With its ruling of 15 September 2016, Senatex (C-518/14), the ECJ has opened the gateway to a retroactive invoice correction but left room for new questions. The German tax administration has yet to take a stand on this ruling.
The temporal effect of an invoice correction had been a subject of discussion for quite some time and has now been addressed by the ECJ in its ruling on 15 September 2016, Senatex (C-518/14). The ECJ found that legislation, under which the correction of an invoice in relation to a detail which must be mentioned does not have retroactive effect, is not in line with the Directive 2006/112. Rather, it must allow the correction of an invoice with the effect that the VAT deduction can be exercised with respect to the year in which the invoice was originally drawn up. The postponement of the right to deduct VAT until the year in which the invoice is corrected entailed with the interest for late payments poses a penalty that goes further than is necessary to attain the correct collection of VAT and to prevent evasion. This ruling, therefore, requires a change within the German tax authorities regarding its current handling of incorrect invoices.
For cases in which the tax authorities have previously denied the VAT deduction due to an incorrect invoice but have granted it once the taxable person was in possession of a corrected invoice, this decision can have the following consequences:
In order for the taxable person to carry out a retroactive correction and a VAT deduction which relates to a previous year, that year has to be still open for VAT assessment. In case the assessment for the year in which the invoice was initially issued is already final, Senatex could result in a complete VAT deduction denial. With regard to this particular point it is of great relevance for the taxable person, whether the correction of an invoice constitutes a retroactive event in the sense of Sec. 175 para. 1 no. 2 General Tax Act, since in that case the statute of limitation for tax assessments does not begin until the end of the year in which the event occurs (Sec. 175 para. 1 sent. 2 General Tax Act).
The judgment does not clarify the extent to which a correction shall be possible. It is questionable whether all the details set out in Sec. 14 para. 4 German VAT Act can be corrected. In any case, invoices displaying a too high or unjustified tax (Sec. 14c German VAT Act), should not fall within the scope of this judgement. Furthermore, from Terra Baubedarf (C-152/02) it is clear, that for the right to deduct VAT to arise in the first place the taxable person must be in possession of an invoice.
The decision does also not explain until which point in time a correction shall be possible. This could be the issuance of the fiscal notice on the denial of the VAT deduction, the appeal process or the final court hearing.
In addition the practical application of this judgment might prove difficult for some entrepreneurs. This may be because, the person that issued the invoice can no longer be reached or because the practical process of the correction – 1. cancellation of the incorrect invoice, 2. issuance of the corrected invoice – might be seen as the drawing up of a new invoice. Until that question is resolved, taxpayers should retreat to a simple amendment of the existing invoice in accordance with Sec. 31 para. 5 VATA Decree.
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It remains to be seen how the German tax authorities are going to implement this judgment. While, according to the ECJ, the failure to comply with formal conditions cannot to be sanctioned with the denial of the right to deduct VAT the German legislation may introduce (other) penalties for such a failure.
