FIFTH SECTION
PARTIAL DECISION
AS TO THE ADMISSIBILITY OF
Application no. 6689/03
by BUSINESS SUPPORT CENTER
against Bulgaria
The European Court of Human Rights (Fifth Section), sitting on 27 November 2007 as a Chamber composed of:
MrP. Lorenzen, President,
MrsS. Botoucharova,
MrK. Jungwiert,
MrV. Butkevych,
MrsM. Tsatsa-Nikolovska,
MrR. Maruste,
MrM. Villiger, judges,
and Mrs C. Westerdiek, Section Registrar,
Having regard to the above application lodged on 13 February 2003,
Having deliberated, decides as follows:
THE FACTS
The applicant organisation, the “Business centre for assisting small and medium-sized enterprises – Ruse” (“the Business Support Centre”), is a non-profit organisation registered in 1996 with a seat in the town of Ruse. It is represented before the Court by Mrs M. Makedonska, a lawyer practising in Ruse.
A. The circumstances of the case
The facts of the case, as submitted by the applicant organisation, may be summarised as follows.
1. Background
On 14 December 1998 the Business Support Centre entered into an agreement with the Austrian Ministry of Foreign Affairs to set up a business incubator for small and medium-sized enterprises in the town of Ruse. A pre-condition for disbursement of funds under the programme was that the Ruse municipal council would provide, free-of-charge, a building for use by the business incubator.
On 11 March 1999 the Business Support Centre and the Ruse municipal council entered into an agreement whereby the latter granted the applicant organisation the right to use a property for the needs of the business incubator for a period of ten years (“the property”). The Business Support Centre undertook to renovate the property on its account and to transfer at the end of the contract all the improvements it made back to the Ruse municipal council together with the property.
Subsequently, the applicant organisation renovated the property in the course of which it received a number of supplies on which value added tax (“VAT”) was charged. The renovation of the property cost 192,761 Bulgarian levs (“BGN”: approximately 98,851 euros (“EUR”)) and was completed on 9 February 2000. It was paid in full by the applicant organisation, but in the official construction documentation the Ruse municipal council, as owner, accepted the renovation works from the construction company.
2. Tax assessment against the applicant organisation
On 11 April 2000 the tax authorities initiated an audit of the applicant organisation, which covered, in respect of VAT, the period from 1 July 1999 to 29 February 2000.
On 31 August 2000 the Tax Office “Centre” of the Ruse Territorial Tax Directorate issued a tax assessment against the applicant organisation. In respect of VAT it found that the Business Support Centre had erroneously deducted five credits for the VAT it had paid to suppliers, amounting to BGN 25,944.80 (approximately EUR 13,304) and had failed to charge VAT, in the amount of BGN 38,552.30 (approximately EUR 19,770), on a taxable service it had provided.
The first VAT credit related to a supply received from a sole trader and amounted to BGN 11,400 (approximately EUR 5,846). The tax authorities did not establish a failure by the applicant organisation to comply with its VAT reporting and payment obligations. However, upon making a cross-check with the supplier, the tax authorities established that the sole trader had failed to enter the effected supply in its own accounting records for the respective month and had not made the appropriate filings with the tax authorities. Thus, they considered that no VAT had been “charged” on the supply in question and that the applicant organisation could not therefore deduct a VAT credit on the amount it had paid to the sole trader as VAT.
The second VAT credit related to a supply received from a joint stock company and amounted to BGN 2,583.17 (approximately EUR 1,324). In this instance the date of issuance of the invoice had been amended by hand, for unknown reasons, after it had been issued, so the tax authorities no longer considered it to be a valid VAT invoice under domestic legislation and found, therefore, that the claimed VAT credit was not supported by a VAT invoice containing all the required prerequisites as per the applicable accounting legislation.
The remaining three VAT credits, totalling BGN 11,961.63 (approximately EUR 6,134), related to supplies received by the applicant organisation which it admitted to having improperly entered twice in its books and to have used the underlying VAT credits on two separate occasions.
Separately, the tax authorities reassessed the VAT treatment of the renovation works, which were wholly financed by the applicant organisation, and found that the Business Support Centre had provided a VAT taxable service to the Ruse municipal council as a result of the improvements it had made to the latter’s property. Considering that the property had been provided free-of-charge, the tax authorities found that no consideration was being given by the Ruse municipal council and, accordingly, that the applicant organisation was wholly liable for charging and paying the VAT on the value of the undertaken renovation works, which amounted to BGN 38,552.30 (approximately EUR 19,770).
In addition to making adjustments to the applicant organisation’s VAT credit deductibles and its liability for payment of VAT for the relevant periods, the tax authorities also ordered it to pay interest on the respective amounts.
3. Appeal proceedings against the tax assessment
On 4 October 2000 the applicant organisation appealed against the tax assessment.
In a decision of 6 November 2000 the Ruse Territorial Tax Directorate confirmed in full the findings in the tax assessment in respect of VAT. The applicant organisation appealed to the courts.
On 28 May 2001 the Varna Regional Court found against the applicant organisation and upheld the findings of the tax authorities in full. The applicant organisation appealed further.
Likewise, in a final judgment of 13 August 2002 the Supreme Administrative Court upheld the lower court’s findings and dismissed the applicant organisation’s appeal. In reaching their decisions, the courts addressed in detail the arguments of the parties, independently assessed the applicable tax treatment and substantiated their findings.
B. Relevant domestic law
Value Added Tax Act
(a) General information
The Value Added Tax Act 1999 (“the VAT Act 1999”) was in force from 1 January 1999 to 31 December 2006. Although at the time Bulgaria was not a member of the European Union, the VAT legislation in many aspects followed the provisions of the Sixth VAT Directive.
In general, VAT was charged on the price due to a supplier of goods or services increased by certain costs, taxes and charges, less the VAT chargeable itself. Most domestic supplies of goods and services and imports were subject to the standard rate of twenty percent VAT.
VAT was generally reported and paid monthly. The monthly VAT returns were to be filed and monthly VAT payments were to be made by the fourteenth day of the following month.
At the relevant time, any person (legal or physical, resident or non-resident) who had a taxable turnover exceeding BGN 75,000 during the preceding twelve months was obliged to register for VAT purposes (section 108). Voluntary and optional registrations were also possible in certain cases.
(b) VAT credits and reimbursements
At the relevant time and as pertinent to the present case, where VAT charged on supplies exceeded the VAT charged on sales in a given tax period, the excess VAT deduction was first carried forward for a period of six months to offset any VAT debt due in these six months, as well as against other liabilities to the State (sections 63 and 77). If at the end of the six-month period the excess VAT, or part thereof, had still not been recovered, the balance was refunded within a further forty five days (section 77). The period could be extended if the tax authorities commenced a tax audit (section 78 (7)).
At the relevant time, section 64 of the VAT Act 1999 provided, as relevant, that the right to deduct a VAT credit for a recipient of a supply existed when the following conditions were fulfilled: (a) the recipient of the supply on which VAT had been charged was a VAT registered person; (b) the VAT had been charged by the supplier who was a VAT registered person at the latest on the date of issuance of the VAT invoice; (c) VAT was chargeable on the supply in question; (d) the goods or services received were used, are being used or will be used for VAT taxable supplies; (e) the recipient holds a VAT invoice which meets the statutory requirements. Further to the above in respect of item (b), during the relevant period VAT was considered to have been charged when the supplier issued an invoice which indicated the VAT, entered this invoice in its accounting records as a liability to the State budget and in the VAT return it filed with the tax authorities (section 55 (6)).
COMPLAINTS
1. The applicant organisation complains under Article 1 of Protocol No. 1 to the Convention that the authorities erroneously reassessed its VAT liabilities. In particular, it complains that a VAT credit was denied solely on the grounds that a supplier had failed to comply with its own VAT reporting and payment obligations. It argues that it had a “legitimate expectation”, within the meaning of Article 1 of Protocol No. 1 to the Convention, to the refund of the VAT, which arose at the moment it had complied with its own VAT reporting and payment obligations and the prerequisites for a VAT credit had been met. Another VAT credit was refused because the date of the VAT invoice issued by a supplier had been corrected after it had been issued. Lastly, it complained of the reassessed VAT treatment of the renovation works it undertook of the property and the resulting requirement to pay VAT on the allegedly VAT taxable service it had provided to the Ruse municipal council.
2. The applicant organisation complains under Article 6 of the Convention that the court proceedings for challenging the tax assessment were unfair, that the courts failed to accurately assess the evidence before them and gave weight only to those documents and arguments which supported the position of the tax authorities.
THE LAW
A. Complaint under Article 1 of Protocol No. 1 to the Convention concerning the VAT credit refused due to non-compliance of supplier
The applicant organisation complained of the authorities’ refusal to recognise its right to deduct a VAT credit of BGN 11,400 (approximately EUR 5,846) under a VAT taxable supply solely because the supplier failed to comply with its own VAT reporting and payment obligations.
Article 1 of Protocol No. 1 to the Convention reads as follows:
“Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.”
The Court considers that it cannot, on the basis of the case file, determine the admissibility of this complaint and that it is therefore necessary, in accordance with Rule 54 § 2 (b) of the Rules of Court, to give notice of this part of the application to the respondent Government.
B. The remainder of the applicant organisation’s complaints
The Court has examined the remainder of the applicant organisation’s complaints as submitted by it. However, in the light of all the material in its possession, and in so far as the matters complained of were within its competence, the Court finds that they do not disclose any appearance of a violation of the rights and freedoms set out in the Convention or its Protocols.
It follows that this part of the application must be rejected as being manifestly ill-founded, pursuant to Article 35 §§ 3 and 4 of the Convention.
For these reasons, the Court unanimously
Decides to adjourn the examination of the complaint concerning the authorities’ refusal to recognise the applicant organisation’s right to deduct a VAT credit of 11,400 Bulgarian levs (approximately 5,846 euros) under a VAT taxable supply solely because the supplier failed to comply with its own VAT reporting and payment obligations (Article 1 of Protocol No. 1 to the Convention);
Declares the remainder of the application inadmissible.
Claudia WesterdiekPeer Lorenzen
RegistrarPresident
Full & Egal Universal Law Academy