In another ground-breaking judgment relating to taxation, the Constitutional Court has ruled in favour of VAT payers. The Constitutional Court has been more and more often considering disputes between VAT payers and tax authorities, where the tax authority has withheld the entire excess VAT while contesting only some performance and considering the other undisputed. In its judgment, the Constitutional Court also refers to limitations applicable to tax authorities on related audits. You can learn more in our article below.
Constitutional Court – the right to the refund of an undisputed part of excess VAT
In its judgment in case no. II. ÚS 819/18, the Constitutional Court ruled on a serious misconduct by a tax authority relating to its unconstitutional encroachment upon the rights of ownership of an audited VAT payer (“Payer”).
In its tax return, the Payer declared performance relating to its main business activity (cladding for commercial buildings and halls) as well as relating to the business of trading in precious metals. It was this performance relating to this other activity and the rights to deduct VAT resulting from it that have been contested by the tax authority on the grounds of the Payer’s potential participation in carousel fraud. As a result, the tax authority has withheld the entire declared excess VAT on both activities.
The Constitutional Court started by stating that the same legal issues had been considered by the European Court of Justice (“ECJ”). Nevertheless, in this context, the Constitutional Court stated that it did not deem it necessary to wait for a decision by the ECJ in the matter, as the Constitutional Court is the only authority to decide on the issue of constitutionality and not the ECJ. In the opinion of the Constitutional Court, the issue of constitutionality and the issue of EU law interpretation need to be separated, while the criterion of constitutionality is, in principle, independent of the criterion of compliance with EU law.
The Constitutional Court stated that withholding excess VAT was an undisputable encroachment upon the proprietary rights of a taxpayer, specifically the right to the protection of property under Article 11 of the Czech Charter of Fundamental Rights and Freedoms.
According to the Constitutional Court, the Tax Code (S. 90(3) in conjunction with S. 85(1)) permits the tax authority to examine, before assessing the tax, only that part of the performance about which there is reasonable doubt. However, it does not give the tax administrator the right to withhold an undisputed part of excess VAT derived from such performance that is not subject to the investigation as undisputable.
According to the Constitutional Court, the tax administrator could have and should have divided the claimed excess VAT into a disputed amount and an undisputed amount that could have been declared and paid to the taxpayer without further conditions. In this context, the Constitutional Court has added that as a result of the division, the tax administrator could have assessed on the taxpayer an underpayment of VAT, alternatively against the excess VAT, which could have put even more burden on the taxpayer. Such a procedure is not in compliance with the requirements under Article 11 of the Charter and S. 5(3) of the Tax Code, as it would not be a manifestation of a minimisation of an encroachment upon the taxpayer’s rights. Consequently, the Constitutional Court has emphasised in this context that, from the perspective of constitutionality, a decision relating to non-examined performance may only be issued for the benefit and not to the detriment of the taxpayer.
It will be interesting to see how this judgment will be dealt with by the tax administration. It still remains unclear how refunds of a part of excess VAT will be carried out in practice. We will monitor the development in this matter and will keep you informed.
Do you need advice on VAT? Do not hesitate to contact us and we will take care of your VAT returns, represent you before tax authorities in VAT audits and VAT notices. We will be pleased to discuss VAT consultancy with you. Let us know.
