Background
Under Belgian VAT law (Article 51bis, §4 of the VAT Code), a taxpayer can be held jointly liable for the VAT debts of a third party if they knew or should have known that the VAT would not be paid by that third party. This regulation is designed to combat VAT fraud and prevent tax evasion.
The case of Dranken Van Eetvelde NV involved VAT fraud that came to light in 2011, where false invoices were issued for the supply of drinks, including beer kegs, to customers, mainly businesses in the hospitality sector. These hospitality businesses then sold the drinks "off the books," meaning that these sales were not recorded and, therefore, not subject to VAT or income taxes. This allowed the businesses involved to conceal their profits and evade taxes.
The investigation revealed that Dranken Van Eetvelde NV had issued invoices for supplies to customers who were unknown at the given addresses or who had never received the ordered goods. In reality, the drinks were supplied to taxable persons, such as pub owners, but their identities could not be traced afterward. These buyers sold the drinks without reporting their turnover to the tax authorities, enabling them to evade VAT and taxes.
Despite Dranken Van Eetvelde NV having correctly declared the VAT on the supplies they delivered, the Belgian tax authorities still held the company jointly liable for the unpaid VAT of its buyers. This led to a tax reassessment and a 200% fine, based on the joint liability for the buyers' VAT debts and the correction of previously incorrectly reclaimed VAT amounts.
Dranken Van Eetvelde NV appealed this decision, arguing that the imposed joint liability and fine were disproportionate since the company was not directly involved in its customers' fraud. The court in Ghent referred the case to the Court of Justice of the European Union to assess whether the Belgian regulation complies with European law, particularly the VAT Directive and the principle of proportionality.
Preliminary Questions
The European Court was asked the following questions:
1. Proportionality principle: Is it justified to hold a taxpayer jointly liable without considering their actual involvement in the fraud?
2. Neutrality principle: Does the regulation violate the neutrality principle by holding a taxpayer liable for VAT owed by another party, without accounting for the possibility of VAT deduction?
3. Ne bis in idem principle: Does the EU Charter allow a person to be punished both administratively and criminally for acts considered as one continuous offense?
4. Cumulative sanctions: Can a person be punished twice for the same acts, without clear rules regarding the proportionality of the sanctions imposed?
In summary, the case concerns whether Belgium's joint liability rule in VAT fraud and the imposed heavy fines are compatible with European law, especially the VAT Directive and fundamental EU principles such as proportionality, neutrality and ne bis in idem.
Assessment
The Advocate General addresses the four preliminary questions in a structured analysis, distinguishing between two main themes: the scope of the ne bis in idem principle and the joint liability of the supplier under Articles 205 and 273 of the VAT Directive.
A. Ne bis in idem principle (Article 50 of the Charter)
The third and fourth questions concerned the application of the ne bis in idem principle, which prevents a person from being punished twice for the same act.
However, the Advocate General found that the ne bis in idem principle is not relevant in this case. The administrative and criminal sanctions related to different time periods and concerned distinct facts.
Conclusion: The Advocate General concluded that there is no violation of the ne bis in idem principle, as the facts behind the sanctions are not identical and span different periods.
B. Joint Liability under article 205 of the VAT Directive
The first and second questions pertain to the scope of Article 205 of the VAT Directive, which allows Member States to hold a third party jointly liable for the VAT obligations of a taxable person.
Article 205 stipulates that Member States may require a third party to be jointly liable for the due VAT. However, this only applies to a duly established VAT debt, not to presumed or unknown debts of third parties. A tax assessment must be based on an actual debt, not a presumption. In this case, the joint liability was based on presumed VAT debts, which the Advocate General finds inconsistent with the provisions of Article 205.
Conclusion: The Advocate General concludes that Article 205 of the VAT Directive does not allow a taxable person to be held jointly liable for presumed VAT debts of third parties.
C. Additional liability under article 273 of the VAT Directive
The Advocate General further examines whether Article 273 of the VAT Directive could provide a basis for joint liability in this case.
Article 273 provides Member States with the authority to implement additional measures to secure VAT collection and combat fraud, including the possibility of extending liability to cover presumed VAT debts of third parties, such as those arising from fraudulent invoices. However, the Advocate General emphasizes that such measures must always comply with the principle of proportionality.
Although Member States are permitted to take measures under Article 273 to fight fraud, these measures must be proportional to the specific circumstances and respect the principle of VAT neutrality. In this case, the Advocate General argues that a 200% penalty can be considered disproportionate, as it leads to a financial burden significantly exceeding the actual VAT debt. This would violate the principle of proportionality and could result in an excessive penalty for the taxpayer.
The Advocate General also references Article 203 of the VAT Directive, which states that VAT is payable once it is mentioned on an invoice, even if no actual supply of goods or services took place, and even if the tax is not legally owed. This means that a taxable person remains liable for VAT on fraudulent invoices, even if they correctly declared VAT for their own supplies.
However, Article 203 also allows for the correction of mistakes on invoices. If a taxable person corrects an error and removes the risk of tax loss, the incorrectly charged VAT should be refunded. In this case, despite any possible corrections, the original VAT liability remains for the taxable person, along with the imposition of a 200% penalty. This combination imposes an undue and excessive burden on the taxpayer.
The accumulation of the initial VAT liability and the 200% penalty could lead to an obligation that is nearly five times the original debt. This results from the taxable person being held responsible for the VAT mentioned on the invoice (as per Article 203), then being penalized with a 200% fine, and potentially losing the right to deduct VAT due to their involvement in the fraud. The Advocate General concludes that this is disproportionate, especially considering that the actual loss to the public treasury is likely limited to the added value (the difference between purchase price and sale price) and not the full VAT amount on the fraudulent invoices.
Furthermore, the Advocate General highlights the risk to the principle of VAT neutrality if the correction of erroneously invoiced VAT is not permitted. The ability to rectify mistakes must exist, particularly when the taxable person acted in good faith or when the tax loss has already been prevented. However, Belgian law excludes the possibility of making such corrections, adding to the disproportionate nature of the sanctions.
Another concern raised by the Advocate General is that tax authorities may focus more on parties indirectly involved in the fraud, such as suppliers, rather than the actual fraudsters. This approach could undermine the effectiveness of measures to combat VAT fraud, as the fraudsters may escape punishment, contrary to the objectives of Article 273 of the VAT Directive, which is intended to combat fraud effectively.
Lastly, the Advocate General suggests that addressing VAT fraud may be more appropriately managed through national criminal proceedings rather than through EU VAT rules. There is a need for coordination between criminal and tax procedures to prevent the risk of double punishment, which would violate the ne bis in idem principle. It is unclear whether Belgian law currently provides adequate coordination in this regard.
Commentary
Belgium's strict penalty policy for VAT fraud has been a subject of debate for some time, and the Advocate General's criticism could hopefully stimulate significant reforms.
The Advocate General’s opinion calls into question the application of joint liability. If the Court of Justice follows this reasoning, taxpayers may gain new legal tools to challenge Belgium's liability rules in VAT disputes, potentially offering relief to taxpayers who have been unfairly burdened with heavy fines.
Stay tuned for further developments.
Stay tuned for further developments.