Following the verdict dated 12 July 2019 (case file number III SA/Wa 141/19), the Provincial Administrative Court in Warsaw once again ruled that some of the provisions of the Polish Act on Goods and Services were contradictory to the VAT neutrality principle. This time it related to the regulations on the intra-Community acquisitions of goods effective as from 2017 which – in the case of applying the reverse charge mechanism - might prevent the deduction of input tax in the same declaration in which the output tax was shown. In turn, under these circumstances the requirement of neutrality in VAT settlements results, among other things, from Article 167 of the EU Directive 2006/112/EC which stipulates that the right to deduct tax arises when this deductible tax becomes chargeable.
In recent years the jurisprudence of administrative courts have, on many occasions, addressed the issue of the compliance of the restrictions for settling taxes on a reverse-charge basis as stipulated in Polish law with EU laws. It should be recalled that currently this manner of settlements refers not only to cross-border transactions, but also to certain domestic transactions (for instance, transactions made on the construction services market or related to trading in mobile phones). The provisions entitling a taxpayer to deduct input tax on account of these transactions within the same period of settlement in which the taxpayer showed output tax, provided that the transaction was settled no later than within one of the three periods of settlements after the lapse of the period during which the tax obligation arose, caused taxpayers and courts to show concern. In turn, if the output tax was not showed within the afore-mentioned time limit, the taxpayer should show, within the settlement period, the input tax with respect to which the time limit for filing a tax declaration (the so called adjustment on an ongoing basis) had not yet elapsed. Thus, applying the afore-mentioned provisions would lead, as a rule, to VAT arrears resulting from the impossibility of showing the output tax and input tax within the same settlement period. For the taxpayer this implies the obligation to pay tax arrears with default interest. In addition, as from 2017, should the input tax be prematurely deducted, purchasers of goods or services are liable to additional penalties in the amount of 30% for tax arrears.
The above restriction seems to be contradictory to the EU VAT neutrality principle which has been confirmed by a number of verdicts from the administrative courts, e.g. the Provincial Administrative Court in Szczecin dated 4 April 2019 (case file number I SA/Sz 897/18), the Provincial Administrative Court in Krakow dated 14 December 2018, (case file number I SA/Kr 1199/18) and of 29 September 2017, (case file number I SA/Kr 709/17), and the Provincial Administrative Court in Warsaw dated 15 May 2018 (case file number III SA/Wa 2488/17) and 25 January 2019 (case file number III SA/Wa 1039/18). The necessity to take account of the provisions of the Directive in court decisions concerning the rights and obligations of taxpayers who settle output and input taxes by the reverse charge method was ruled by the courts in the verdicts: the Provincial Administrative Court in Wroclaw dated 30 August 2018, case file number I SA/Wr 604/18, the Provincial Administrative Court in Lodz dated 26 September 2018, I SA/Łd 402/18, and the Provincial Administrative Court in Wroclaw dated 12 July 2018, I SA/Wr 479/18.
Although with respect to a number of the aforementioned verdicts, no written justification has been provided, the key prerequisite to which the courts referred to each time was the EU neutrality principle specifically applicable to the settlement of output tax and input tax based on the reverse charge mechanism. According to this principle, a purchaser of a service which is subject to the settlement by the reverse charge mechanism, constituting an exception to the general rules governing VAT taxation, should not incur any negative economic consequences for settling, in one declaration, both output tax and input tax on account of a given transaction. Neither should the legislator establish any additional conditions limiting the purchaser's right to deduct the input tax when the output tax-related obligation arises. As a consequence, it follows from the provisions of Directive 2006/112/EC that since the output tax on acquisition becomes due from the taxpayer in the month in which the VAT-related obligation arises, within the same period the taxpayer is also entitled to deduct the input tax.
The jurisprudence of the administrative courts is not, however, uniform. In recent years, verdicts were also issued presenting the standpoint that postponing the taxpayer's right to exercise the right to deduct input tax does not prove that the Polish regulations contradict the provisions of Directive 2006/112/EC, for instance the verdicts of the Provincial Administrative Court in Gliwice dated 1 October 2018 (case file number III SA/Gl 593/18), of 23 January 2019 (case file number III SA/Gl 1090/18), of 1 April 2019 (case file number III SA/Gl 1219/18), and the verdicts of the Provincial Administrative Court in Opole dated 13 February 2019 (case file number I SA/Op 1/19), of 13 March 2019 (case file number I SA/Op 12/19) and of 22 August 2018 (case file number I SA/Op 246/18).
The verdicts of the Provincial Administrative Courts referred to in the introduction which were positive for taxpayers forming a beneficial line of interpretation undoubtedly highlight the need for a critical consideration of the applicable provisions of the Polish VAT Act, as well as the possibilities of "defending" the taxpayer against the restrictive interpretation of these provisions and also against applying sanctions resulting from them. It is to be hoped that the standpoint which is negative for taxpayers will not prevail in future. The taxpayer should not incur any negative consequences related to the incorrect implementation of the EU regulations into the national legal system. In these cases the taxpayer is entitled to refer directly to the provisions of Directive 2006/112/EC, unless the provision to which the taxpayer refers is unquestionably clear and unconditional, as it is in the case of Article 167 of Directive 2006/112/EC.
It is worth adding that as from 1 November 2019, the settlement of domestic transactions so far based on the reverse charge mechanism will be replaced - with respect to the deliveries of goods or services (e.g. deliveries of steel, scrap, electronic equipment, gold, nonferrous metals, fuel, plastic, and rendering construction services) - by the mandatory split payment mechanism. This means that a purchaser of goods or services will no longer be obliged to settle the output tax and remit it to tax office. Instead, the payment from the purchaser of goods or services in an amount exceeding PLN 15,000 will be made to a separate VAT account of the supplier or service provider.
The new provisions will not, however, change the manner of settling intra-Community transactions with respect to which a VAT taxpayer is the purchaser, i.e. the intra-Community acquisition of goods and import of services. Therefore, it is worth bearing in mind the possibility of interpreting the restrictive Polish regulations with the application of the EU interpretation for which the neutrality principle is of key importance.