the tax office, as well as other data necessary for the correct completion of the tax declaration. The VAT Act of 9 January 1993 was repealed on 1 May 2004 4. Minister of Finance's Ordinance of 22 December 1999 50 1. Invoices and correcting invoices are to be issued in at least two copies, and originals are to be forwarded to the buyer and duplicates left with the supplier. 3. Only originals of invoices or originals of correcting invoices or their duplicates as provided for by 51 constitute a basis for reducing the output VAT or for the reimbursement of the input VAT 4. In a case where: 1)... 2) a buyer is in possession of an invoice or correcting invoice not confirmed by a duplicate kept by the supplier... Such invoices... do not constitute a basis for deducting the output VAT or reimbursing the input VAT. 5. The provision under point 4 (2) is not applicable in cases where a supplier who has issued an invoice or a correcting invoice has recorded the sale detailed in the invoice in his VAT declaration. 51 1. In cases where the original of the invoice or the original of the correcting invoice is damaged or lost, a supplier, at the buyer's request, must issue this invoice again in accordance with data from the duplicate. The Ordinance of 22 December 1999 was repealed on 26 March 2002.
FORMELA (II) v. POLAND STATEMENT OF FACTS AND QUESTIONS 7 The new VAT Act came into force on 1 May 2004 when Poland joined the European Union. Section 86(1) of the VAT Act of 2004 provides for the possibility to deduct input VAT. According to the judgement of the Supreme Administrative Court of 22 October 2010, [a] possibility to deduct input VAT arises neither from the possession of an invoice nor from the payment of the due amount to the bank account, but from the actual effecting of the transaction. C. Community Law (as summarized in Bulves AD v. Bulgaria, no. 3991/03, 30-32, 22 January 2009) 30. Consequently, it is worth mentioning in the context of the present case the following two judgments of the Court of Justice of the European Communities (CJEC), which examine the entitlement of the recipient of a supply to reimbursement of the VAT charged on such a supply in cases of suspected carousel fraud. This type of fraud, a kind of VAT missing trader intra-community fraud, occurs when goods are imported VAT-free from other Member States, are then re-sold through a series of companies at VAT-inclusive prices and subsequently re-exported to another Member State with the original importer disappearing without paying over to the tax authorities the VAT paid by its customers. 31. In its judgment of 12 January 2006 in joined cases C-354/03, C-355/03 and C-484/03, Optigen Ltd (C-354/03), Fulcrum Electronics Ltd (C-355/03) and Bond House Systems Ltd (C-484/03) v Commissioners of Customs & Excise: reference for a preliminary ruling from the High Court of Justice (England & Wales), Chancery Division - United Kingdom, European Court Reports (ECR) 2006, page I-00483, the CJEC concluded as follows: Transactions such as those at issue in the main proceedings, which are not themselves vitiated by value added tax fraud, constitute supplies of goods or services effected by a taxable person acting as such and an economic activity within the meaning of Articles 2 (1), 4 and 5 (1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, where they fulfil the objective criteria on which the definitions of those terms are based, regardless of the intention of a trader other than the taxable person concerned involved in the same chain of supply and/or the possible fraudulent nature of another transaction in the chain, prior or subsequent to the transaction carried out by that taxable person, of which that taxable person had no knowledge and no means of knowledge. The right to deduct input value added tax of a taxable person who carries out such transactions cannot be affected by the fact that in the chain of supply of which those transactions form part another prior or subsequent transaction is vitiated by value added tax fraud, without that taxable person knowing or having any means of knowing. (emphasis added) 32. In a similar judgment of 6 July 2006 in joined Cases C-439/04 and C-440/04, Axel Kittel v. Belgian State (C-439/04) and Belgian State v. Recolta Recycling SPRL (C-440/04) (ECR 2006, page I-06161), the CJEC went on to state the following. Where a recipient of a supply of goods is a taxable person who did not and could not know that the transaction concerned was connected with a fraud committed by the
8 FORMELA (II) v. POLAND STATEMENT OF FACTS AND QUESTIONS seller, Article 17 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment, as amended by Council Directive 95/7/EC of 10 April 1995, must be interpreted as meaning that it precludes a rule of national law under which the fact that the contract of sale is void - by reason of a civil law provision which renders that contract incurably void as contrary to public policy for unlawful basis of the contract attributable to the seller - causes that taxable person to lose the right to deduct the value added tax he has paid. It is irrelevant in this respect whether the fact that the contract is void is due to fraudulent evasion of value added tax or to other fraud. By contrast, where it is ascertained, having regard to objective factors, that the supply is to a taxable person who knew or should have known that, by his purchase, he was participating in a transaction connected with fraudulent evasion of value added tax, it is for the national court to refuse that taxable person entitlement to the right to deduct. COMPLAINTS 1. The applicant complains in substance under Article 1 of Protocol No. 1 that, in spite of his full compliance with his own VAT reporting obligations, the domestic authorities refused him the right to deduct the input VAT he had paid on a received supply of goods because his suppliers had not complied, or had been late in complying, with their own VAT reporting obligations. Moreover, as a result of the refusal to allow the aforesaid deduction, the applicant had unjustifiably to pay the input VAT a second time, this time directly into the State budget under the tax assessment, together with interest. 2. The applicant also complains under Article 6 that the proceedings regarding the tax assessment were unfair. QUESTIONS TO THE PARTIES 1. Do the facts of the case fall within the scope ratione materiae of Article 1 of Protocol No. 1 to the Convention (see Bulves Bulves AD v. Bulgaria, no. 3991/03, 22 January 2009 and Stefan Nazarev and Others v. Bulgaria, dec. of 25 January 2011, n o 26553/05, 25912/09, 40107/09 and 12509/10)? 2. If so, has the applicant exhausted all domestic remedies? 3. Has there been an interference with the applicant's right to the peaceful enjoyment of his possessions, within the meaning of Article 1 of Protocol No. 1? If so: (a) was that interference necessary to secure the payment of taxes; (b) was the interference in the general interest, considering that i. the applicant's suppliers, company S., complied, though belatedly, with their VAT reporting obligations, and ii. it is not established whether supplier K. had paid the VAT; and (c) did the interference impose an excessive individual burden on the applicant (see Bulves Bulves AD v. Bulgaria, no. 3991/03,
FORMELA (II) v. POLAND STATEMENT OF FACTS AND QUESTIONS 9 22 January 2009 and Stefan Nazarev and Others v. Bulgaria, dec. of 25 January 2011, n o 26553/05, 25912/09, 40107/09 and 12509/10)? 4. In addition, what was the resulting financial effect on the State budget in the present case?