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The Court of Justice of the European Union (CJEU) issued an important decision opening the door to the possibility of obtaining a refund of value-added tax (VAT) paid due to adjustment of the input VAT deduction when goods that have lost their usefulness are scrapped.

Below is a brief overview of the issue and a summary of the decision, along with suggestions for possible next steps.

Context

As a general rule, if an event occurs that constitutes a change in the factors used to determine the amount of VAT to be deducted, the taxable person is required to adjust the initial deduction.

VAT Directive 2006/112VA provides that no adjustments of the VAT deduction shall be made if the destruction, loss or theft of property is duly proved or confirmed. In these cases, economic loss has been suffered, but the loss is not required to be duly proved or confirmed.

In contrast, the Bulgarian VAT Act explicitly provides that a taxable person who has deducted VAT on goods that he has produced, acquired or imported shall pay tax in an amount equivalent to the input VAT deducted if those goods are destroyed, shrinkages are established or the goods are scrapped.

As a result, many businesses operating in Bulgaria are obligated to return the initially deducted VAT for goods that the taxable person considered to have become unusable in the course of his or her usual economic activities (due to factors outside his control, such as if the goods are technically outdated). This usually leads to additional economic losses for affected businesses, especially those that acquire a significant number of machines and inventory (e.g., manufactures and retailers dealing with consumable goods).

Background of the case

"Balgarska telekomunikatsionna kompania" EAD (BTK), a Bulgarian taxable person, wrote off various goods, including installations, equipment, and appliances considered unsuitable for use or sale.

Some of these goods were sold as waste to taxable third-party undertakings, and others were disposed of or destroyed. According to the local legislation, the taxable person adjusted the deduction made, which led to repayment of VAT. BTK requested refund of the repaid sums, which the local tax authorities denied. Once the case reached court in Bulgaria, a request for preliminary ruling was referred to the CJEU. The Bulgarian court sought clarification and interpretation of Article 185 of the VAT Directive — in particular, the possible effect that subsequently selling written-off goods as waste or scrapping them would have on the amount of the initially deducted VAT.

Highlights of the CJEU decision

In brief, the CJEU ruled that:

• Writing off goods that had been subject to VAT, and then selling those goods as waste, does not constitute a change in the factors used to determine the amount to be deducted, and respectively does not raise an obligation for adjustment of the input VAT deduction.
• As opposed to the practice so far in Bulgaria, destroying/scrapping goods duly proven to have lost all usefulness in the taxable person's economic activities does not give rise to an adjustment obligation.
• National laws requiring the adjustment of input VAT deducted upon acquisition of written-off goods are precluded if the goods are subsequently destroyed or disposed of in a way that effectively means they have disappeared irreversibly.

Next steps and how we can assist:

• Review historical payments of VAT for scrapped goods and identify amounts that have been repaid to the state budget as a result of adjustment of input VAT deduction following destruction of goods due to loss of their usefulness
• Identify risks or opportunities for claims of overpaid VAT
• In terms of future optimization, review and update of current internal policies for scrapping/destroying goods

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For additional information with respect to this Alert, please contact the following:

Ernst and Young Law Partnership Bulgaria, Sofia

Milen R. Raikov | Milen.Raikov@bg.ey.com

Lora Terzieva | Lora.Terzieva@bg.ey.com

Published by NTD’s Tax Technical Knowledge Services group; Carolyn Wright, legal editor