May 16, 2023
Bulgaria: Decision of CJEU on Bulgarian referral raises refund potential for certain VAT payments
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.
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of his or her usual economic activities (due to factors outside his control, such as if the goods are technically outdated).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:
Next steps and how we can assist:
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