C-454/98

SCHMEINK & COFRETH AND STROBEL

OPINION OF ADVOCATE GENERAL FENNELLY delivered on 13 April 2000 *

1. In this preliminary reference the Court is for consideration ... by a taxable person asked to consider the circumstances in acting as such' is subject to VAT. Under which the Sixth VAT Directive obliges or Article 17(2)(a) a right to make a deduction permits Member States to provide for the will arise in respect of VAT 'due or paid' by remission of liability incurred in respect of a taxable person 'in respect of goods or VAT wrongly mentioned on invoices services supplied or to be supplied to him regarding transactions that have never by another taxable person'. Article 20 taken place. 1 Essentially, this involves permits Member States to adjust '[t]he consideration of the scope of the principle initial deduction' allowed to a taxable enunciated in Genius Holding v Staatsse- person in certain circumstances. Article 21 cretaris van Financiën and, in particular, of is concerned with the '[p]ersons liable for whether an incorrect invoice must have payment of VAT'. Article 21(1) provides, in been issued in good faith for the issuer later relevant part, that: to seek its rectification. 2

'The following shall be liable to pay value added tax: I — The legal and factual background

1. under the internal system: A — The legal context

2. Under Article 2(1) of the Sixth Directive 'the supply of goods and services effected

3. In German law, the Umsatzsteuergesetz a service, even though he is not an entre- (Turnover Tax Law) 1991 (hereinafter the preneur or is not making a supply or 'UStG') distinguishes between VAT that is providing any other service.' incorrectly mentioned on invoices (see subparagraph 2 of Paragraph 14 of the UStG) and that which is improperly men- tioned (see subparagraph 3 of Para- graph 14 of the UStG), the latter being relevant in the present case. Those provi- sions are worded, respectively, as follows: 4. Paragraph 190, subparagraph 3 of the German Umsatzsteuer-Richtlinien (Turn- over-Tax Instructions) provides that, if the imposition of liability of even an impro- perly mentioned tax results in material hardship, the tax authorities — in deroga- tion from the statutory rules — may, on grounds of equity, allow the issuer to rectify the invoice by analogous application of the more generous provision of subpara- graph 2 of Paragraph 14 of the UStG. In this respect, under Paragraph 227 of the 'If in an invoice in respect of a supply or Abgabenordnung (Tax Code, hereinafter other service an entrepreneur mentions 'AC·'), it is provided that: separately a higher amount than he owes for the transaction under this Law, then he shall also be liable for the higher amount. If he rectifies the amount of tax vis-à-vis the recipient of the service, subparagraph 1 of Paragraph 17 shall apply correspondingly'; 'The tax authorities may waive, in whole or in part, claims arising from a liability to tax where it would be inequitable to pursue them in the circumstances of the particular case ... .'

6. Schmeink & Cofreth, the plaintiff and 8. Mr Strobel, the plaintiff and appellant in appellant in the first action (hereinafter the second action, ran a data-technology, 'Schmeink'), issued, on 31 December 1991, office-appliances business during the rele- to a company whose shares it was acquir- vant years, 1992 and 1993. He issued ing a pro forma invoice mentioning the sum fictitious invoices to various leasing under- of DEM 529 370.80 in respect of VAT on takings relating to supplies which were the charges made for advice which was never made in order to disguise losses and never actually provided. The invoice was boost the profitability of one of his sub- apparently used a year later by the latter sidiaries. The leasing undertakings paid the company to assist it in an application for an invoices and deducted the turnover tax investment grant. Following a special inves- mentioned therein as input tax. Mr Strobel tigation by the defendant, the Finanzamt made the consideration in each case subject (Tax Office), Borken, Germany (hereinafter to VAT, but agreed to repay the purchase 'the first defendant'), into Schmeink's VAT price to the leasing undertakings by instal- position, the first defendant, on 14 April ments. In 1994 Mr Strobel voluntarily 1993, assessed Schmeink for VAT as shown informed the local Public Prosecutor's on the relevant invoice, in accordance with Office and the Finanzamt Esslingen, Ger- subparagraph 3 of Paragraph 14 of the many (hereinafter 'the second defendant') UStG. of the incorrect declarations. Mr Strobel was assessed, in accordance with the sec- ond alternative of the second sentence of subparagraph 3 of Paragraph 14 of the UStG, for the VAT mentioned in the relevant invoices, namely D E M 5 1 9 3 4 6 . 3 6 for 1 9 9 2 a n d DEM 653 156.51 for 1993.

Finanzgericht, Baden-Würtemberg. He fur- judgment of 23 November 1995, the Bun- ther appealed to the Bundesfinanzhof alle- desgerichtshof (Federal Court of Justice), ging that Paragraph 227 of the AO was relying upon Article 20(1)(a) of the Sixth applicable because, although he did not Directive and Genius Holding, held that, demand the return of the fictitious invoices, for remission of tax liability occurring he had acted in sufficient time to prevent under Paragraph 14(3) of the UStG to be risk to tax revenues. permissible under Paragraph 227 of the AO, it was necessary, in addition to the removal of risk of loss to the tax autho- rities, for there to have been 'an excusable error' on the part of the issuer of the invoice. 3 The Bundesfinanzhof, in its pre- sent order for reference, appears inclined, on the basis of its own case-law, to reject the imposition of such a condition. As the errors of both plaintiffs in the present 10. In their appeals, both plaintiffs have proceedings were not unintentional, it essentially contended that, to benefit from questions, inter alia, whether the VAT the possibility of remission on equitable principle of fiscal neutrality requires that grounds, it should suffice that the issuer of the issuer of an invoice establish its 'good the relevant invoices eliminates the risk of faith' in order to be allowed remission of loss to the tax authorities, whether by liability arising on foot of an invoice in retrieving the invoices issued from the circumstances where all risk of loss of addressee(s) before they are used for tax- revenue has been eliminated. It suggests deduction purposes, or by discharging the that such an interpretation could give rise tax declared thereon and then ensuring that to constitutional difficulties in Germany, the addressees repay the authorities any because the national provision implement- inputs improperly deducted on the basis of ing Article 21(1)(c) of the Sixth Directive the fictitious invoices. would approximate to a penal provision under which the burden of tax mentioned on invoices would be imposed on issuers, even where their conduct did not threaten the principle of tax neutrality.

2. Is it an imperative prerequisite for rectifying an improperly invoiced tax that the issuer of the invoice should demonstrate good faith or are there A — Required rectification procedures other circumstances in which an invoice may be rectified (and, if so, what are those circumstances)?

14. Schmeink, supported on this point by the Commission, suggests that it is not sufficient for Member States merely to 3. What conditions must be satisfied for allow rectification of VAT unjustifiably the issuer of an invoice to be acting in mentioned on invoices pursuant to an good faith?' 'equitable procedure' subsequent to the fixing of the taxpayer's initial tax liability. It claims that the principle of neutrality, as interpreted, inter alia, in Gibbs v Commis- sioners of Customs and Excise 5 and Molenheide and Others v Belgian State, 6 requires that all unduly levied VAT must be III — Observations 4 — The Court dispensed with the necessity for an oral hearing in accordance with Article 104(4) of its Rules of Procedure. 5 — Case C-317/94 [1996] ECR I-5339, paragraph 28. 13. Written observations only were sub- 6 — Joined Cases C-286/94, C-341/95, C-401/95 and C-47/96 [1997] ECR I-7281, paragraph 42 (hereinafter 'Molen- mitted by Schmeink, Germany and the heide').

I - 6979

OPINION OF MR FENNELLY — CASE C-454/98

16. I do not agree that it is unnecessary to answer the first question. It is true that the plaintiffs' appeals in the main proceedings concern the equitable procedure available under Paragraph 227 of the AO where the tax has been paid. However, it is clear from the order for reference that this occurred '... it is intended to establish a uniform because there is no autonomous possibility basis so as to guarantee the neutrality of the of rectification under Paragraph 14(3) of system and, as indicated in the 12th recital the UStG in cases where the VAT in in its preamble, to harmonise the rules question is improperly mentioned on the relevant invoice. Thus, it is clear that if a 8 — See, inter alia, Case C-415/93 Union Royale des Sociétés de Football Association and Others v Bosman and Others [1995] ECR I-4921, paragraphs 59 and 61, confirmed recently in Case C-254/98 Schutzverband gegen unlauteren 7 — Case C-188/95 Fantask and Others v Industriministeriet Wettbewerb v TK-Heimdienst Sass [2000] ECR I - 151, 11997] ECR I-6783. paragraph 13.

I - 6980

SCHMEINK & COFRETH AND STROBEL

governing deductions "to the extent that Genius Holding, to provide, in their respec- they affect the actual amounts collected" tive national laws, for the possibility of and to ensure that the deductible propor- rectifying tax liabilities arising on the face tion [is] calculated in a similar manner in of issued invoices. all the Member States.' 9

I - 6981

OPINION OF MR FENNELLY — CASE C-454/98

B — The conditions for rectification no danger of any loss of VAT revenues, would infringe the principle of neutrality. It would disadvantage them by comparison with other taxable persons who are only liable to pay VAT in respect of concrete 21. The question whether good faith on the transactions. In its view, Genius Holding, part of the issuer of the invoice constitutes which is based on Article 21(1)(c) of the in Community law a prerequisite for recti- Sixth Directive, concerns only those cases fication is, in reality, the principal issue where invoices are issued in error. More raised by this reference. generally, it follows, both from the fact that, under Article 2, VAT liability is pre- dicated on the occurrence of a taxable transaction and from the principle of neutrality, that no VAT liability arises where no such transaction occurs. 22. Where the invoice issued has not given rise to a deduction and has been returned to its issuer, Schmeink contends that the principle of fiscal neutrality requires that a claim for rectification be accorded with- out the necessity of proving good faith. It also asserts that to require bona fides in the absence of any possibility of abusive claims for deduction being made would infringe the principle of proportionality.

bona fides, it is necessary to analyse the the case was essentially concerned with an case-law concerning invoices. adjustment made to a deduction that had initially been allowed. The need for adjust- ment arose because Genius Holding had deducted tax invoiced to it by certain subcontractors although the relevant Neth- erlands VAT rules at the time precluded 26. Jeunehomme, decided 17 months such subcontractors from charging VAT. 16 before Genius Holding, concerned a claim Genius Holding maintained, with the sup- made by a taxable person who objected to port of the Commission, that, if a taxable the disallowance of a deduction which had person who has paid invoices were unable been based on invoices received from to deduct VAT therein charged to it by its certain suppliers. The tax administration suppliers, this would result, contrary to the took the view that the relevant invoices principle of neutrality, in double taxation. contained insufficient information. The The Member States who submitted obser- case thus concerned the right of deduction, vations called for a strict interpretation which is expressly recognised by Arti- whereby only VAT actually due could be cles 17 and 18 of the Sixth Directive and deducted, although the Netherlands' posi- which, pursuant to Article 20(1)(a), is sub- tion was 'less radical' in that the relevant ject to adjustment whenever the deduction made is 'higher or lower than that to which Dutch administrative practice was first to the taxable person was entitled'. The Court look to the issuer of the invoice for held that the Member States' competence payment of such VAT and '[i]t [wa]s only to regulate the information which may be if that step appear[ed] to have no chance of required to appear on invoices was 'limited producing a result that, under certain to what is necessary to ensure the correct conditions, for example, in the absence of levying of value-added tax and permit good faith on the part of the person who supervision by the tax authorities'. 14 It is received the invoice, the tax deducted [wa]s clear that the Court was concerned to later charged to the latter'. 17 It is not, ensure that Member States have sufficient however, stated in the report of the case but not unlimited latitude to apply rules whether the suppliers — the subcontractors designed to verify, as Advocate General Sir in that case — had actually paid the VAT Gordon Slynn put it in his Opinion in Jeunehomme, 'the genuineness of the trans- action' in respect of which the input was claimed; i.e. to check that the supplier in question has actually 'accounted for the VAT'. 15

mentioned on the invoices sent to Genius obiter dictum, to address the argument Holding, nor, indeed, whether Genius based on the principle of neutrality. Genius Holding had actually paid the invoices Holding, the recipient of the invoices in including the relevant VAT. It is, thus, not question, supported by the Commission, possible definitively to consider either that contended that to limit its right to deduct the former acted merely in error in invoi- would infringe that principle. In response, cing the VAT in question to the latter or the Court declared that it was for the whether the latter was in collusion with the Member States 'to provide in their internal former. 18 legal systems for the possibility of correct- ing any tax improperly invoiced where the person who issued the invoice shows that he acted in good faith'. 22 However, it seems clear that the issue of good faith did not arise on the facts of the case. First, 28. In Genius Holding the Court inter- the case concerned a recipient of invoices preted Article 17(2)(a) of the Sixth Direc- and, secondly, the Dutch practice, by tive, under which a taxable person may reference to which it was presumably deduct VAT 'due or paid to in respect of inspired (see paragraph 27 above), men- goods or services supplied or to be supplied tioned the absence of good faith on the part to him by another person', to mean that of invoice recipients as being only one 'the right to deduct may be exercised only possible basis upon which the tax deducted in respect of taxes actually due, that is to could be charged to the latter. Nevertheless, say, the taxes corresponding to a transac- it is clear that the Court posited, in the tion subject to VAT or paid in so far as they interest of preventing tax evasion, good were due'. 19 Consequently, it held that faith as a requirement for rectification of national tax authorities are entitled, under tax liability, though it left open the issue of Article 20(1)(a), to adjust a deduction 'even the precise relationship between that if it corresponds to the amount of the tax requirement and the principle of fiscal mentioned on the invoice or other docu- neutrality where there is no risk of evasion. ment serving as invoice'. 20It justified this construction by observing that it was 'best adapted to prevent tax evasion, which would be made easier if any tax invoiced could be deducted'. 21

(paragraph 25) that the concern to prevent ghorst. 25 That case concerned certain tax evasion constitutes the foremost Com- credit notes issued by a livestock dealer to munity-law concern in respect of the exer- Mr Langhorst, a farmer, which were cise by Member States of their competence deemed to serve as invoices. They incor- to administer their national VAT systems. rectly mentioned a higher rate of VAT than that which Mr Langhorst was actually liable to pay. Referring to Article 21(1)(c) of the Sixth Directive and the objective of preventing fraud, the Court held that because Mr Langhorst, having agreed to the self-billing system operated by the 31. In Reisdorf v Finanzamt Köln-West the dealer, could be regarded as the author of Court was asked whether a taxable person the notes, he was liable for the VAT therein may be absolved from the normal require- mentioned. 26 ment of producing the original of an invoice where the right of deduction has been exercised in respect of the VAT therein mentioned. 23 It held that 'the Sixth Direc- tive gives Member States the power to determine the rules relating to the super- vision of the exercise of the right to deduct input tax, in particular the manner in which taxable persons are to establish that right' and that this includes 'the power to require production of the original invoice 33. The Court's concern with fraud pre- when tax inspections are carried out and vention is also evident in its decision in also, where a taxable person no longer Grandes Sources d'Eaux Minérales Fran- holds it, to allow him to produce other çaises v Bundesamt für Finanzen, 27 where cogent evidence that the transaction in the plaintiff could only produce, as evi- respect of which the deduction is claimed dence of its entitlement to a reimbursement actually took place'. 24 The Court was of VAT, a duplicate invoice, the original clearly concerned, as it was in Jeune- having been lost for reasons beyond its homme, to ensure that the Member States control. 28 While satisfied that the require- may counter tax evasion by permitting ment for originals 'reflect[ed] the general deductions to be made only where the purpose of the Eighth Directive, which is taxable person is able to demonstrate the stated in the sixth recital in the preamble as genuineness of the claimed VAT input. being that of preventing "certain forms of

tax evasion or avoidance"' and, in particu- if it is established that the invoice was lar, the re-use of invoices 'to make further issued in good faith, it would manifestly applications for a refund', the Court, none infringe the principle of neutrality to pre- the less, held that Article 3(a) of that vent the taxable person from availing of a Directive '[could] not be interpreted as right of rectification where there has been precluding Member States from accepting no loss or risk of loss of tax revenue. I such an application for a refund in excep- consider that, in such circumstances, Com- tional circumstances where there is no munity law would require Member States doubt that the transaction which led to to permit the rectification of VAT declara- the application for a refund occurred ... tions affected by erroneous invoices, in and where it is established that, in view of accordance with national rules. To my the circumstances, there is no risk of mind, this interpretation effectively under- further applications for a refund'. 29Refer- lies the dictum in Genius Holding. How- ring to the principle of proportionality, it ever, I agree with the Commission that the then observed that 'exclusion of the possi- same principle should logically also require bility mentioned [was] not necessary in this that rectification be possible where, despite case to prevent fraud or tax evasion'. 30 the occurrence of an inexcusable initial error or the presence of bad faith when an invoice was drawn up, appropriate and effective steps have been taken by the issuer to ensure that no loss of tax revenues occurred. 31

or attempted issuance of false or fictitious later case-law concerning invoices, to my invoices. Community law would also, in mind, provides support for the view that my opinion, not preclude Member States there is a Community-law obligation on from prescribing that the burden of proving Member States not to permit rectification the absence of any threat to VAT revenues save in those cases where good faith is rests upon the responsible taxable person. demonstrated. In the relevant part of its This would a fortiori be the case where judgment in Genius Holding, the Court good faith was initially lacking. held that 'it is for the Member States to provide in their internal legal systems' for rectification 'where the person who issued the invoice shows that he acted in good faith'. 33 An ordinary interpretation of this passage does not suggest that the Court intended to impose stringent requirements on Member States. In particular, I do not think it supports the view that Member States would be precluded from permitting, 36. If the Court accepted this interpreta- within the framework of their own national tion, it would not need to consider what, VAT systems, the rectification of VAT for Community VAT law purposes, should liability arising from declarations based be the substantive content of the notion of on erroneous or fictitious invoices. More- 'good faith'. In the light of the widely over, I see no good policy reason for differing current practices in national law imposing such an obligation on Member as to the meaning of that notion, and in the States. absence of any explicit provisions dealing with this issue in the Sixth Directive, it should, in my opinion, be left to the Community legislature, if it considers it appropriate, to develop a Community-law definition of 'good faith'. 32 However, if the Court were to disagree with this recom- mendation, neither Genius Holding nor the

I - 6987

OPINION OF MR FENNELLY — CASE C-454/98

that passage as referring to fraud unrelated 38. On this interpretation of the Sixth to the VAT system. To my mind, the Directive, it is unnecessary to consider the principle mentioned in that passage should third question posed by the Bundesfinanz- not deprive the Member States of the hof. Accordingly, I am of the view that autonomy, in applying their national VAT rectification of incorrect or false invoices systems, to grant rectification even where should not be discretionary but, rather, bona fides on the part of the taxpayer was should always effectively be possible pro- wanting, provided there is no danger to vided the taxable person who is responsible VAT receipts. for issuing them demonstrates that no loss of VAT revenue will occur.

IV — Conclusion

39. In the light of the foregoing, I propose that the Court answer the questions referred as follows:

(1) Community law does not require that national law allow rectification of an improperly invoiced tax as part of the procedure during which the initial tax liability of a taxable person who has issued erroneous or fictitious invoices is determined, provided that it is effectively possible for that person later to seek rectification of the sum thereby levied and that the availability of such relief, where the appropriate conditions are satisfied, is not discretionary;