Janina Fornalik from MDDP & Partners
On December 22 2008 the European Court of Justice (ECJ) handed down a ruling (case file C-414/07) stating that Polish VAT provisions placing restrictions on the deduction of VAT on the purchase of fuel to vehicles are contrary to the European Community regulations. The ruling was issued with regard to the dispute pending before the Polish regional administrative court in Cracow between the Polish tax authority (director of the tax chamber in Cracow) and Magoora. The Polish court decided to refer the questions to ECJ for a preliminary ruling with respect to the conformity of national law with the EU regulations.
Poland: VAT deduction on the purchases of fuel to vehicles
MDDP & Partners
The ECJ stated that the Polish law is in breach of the standstill clause stipulated in article 17(6) of the sixth EC directive, which allows the new member states to retain after the accession to EU, only those restrictions on the right to deduct input VAT which existed and were actually applied when the directive entered into force (i.e. in the case of Poland on the accession date). In other words, Poland was entitled to retain the restrictions binding before accession, i.e. until April 30 2004.
In fact Poland has introduced two amendments to the local regulations since joining the EU, changing the criteria determining the vehicles entitling input VAT deduction (on purchases/leasing of the car as well as on fuel used to the car): firstly as of May 1 2004 (when the new VAT act was entered into force), and secondly as of August 22 2005. In both cases the scope of the restrictions in input VAT deduction have been extended comparing to those in place before May 1 2004.
As a consequence of the infringement by the Polish regulations of the EU rules confirmed in the ECJ ruling, the Polish taxpayers are entitled to disregard the Polish VAT law and deduct input VAT incurred on purchases of fuel in those cases, where such a right would be permissible under the regulations binding before May 1 2004 as well as before August 22 2005, when the additional amendments were introduced to the Polish VAT act.
Moreover, the above ruling also provides grounds for the right to full deduction of input VAT on purchases of vehicles as well as on leasing fees, where such a deduction was allowed under the provisions binding before May 1 2004 and before August 22 2005.
Some of the Polish taxpayers have already applied for the refund of VAT not deducted previously after May 1 2004. The Polish tax authorities accept the right to recover VAT only with regard to the vehicles which would entitle for deduction based on the regulations in force before Poland's accession.
However, there are also grounds arising from the ECJ ruling to recover VAT incurred on the purchases of fuel used by all vehicles used for taxable activities, including passenger cars, irrespective of fulfillment of the criteria applicable before May 1 2004. This interpretation would lead to significant financial consequences for the state budget, and therefore, it not accepted by the Polish tax authorities. The taxpayers might, however, appeal against the negative decisions to the administrative court.
Also the proceedings before the Polish administrative court regarding the Magoora case analysed by ECJ will be finalised soon (the final court verdict is expected in April 2009) which would also provide basis for the future strategy to be taken by Polish taxpayers.
Nevertheless, the Polish automotive market has responded immediately to the business needs arising from the ECJ ruling and again the car producers offer cars fulfilling the criteria binding before May 1 2004.
Janina Fornalik (firstname.lastname@example.org)