05 December, 2019
ETNO-GSMA Tax Policy Committee Position
Implementation within Member States of provisions of Council Directive 2006/112/EC (“the EU VAT Directive”) concerning VAT adjustments on unpaid invoices, and specific impact on the telecommunications sector.
ETNO-GSMA Tax Policy Committee Position
The ETNO-GSMA Tax Policy Committee (hereinafter The Committee) has taken the opportunity to consider the correct implementation of Article 90 of the EU VAT Directive within various EU Member States, and would like to articulate the following position.
In the decision of the European Court of Justice (“CJEU”) in Di Maura C-246/16, the CJEU ruled that Member States may not derogate fully from the requirement to allow a reduction of the VAT taxable amount in the case of non-payment of an invoice. It is settled case-law that exceptions must be interpreted strictly. Member States may put in place measures to counteract the inherent uncertainty of the definitive non-payment of an invoice. However, such measures cannot extend beyond that uncertainty, and must conform with the principles of the EU VAT system.
Issues affecting the telecommunications sector
In a number of EU Member States businesses are currently unable to make VAT adjustments on unpaid invoices. In certain cases such an adjustment is completely precluded under national legislation, for instance in B2C business. In other cases the commercial measures reasonably taken to enforce payment are not sufficient to meet the requirements under national legislation that must be completed prior to making a VAT adjustment on an unpaid invoice.
Within the telecommunications sector it is common to incur relatively low value consumer debts. Typically the value of these unpaid invoices, relating to consumer contract customers, is in the range of €10 - €200. Operators complete a range of commercial steps to recover such low value debts. These commercial steps vary depending on the business and the market, but can include amongst others: sending of payment reminders, charging of late payment fees, freezing of service provision, contract termination and the use of external debt collection services.
In many Member States the commercial steps taken by our members are sufficient to allow for a VAT adjustment on the unpaid invoice. However, as noted above, in a number of Member States the debt recovery action taken is not sufficient to meet the requirements set in national legislation to allow for a VAT adjustment (hereinafter “onerous requirements”).
Onerous requirements vary by Member State, but can include amongst others the requirement to: complete judicial proceedings against the customer, complete non-judicial proceedings through a mandated State agency, document customer bankruptcy, and/ or complete insolvency proceedings. We consider requirements to be onerous where completion of the necessary steps would not be economically rational. This is the case where completion of the onerous requirements would result in a cost that is higher than the value of the VAT on the debt itself.
EU principles at hand
The Committee believes that national measures to counteract the inherent uncertainty of the definitive non-payment of an invoice should take into account the following EU principles that have been considered directly relevant by the CJEU within its decisions in Di Maura C-246/16 as well as the more recent judgements in A-PACK CZ C-127/18 and UniCredit Leasing C-242/18.
- Neutrality of VAT. As emphasized in Di Maura a “trader, as tax collector on behalf of the State, is entirely to be relieved of the burden of tax due or paid in the course of his economic activities”. National measures should not be implemented that in general result in taxable persons paying VAT on an amount higher than the amount received from the customer. Furthermore, taxable persons should not suffer a significant cash-flow disadvantage as a result of their activity in acting as a tax collector on behalf of the State.
- Proportionality and reasonable probability. Proportionality is a general principle of EU law, and in line with this principle measures to counteract the uncertainty of definitive non-payment of an invoice may not go beyond that uncertainty. The CJEU clarified in Di Maura that proportionality is achieved “when the taxable person demonstrates a reasonable probability that the debt will not be honoured” (see also the UniCredit Leasing decision point 81). The requirement to demonstrate a reasonable probability of non-payment does not mean that non-payment must be definitively established. The CJEU highlights that the taxable base can be re-evaluated upwards in the event that payment nonetheless occurs, which ensures the neutrality of VAT in such an instance.
- Different treatments for different types of debts. The AG in Di Maura confirms that it should not be uneconomical for a taxpayer to meet the relevant conditions. A condition that "results in significant costs is fundamentally incompatible with the principle of neutrality and the principle of proportionality. In line with the view of the Commission, this applies in particular (but not only) to debts of a small value". A reasonable measure may therefore be different for a high value business debt than for a low value consumer debt.
- Fiscal harmonization. It is an objective of the EU VAT Directive to pursue fiscal harmonization. This is undermined where a taxable person in one Member State suffers a VAT cost, or cash flow disadvantage, compared to competitors in other Member States, as a result of national legislation concerning the adjustment of VAT on an unpaid invoice. Fiscal harmonization will be achieved where national measures are in line with the neutrality and proportionality principles.
It is the view of the Committee that the national measures currently in place in certain EU Member States, concerning VAT adjustments on unpaid invoices, are not in line with the EU principles highlighted above. As a consequence, in many cases it is commercially impossible for our members to make such adjustments and to therefore achieve a VAT neutral position. This is especially the case in respect of low value consumer debts, although in many Member States the correction of high value and business debts is also not possible in practice.
In order to achieve a neutral, proportionate and harmonized position, we propose that EU Member States implement national measures in relation to VAT adjustments on unpaid debts that apply the following criteria:
- Commercial steps. VAT adjustments should be permitted where debt remains outstanding despite a taxable person having completed reasonable commercial steps to recover that debt. Additional formal conditions, such as requiring insolvency proceedings to be initiated, should be avoided where possible but in any case must be proportionate. Where formal conditions are imposed, adjustment should be permitted as early as possible, and should not, for example, be delayed until the end of proceedings that may last for many years.
- Time-based provision. An extended period of non-payment is in the view of the Committee a highly relevant factor in demonstrating a reasonable probability that an invoice will not be paid. A time based provision should therefore be applied which, combined with completion of commercial debt recovery measures, would counteract the uncertainty of non-payment of an invoice. In the view of the Committee a period of approximately six months, and at a maximum one year, would be appropriate in this regard.
- Corresponding customer adjustment. Where a time-based provision is in place, in order to ensure the neutrality of VAT, a corresponding VAT adjustment should be required on the part of a taxable customer. This would require a downward adjustment of input VAT in respect of any unpaid purchase where the related invoice remains unpaid after the mandated period of time.
- Readjustment for subsequent payment. In order to ensure the neutrality of VAT, national measures should require the upwards adjustment of VAT in the event that customer payment nonetheless occurs. This allows for national measures to meet the neutrality principle by allowing VAT adjustments where a reasonable probability of non-payment is at hand, whilst at the same time securing State revenues in the event of subsequent payment by the customer.
- Low value threshold. Member States may seek to distinguish between low and high value debts by setting a threshold above which judicial, or similar more onerous measures, are considered necessary in light of local market conditions. The Committee does not consider such a threshold is necessary where a time-based provision is implemented (that is combined with completion of commercial recovery steps and readjustment for subsequent repayment). However, where such a threshold is implemented, to ensure proportionality in the view of the Committee a threshold at a minimum of €300 per invoice (applied to consumer and business debts) would be appropriate in this regard.
The Committee encourages Member States to review national legislation currently in place in relation to VAT adjustments on unpaid invoices, and where necessary to implement revised national measures that are in line with the five criteria outlined above.
The Committee notes that at the current time there is a significant volume of ongoing litigation in a number of national courts in respect of this issue, including multiple referrals to the CJEU. The Committee considers that it is in the interest of all parties for national measures to be implemented that are in line with EU principles, and that such a position is achieved without the need for court proceedings that are costly and time consuming for all parties involved.