Judgment of the CJEU оn the adjustment of input VAT deductions

In this issue of Tax News we present the judgment of the Court of Justice of the EU on case C-127/22, "Balgarska telekomunikatsionna kompania" EAD concerning the adjustment of input VAT deductions for destructed/ scrapped goods.

At the end of last week, The Court of Justice of the EU (“CJEU”) issued a long-awaited judgement of particular importance when it comes to the rules of the Bulgarian VAT Act concerning the adjustment of input VAT deductions in the event of destruction / scrapping of goods. More specifically, the CJEU ruled that adjustment of input VAT should not be made where goods were scrapped and were subsequently (i) supplied under Art. 163a of the Bulgarian VAT Act (i.e., as waste) or (ii) destroyed and this has been duly proven.

A Bulgarian company, operating in the telecommunications sector, acquired various goods – capital goods, other goods supporting its activities, goods for resale purposes. Input VAT deductions were made for the VAT incurred on these acquisitions. In a subsequent tax period some of the purchased goods were scrapped, since the taxable person considered them unsuitable for use or sale for various reasons, including wear and tear, defects or their obsolete or unsuitable nature. The input VAT initially deducted upon their acquisition was adjusted in accordance with Art. 79 of the Bulgarian VAT Act.

At the beginning of 2019, the Company submitted a claim for reimbursement of the sums paid in connection with the above adjustments, on the basis that the national provision under which the adjustments were made (Art. 79 of the Bulgarian VAT Act) is incompatible with the European rules (Art. 185 of Directive 2006/112/EC). The request was rejected by the Bulgarian revenue authorities with a decision, which was subsequently appealed by the Company in court. To resolve the dispute, the Bulgarian Supreme Administrative Court staid the proceedings and referred to the CJEU five questions regarding the interpretation of Art. 185 of Directive 2006/112/EC.

The CJEU examined separately the two hypotheses of scrapping of goods, considered by the taxable person as no longer suitable to be used in his usual economic activity, as they arose according to the factual situation of the case:

(i)   scrapping of goods followed by a taxable supply of the goods but in the form of waste, and

(ii)   scrapping of goods followed by a voluntary destruction / disposal of the goods.

For both hypotheses, although on different grounds, the Court reached the conclusion that Directive 2006/112/EC does not require adjustment of input VAT and precludes national law which provides for such an adjustment.

Regarding the first hypothesis, the CJEU stated that, ultimately, the goods for which input VAT deduction was initially made were subject of a subsequent taxable supply, i.e., there was no "change in the factors used to determine the amount to be deducted" within the meaning of Art. 185, paragraph 1 of Directive 2006/112/EC (only in the presence of such a change could an adjustment of the initially deducted input VAT be required).

An important point made by the Court is that for the above conclusion it is irrelevant that (1) the sale of waste was not within the usual economic activities of the taxable person, or that (2) the value of the goods concerned was reduced in relation to their initial value, by reason of the fact that they were sold as waste or that (3) by the same reason, their original nature has been changed.

Regarding the second hypothesis, the CJEU stated that although there was a "change in the factors used to determine the amount to be deducted", input VAT adjustment should again not be made, since destruction and disposal are situations explicitly excluded from the scope of the adjustment mechanism (as per Art. 185, paragraph 2 of Directive 2006/112/EC). To this end, the destruction must be duly proven or confirmed and be undertaken due to objective loss of usefulness of the respective goods in the context of the taxable person’s usual economic activities.

In its reasoning, the Court made two important clarifications – (1) even if the destruction of the goods is the result of a voluntary action of the taxable person, this does not give rise to an adjustment obligation and (2) methods of disposal of goods such as their landfilling or turning for waste processing must be regarded as ‘destruction’, since they entail the irreversible disappearance of those goods.

The judgement of the CJEU was issued in the context of a request for a preliminary ruling made by the Bulgarian Supreme Administrative Court and is focused on the compatibility of the Bulgarian VAT provisions with the EU law. Thus, the economic and legal situations laying in the background of the case are familiar and highly relevant to Bulgarian taxable persons.

We anticipate the approach of the Bulgarian legislator in introducing legislative changes in the national law following the CJEU's judgement. We are also awaiting the reasoning of the Supreme Administrative Court in the final decision on the dispute between the taxpayer and the National Revenue Agency. The concept of "duly proven or confirmed destruction” is important and it remains to be seen if it will get more specific interpretation.

The current decision of the CJEU is interpretive and its conclusions are binding for the National Revenue Agency and the Bulgarian courts with respect to both future and past periods. Practically, this means that:

• Businesses which have already made input VAT adjustments for scrapped/ destroyed goods could reconsider their position and request the VAT for refund where the circumstances allow this. 
• Taxpayers may consider if they could cease making input VAT adjustments when scrapping goods in future periods in the hypotheses considered by the CJEU above.

If you scrapped or destroyed goods and charged VAT in accordance with Art. 79 of the VAT Act and/ оr wish to evaluate the possibilities for not charging VAT upon scrapping goods in the future, the Tax and Legal team of KPMG in Bulgaria will be happy to assist you to better understand the consequences of the CJEU's decision for your business. This may include a detailed assessment of the possible refund of amounts charged in past periods as input VAT adjustments as well as evaluation and recommendations regarding the criterion of "duly proven or confirmed" destruction of goods.

Ivan Vargoulev
Director, Tax
Tel.: +359 (2) 9697 700

Antoaneta Krasteva-Nikolova
Senior Manager, Tax
Tel.: +359 (2) 9697 700