CJEU: The 20% sanction in the VAT Act inconsistent with EU law

On April 15, 2021, the Court of Justice of the EU issued a judgment in the case C-935/19 Grupa Warzywna, in which it found that the provisions of the Polish VAT Act in the field of 20% sanctions infringe EU regulations.

In particular, the CJEU focused on the unacceptable obligation of the tax authorities to automatically determine the 20% sanction, without taking into account the facts of the case and the nature of the infringement. The CJEU judgement opens a way for taxpayers to challenge rulings in which the authorities have determined the additional VAT sanction.

What was the case about?

The judgment of the CJEU concerned the provisions of the Polish VAT Act regarding the additional VAT liability (the so-called VAT sanction).

Pursuant to these provisions, tax authorities are obliged to impose a VAT sanction in case they find that a taxpayer in the submitted tax return declared an incorrect amount of VAT liability, an inflated amount of the excess input VAT or did not submit a VAT return at all and did not pay the VAT liability amount. The sanction is, as a rule, a 30% of the understatement. However, if, after the tax audit or customs and fiscal audit, the taxpayer has adjusted his VAT return in accordance with the findings of this inspection and has paid the tax arrears – the VAT sanction is reduced to 20%.

It is precisely the provisions concerning the determination of this sanction in the case of a voluntary correction by a taxpayer of the VAT return as instructed by the tax authority after the audit that raised doubts in the Provincial Administrative Court in Wrocław with respect to their compliance with EU law.

What did the CJEU decide?

In today’s judgment, the CJEU addressed the presented issue more extensively and concluded that the EU law is opposed to the national provisions that allow for the automatic imposition of an additional VAT sanction without taking into account:

• the nature and seriousness of the irregularities in the tax return,
• the circumstances determining whether that error constitutes fraud, and
• the fact that State Treasury revenue has not been diminished.

The CJEU noted that the Member States are entitled to adopt sanctioning provisions to ensure the correct collection of VAT and prevention of fraud, but those provisions should not go beyond what is necessary to achieve those objectives and should comply with the principle of proportionality.

Therefore, the CJEU stated that the manner in which VAT sanctions are determined should allow the tax authorities to individually impose sanctions inasmuch as to ensure that it is a measure proportional to the seriousness of the infringement and in line with the objectives of proper VAT collection.

In effect, the CJEU held that EU law precludes Polish provisions that imposes a VAT sanction on a taxpayer without distinguishing between the nature of the error and whether that error has led to a reduction in revenues to the state treasury or not.

What are the consequences for taxpayers?

Today’s  CJEU judgment gives taxpayers the ground to challenge the rulings of tax authorities in which an additional VAT liability has been established.

Nonetheless, according to the CJEU judgment, in each case in which an additional sanction was imposed, the nature of such an error is to be examined thoroughly (e.g. whether the error resulted from doubts regarding interpretation of the provisions) or whether the error resulted in the reduction of revenues to the state treasury.

It seems that the reasoning of the CJEU judgment is so generic that it can be taken into account not only in the case of imposing an additional sanction after a taxpayer has adjusted his declaration in line with the findings of the audit (in the amount of 20%), but also in situations where errors in settlements have been identified and the authorities has issued a decision determining the tax liability in VAT (in these cases the sanction amounts to 30%).

In the case of pending proceedings at the stage of appeal bodies and administrative courts, the CJEU judgment may constitute the basis for revoking of the decision concerning the determination of additional VAT sanctions.

In the event that final decisions or judgments of administrative courts have already been issued in cases where an additional tax liability has been established – the judgement of the CJEU may constitute the grounds for resumption of these proceedings. In the case of tax proceedings, the deadline for submitting a motion for the resumption of such proceedings is 1 month from the date of publication of the judgment, and in the case of administrative court proceedings – 3 months from the date of publication of the CJEU judgment. The publication of the CJEU judgment usually takes one to three months after the delivery of the judgment.

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If you are interested in obtaining further information, or would like to discuss the impact of the above judgment please contact:

Tomasz Michalik                     Tomasz.Michalik@mddp.pl                  tel. +48 22 322 68 88

Jakub Warnieło                      Jakub.Warnielo@mddp.pl                    tel. +48 22 322 68 88

or your advisor at MDDP