Negative electricity and gas prices and reverse charge VAT

Judgment of the Provincial Administrative Court (WSA) in Warsaw of 21 February 2024, ref. no. III SA/Wa 2083/23.

Recently, the Polish energy sector has witnessed an unusual phenomenon: the emergence of negative electricity and gas prices on the market. This situation has given rise to disputes and doubts regarding the VAT treatment of such transactions.

Facts

The company applied for an individual tax ruling concerning the taxation of electricity and gas transactions at negative prices. In the request, the company described its activity consisting in the provision of settlement services for transactions, including electricity and gas, executed on the market. The company also noted the occurrence of negative electricity and gas prices on the market, which occurs when supply outweighs demand. Previous market practice has assumed that the lower limit for prices is zero, however, the market now accommodates the possibility of both negative and zero prices for these commodities.

The company  stated that, as of 1 April 2023, it is entitled to apply the reverse charge mechanism for energy and gas transactions at negative prices, in accordance with Article 145e(1) of the VAT Act. The company argued that the fact occurrence of a negative price does not affect the applicability of the reverse charge mechanism, which  aims to protect the Treasury’s interests in commodity transactions on the regulated market. It believes that all the conditions for the application of the reverse charge mechanism are met in the case of negative energy and gas prices.

KIS position

The Director of the National Fiscal Information (KIS), in a ruling dated 10 August 2023, found the company’s position to be incorrectThe director reasoned that in cases of negative gas and electricity prices, the concept of chargeability does not apply. Thus, it is not possible to determine the turnover that would constitute the tax base. Currently, such transactions are not treated as a supply of goods – they should be recognised as a chargeable service provision. The director of KIS assumes that the price of such a service is the value of the surplus electricity collected, and the provider of the service (consisting in the collection and use of unsold surplus energy) is its buyer.

According to Article 145e(1)(3) of the VAT Act, the reverse charge VAT mechanism applies to the supply of gas in the gas system and the supply of electricity in the electricity system, conducted between taxpayers on a commodity exchange, regulated market or organised trading platform (OTF) in accordance with the provisions on commodity exchanges and the Act on Trading in Financial Instruments.

Even with the purchasers having the status of a taxable intermediary in accordance with Article 145e(2) of the VAT Act, it is not sufficient to fulfil this condition alone for the application of the reverse charge mechanism. It is also necessary to fulfil the subject conditions, such as the supply of gas in the gas system or electricity in the electricity system on the relevant trading platforms.

As a result, the company cannot apply the reverse charge VAT mechanism for energy and gas transactions made at negative prices from 1 April 2023, pursuant to Article 145e(1) of the VAT Act.

The company filed a complaint with the WSA in Warsaw contesting the above ruling.WSA’s position

In the justification of the judgment [2], the WSA stated that the VAT Act [3] clearly and explicitly limits its application only to the supply of electricity and gas. Therefore, it does not cover transactions related to the trade of electricity and gas at negative prices, as such activities are treated as a supply of services in terms of VAT. As a result, the VAT reverse charge mechanism cannot be applied to negative energy prices.

Therefore, the court dismissed the company’s complaint and upheld the position of the tax authority.

Practical significance

The court’s decision is of significant importance for the energy industry. It confirms that transactions at negative prices do not qualify for the application of the VAT reverse charge mechanism. This is important for energy market operators, as it establishes that electricity and gas transactions at negative prices are not classified as supplies of goods but rather as supplies of services.This, in turn, may affect the ways in which such transactions are accounted for and taxed and requires market practices to be adapted to the position presented, both by the tax authority and by the court.

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[1] Case ref. 0114-KDIP4-1.4012.160.2023.2.RMA.

[2] Case ref. III SA/Wa 2083/23.

[3] Article 145e(1) of the VAT Act.