Supreme Court's Ruling on 0% VAT and Seller's Good Faith in EU Supplies

The article provides an overview of the recent practice of applying VAT at 0%, as developed by the Supreme Administrative Court on the basis of the recent case law of the Court of Justice of the EU in the field of VAT.

On the change in the application of VAT at 0%

The recent ruling of the Extended Chamber of Judges of the Supreme Administrative Court of Lithuania (the "Supreme Administrative Court") on the application of 0% VAT to supplies of goods to another Member State has caused a lot of controversy, as it has changed the direction of the courts' interpretation. Here is a brief overview of what is most important to know about the new practice as of this year.

The Supreme Administrative Court explained that, when deciding on the obligation of the seller of a Lithuanian company to pay VAT to the state budget on disputed supplies, the tax authorities had to assess the seller's good faith, i.e. whether she knew or, being diligent and careful, could have known about the acquirers' VAT fraud (participation in a fraudulent transaction).

In which situations is this relevant?

The situation in the case was that a Lithuanian company, as a seller, was making deliveries by transferring goods to companies in other EU Member States. The Lithuanian company, as a seller, therefore qualifies such supplies as intra-Community (EU) supplies and applies a 0% VAT rate. In this case, the right of disposal of the goods was transferred to the acquirers (persons acting on their behalf) in a warehouse belonging to the selling company, by loading the goods into vehicles provided by them (the acquirers); the acquirers were responsible for the transport of the goods to the other Member State, but the goods were not transported.

Therefore, in such a case, the tax administration argued in the case that the goods were not transported out of the territory of Lithuania. Consequently, the tax administration considered that such supplies should have been taxed at the standard VAT rate. The obligation to pay this tax rests with the Lithuanian vendor.

In the SACL case, the tax administration relied on information received from the competent authorities of other Member States and by comparing the data provided by the Lithuanian seller, including those contained in the documents relating to the transport of the goods, with the data provided by the customs authorities in the system for identifying the registration numbers and container codes of vehicles on the vehicles which crossed the borders of Lithuania and another EU Member State in the relevant periods. Therefore, the tax administration, on the basis of the totality of the evidence gathered during the tax inspection, denied the assertion of the seller of the Lithuanian company concerning the removal of the goods from the territory of the Republic of Lithuania. The tax administration therefore concluded that the goods had not been transported in the course of the supplies.

Thus, the Supreme Administrative Court (SACC) develops the practice of tax disputes, which is followed by the tax administration. It is therefore important to be aware of such interpretations.

What has the Supreme Administrative Court concluded?

In the case at hand, the Court found that, in deciding whether the Lithuanian seller was liable to pay VAT to the state budget on the disputed supplies, the tax authorities were required to assess the seller's good faith, i.e. whether the seller knew or, having exercised due care and diligence, could have known of the acquirers' fraudulent conduct in the field of VAT (participation in a transaction involved in the fraud).

The Supreme Administrative Court has clarified that, where the right to dispose of the goods in question as owner is transferred to the acquirer in the territory of the Member State of supply, with a view to an intra-EU supply, and where the acquirer undertakes to transport the goods to the Member State of destination, the bona fide supplier may not be liable to pay the VAT on that supply where the acquirer does not fulfil its obligation to transport the goods. Consequently, according to the Supreme Administrative Court, in such a case, the mere fact that the goods in question have not been actually (physically) removed by the acquirer from the territory of the Member State of supply does not in itself give rise to an obligation on the part of the supplier to pay the VAT due on that supply to the State budget. This means that the supply of goods must be assessed in the light of the good faith requirements of the taxable person (the supplier).

Consequently, in accordance with the above-mentioned interpretation of the Court, the conclusion is as follows:

·         if the goods sold are to be taken out of Lithuania by the buyer, but the buyer has not taken the goods out of Lithuania, the tax administration cannot "automatically" tax the Lithuanian seller. In such a case, the tax authorities must determine whether the Lithuanian seller knew or could have known of the fraud.

So, the emphasis should be on what has changed since this decision?

It was in situations such as the one described above that the tax authorities had in the past generally taken the position that, if it was established that the disputed goods had not been transported out of the territory of the Republic of Lithuania, the disputed supplies should have been taxed at the standard rate of VAT, and that it was the seller's company that was liable to pay the tax, irrespective of the seller's honesty or who (the supplier or the transferee) had transported the goods.

VAT is an indirect tax, so it is essentially paid by the final consumer at the point where consumption takes place. Hence, if the goods are not actually taken out of Lithuania, they are not subject to VAT at 0%.

Therefore, prior to this decision, in the absence of documents proving the removal of goods by the buyer, the tax authorities generally charged VAT to the seller. Thus, in such situations, the tax authorities will now assess whether the Lithuanian seller has acted in good faith and has taken all reasonable steps within its power to ensure that the transactions do not involve tax fraud.

However, following the judgment of the Supreme Administrative Court, the conclusion of the Supreme Administrative Court is that the tax authorities were obliged to assess the seller's good faith, i.e. whether the seller knew or, having exercised due care and diligence, could have known of the acquirers' fraudulent conduct in the field of VAT (participation in a fraudulent transaction) when deciding on the seller's obligation to pay the VAT due to the State budget in respect of the disputed supplies.

Finally, it should be noted that, according to the SACL's explanation, where the supplier of the goods, i.e. the Lithuanian seller, is itself responsible for the dispatch or transport of the goods to another Member State, then there is no need to assess its good faith.

The SACL explained that, in such a case, if the fact of dispatching or transporting the goods to another Member State is denied (by denying the evidence provided by the taxable person to that effect), the supplier's good faith is not relevant for the purposes of deciding on the supplier's obligation to pay the VAT on those supplies to the State budget.

Consequently, in such a case, the tax authorities are justified in deciding that such supplies should have been subject to the standard rate of VAT. The obligation to pay this tax falls on the Lithuanian vendor without any assessment of its good faith.