ECJ Backs Administrative Penalties For VAT Misdeclarations

by Ulrika Lomas, for LawAndTax-News.com, Brussels

16 January 2009

The European Court of Justice (ECJ) ruled on Thursday that an 'additional tax' such as provided for by Polish legislation, and which is imposed in the event of a tax declaration error, does not itself count as VAT.

The case in question regards a challenge by the company K-1 to a decision of the Director of the Tax Office in Torun, Poland, to impose an additional tax equivalent to 30% on overstated input VAT on the company's tax declaration.

The Tax Office found the amount of VAT declared by K-1 as input tax had exceeded output tax for May 2005, and fixed an additional tax liability in respect of that month. However, K-1 considered that measure to be incompatible with Community law and appealed against the decision.

Hearing the appeal on a point of law, the Naczelny Sad Administracyjny (Polish Supreme Administrative Court) made a preliminary reference to the Court of Justice in which it asked whether the Polish additional tax was compatible with Community law, more specifically with the common system of VAT established by the Sixth VAT Directive.

The court took the view that the additional liability assessed by the Tax Office was not a tax but an administrative penalty, and ruled that that the principle of a common system of VAT in the European Union does not preclude the introduction by member states of such measures.

"On the contrary...member states may, under the Sixth VAT Directive, impose obligations which they deem necessary for the correct levying and collection of VAT," the court explained in a statement regarding the judgment.

In addition, the court stated that the Polish additional tax does not constitute "a special measure for derogation" for preventing certain types of tax evasion or avoidance, the adoption of which by a member state would require the authorisation of the Council, acting unanimously on a proposal from the Commission.

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