Discounts, Deductions, and Dilemmas: ECJ Clarifies VAT Adjustment Rules

In the case C-689/18, which involves World Comm Trading, a Romanian-based trading company that distributed Nokia Corporation (Nokia) mobile phones, and the Romanian Tax Authority, the ECJ had to clarify the rules relating to VAT deductions on sales discounts.

The main issue was the fact that Nokia issued a single invoice with a Finnish VAT number for these discounts, regardless of where the phones were supplied from, where the World Comm Trading treated all these discounts as related to intra-EU supplies, applying the reverse charge mechanism to the entire value, eventough some supplies were local.

Background of the Case 

In 2004, the World Comm Trading company entered into a contractual relationship with Nokia for the distribution of Nokia's mobile telephony products, which were supplied from Finland, Germany, Hungary, and Romania.

Nokia, as the supplier, used its Finnish, German, and Hungarian VAT numbers when issuing invoices for intra-EU supplies of those goods from Finland, Germany, and Hungary, whereas World Comm Trading accounted for Romanian VAT under the reverse charge mechanism. Regarding the supplies of mobile phones already located in Romania, Nokia issued invoices that included Romanian VAT, and World Comm Trading recorded the VAT as a deductible.

As part of the contractual relationship, Nokia provided World Comm Trading with quarterly discounts on mobile phone sales, contingent upon the company exceeding the specified volume threshold. Importantly, the threshold was calculated irrespective of the place of supply of the goods. 

Therefore, Nokia would issue a single quarterly invoice showing a negative balance, which would include its Finnish VAT number, even in cases when a certain amount of goods to which discounts applied were supplied from Romania. Consequently, the World Comm Trading applied the reverse charge mechanism on the entire value of the discounts as if all the supplies were intra-EU.

After the Romanian Tax Authority conducted a tax inspection, it determined that World Comm Trading had incorrectly accounted for VAT by failing to distinguish between domestic and intra-EU supplies, which led to the issuance of a notice of assessment stating that the company owes RON 821.377 (approximately EUR 174.000).

World Comm Trading unsuccessfully appealed to the National Tax Administration Agency and the Regional Court in Bucharest, claiming that the way it accounted for the discounts granted by Nokia did not affect the State budget. Moreover, at the time the dispute arose, Nokia no longer traded in Romania. Thus, it was impossible to obtain an invoice with the Romanian VAT number for the volume discounts related to domestic supplies of mobile telephony products in Romania.

Consequently, the company appealed before the Court of Appeal of Bucharest (Court of Appeal), which needed clarification on several key matters relating to the dispute before making its final decision. Therefore, the Court of Appeal submitted two questions to the European Court of Justice (ECJ) for a preliminary ruling.

Main Questions from Request For Ruling

The first issue that the Court of Appeal requested clarification on was whether Article 90 of the EU VAT Directive and the principle of VAT neutrality prevent national legislation or administrative practices based on unclear legislation from denying a company the right to deduct VAT on discounts applied to domestic supplies.

The second question that the Court of Appeal raised, providing that the answer to the first one is negative, was whether the principle of proportionality means that the beneficiary should still be allowed to deduct VAT in proportion to the global discount, even if the local supplier, a member of the same group such as Nokia, has ceased activity and can no longer issue an invoice with its VAT number to reduce the taxable amount for VAT reimbursement.

Applicable EU VAT Directive Article

Four articles from the EU VAT Directive were in focus of the ECJ when providing answers to the raised questions: Articles 90, 184-186. Article 90 states that when a supply is cancelled, refused, not fully paid for, or if the price is reduced after the transaction, the taxable amount for VAT must be reduced proportionally. Each EU country defines specific conditions for this reduction. However, in cases where the amount is not paid in full or partially, EU countries may deviate from this rule.

Articles 184-186 define rules for adjusting initial VAT deductions. Under these rules, taxable persons are entitled to an adjustment of the initial VAT if it is either too high or too low compared to the amount the taxable person was genuinely entitled to deduct. Additionally, these Articles define when such adjustments are required and when no adjustments are typically needed, while also leaving it up to the EU countries to establish the detailed procedures for implementing these rules.

Romania National VAT Rules

Relevant articles from two Romanian laws were considered essential for answering the referred question, namely Articles 138(c) and 138a(1) of the Tax Code, and Points 19(1) and 20 of the Government Decision approving methodological standards for the application of the Tax Code.

Articles 138(c) and 138a(1) mandate a reduction in the taxable amount for VAT when discounts, rebates, or other price reductions are granted after goods have been supplied or services provided, and define that for intra-EU acquisitions of goods, the taxable amount is determined using the same criteria as for domestic supplies of those goods, respectively.

Points 19(1) and 20 further elaborate on the rules defined in Articles 138(c) and 138a(1) of the Tax Code, providing detailed information and procedures for implementing and accounting for price reductions and discounts in practice, particularly concerning VAT adjustments.

Importance of the Case for Taxable Persons

Considering that the case originates from the contractual relationship between World Comm Trading and Nokia, it provides clarification and guidance on applying discounts on both domestic and intra-EU supplies, which are regular practices among businesses. Moreover, if a single invoice covers the discounts, the insights from this case may help taxable persons avoid any similar issues with the Tax Authorities.

Furthermore, it is not uncommon for a supplier to cease trading and be unable to issue a new, correct invoice. Therefore, the present case explores whether taxable persons should be required to repay VAT when they are unable to obtain the specific documentation required by national law due to circumstances beyond their control.

Analysis of the Court Findings

Regarding the first question, the ECJ noted that, while it referred to Article 90, Article 185 is more relevant to the specific issue of adjusting an initial VAT deduction when a price reduction is obtained after the VAT return has been filed. From that standpoint, the ECJ reinterpreted the first question to examine whether rules defined in Article 185 of the EU VAT Directive allow EU countries to adjust a taxable person's initial VAT deduction if they deem it to have been excessively high following a discount obtained on domestic goods.

Furthermore, Article 185 should be read together with Article 184. Interpreted in such a way, they imply that any necessary adjustment should ensure the final deductible amount aligns with what the taxable person would have been entitled to if the change had been considered from the beginning.  

Considering that the discounts received by World Comm Trading on domestic mobile telephony supplies in Romania reduced the initially calculated deductible VAT amount, an adjustment to the initial VAT deduction is required to reflect these discounts. This ensures that the final deductible amount is correct and corresponds to the amount as if the discounts had been factored in from the beginning.

Therefore, even if a taxable person does not have a separate invoice for domestic supplies from the local supplier, which is the case with World Comm Trading, they are still obliged to adjust their initial VAT deductions. 

Regarding the second question, and World Comm Trading claims that it could not obtain a new invoice for domestic discounts or claim VAT reimbursement from Romanian tax authorities, since its supplier, Nokia, was no-longer VAT-registered in Romania, the ECJ underlined that the supplier's inability to adjust its VAT liability does not negate the Tax Authority's right to demand the taxable person's VAT deduction adjustment.

The ECJ highlighted two primary reasons for this conclusion. First, the EU VAT Directive does not provide an exemption for this case-specific scenario, and ECJ case law confirms that a Tax Authority's right to reclaim excess VAT deducted by a taxable person is independent of whether the supplier's VAT liability has been adjusted.

Courts Final Decision

Based on all the facts and established case law, the ECJ ruled that the Tax Authorities must adjust a taxable person's, such as World Comm Trading, initial VAT deduction if they determine that the initial deduction was too high after the taxable person obtained a discount on domestic goods.

Moreover, such an adjustment is mandatory for a domestic taxable person, even when their supplier has ceased operations and activities in their EU country, and consequently cannot claim a partial reimbursement of the VAT they paid.

Conclusion

Businesses engaged in cross-border supplies and global discount schemes may find the ECJ's ruling helpful when determining their VAT obligations, and it may also point to specific VAT compliance issues that can be avoided when deducting input tax.

Following the ECJs decision, it is apparent that it is a taxable person's responsibility to accurately make VAT adjustments, even when faced with practical complexities such as global invoicing for mixed supplies or the cessation of a supplier's operations.

Source: Case C‑684/18 - World Comm Trading v National Tax Administration Agency, EU VAT Directive