C-95/07 Ecotrade

JUDGMENT OF THE COURT (Third Chamber)

* 8 May 2008

In Joined Cases C‑95/07 and C‑96/07,

REFERENCES for a preliminary ruling under Article 234 EC from the Commissione tributaria provinciale di Genova (Italy), made by decision of 13 December 2006, received at the Court on 20 February 2007, in the proceedings

Ecotrade SpA

v

Agenzia delle Entrate — Ufficio di Genova 3,

THE COURT (Third Chamber),

composed of A. Rosas, President of the Chamber, U. Lõhmus, A. Ó Caoimh, P. Lindh and A. Arabadjiev (Rapporteur), Judges,

* Language of the case: Italian.

I ‑ 3478 Advocate General: E. Sharpston, Registrar: C. Strömholm, Administrator,

having regard to the written procedure and further to the hearing on 16 January 2008,

after considering the observations submitted on behalf of:

— Ecotrade SpA, by A. Lovisolo and N. Raggi, avvocati,

— the Italian Government, by I.M. Braguglia, acting as Agent, and G. De Bellis, avvocato dello Stato,

— the Cypriot Government, by A. Pantazi‑Lambrou, acting as Agent,

— the Commission of the European Communities, by A. Aresu and M. Afonso, acting as Agents,

after hearing the Opinion of the Advocate General at the sitting on 13 March 2008,

gives the following

Judgment

Legal context and the dispute

1These references for a preliminary ruling concern the interpretation of Articles 17 and 18(1)(d), 21(1) and 22 of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover

I ‑ 3479 taxes — Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1), as amended by Council Directive 2000/17/EC of 30 March 2000 (OJ 2000 L 84, p. 24) (‘the Sixth Directive’).

2The references were made in the course of two disputes between Ecotrade SpA (‘Ecotrade’) and Agenzia delle Entrate — Ufficio di Genova 3 (‘the Agenzia’), concerning a number of recovery notices issued by the latter reassessing, for the purposes of value added tax (‘VAT’), tax returns submitted by Ecotrade for the tax years 2000 and 2001.

Legal context

Community rules

3As regards the right to deduct, Article 17(1) and (2)(a) of the Sixth Directive, in the version resulting from Article 28f(1) thereof provides:

‘1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

I ‑ 3480 2. In so far as the goods and services are used for the purposes of his taxable transac‑ tions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person’.

4According to Article 17(6), until the Council of the European Union has decided what expenditure is not to be eligible for a deduction of value added tax, Member States may retain all the exclusions provided for under their national laws when the Sixth Directive came into force, subject to the qualification that VAT may in no circumstances be deductible on expenditure which is not strictly business expendi‑ ture, such as that on luxuries, amusements or entertainment. Article 17(7) allows Member States, subject to the consultation procedure provided for in Article 29, to exclude for cyclical economic reasons totally or partly all or some capital goods or other goods from the system of deductions.

5According to Article 21(1)(b) of the Sixth Directive, in the version resulting from Article 28g thereof, VAT is payable, under the internal system, by taxable persons to whom services covered inter alia by Article 28bC are supplied, if the services are carried out by a taxable person established abroad. Article 28bC to which it refers covers ‘services in the intra‑Community transport of goods’. That regime, which is also applicable to other services, is widely known as the ‘reverse charge procedure’.

6With regard to the rules for exercise of the right to deduct in circumstances such as those described in the preceding paragraph, Article 18(1)(d) of the Sixth Directive, in

I ‑ 3481 the version resulting from Article 28f(2) thereof, provides that, to exercise that right, a taxable person must comply with the formalities laid down by each Member State.

7Article 18(2) and (3) of the Sixth Directive provides as follows:

‘2. The taxable person shall effect the deduction by subtracting from the total amount of value added tax due for a given tax period the total amount of the tax in respect of which, during the same period, the right to deduct has arisen and can be exercised under the provisions of paragraph 1.

3. Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2.’

8Furthermore, Article 22 of the Directive, in the version resulting from Article 28h, lays down a series of obligations on persons liable for payment of VAT. Among those obligations is the obligation in Article 22(2)(a), according to which every taxable person is to keep accounts in sufficient detail for VAT to be applied and inspected by the tax authority, and the obligation provided for in Article 22(4)(a) and (b), according to which every taxable person is to submit a return by the stated deadline which must set out all the information needed to calculate the tax that has become chargeable and the deductions to be made.

I ‑ 3482

9Finally, Article 22(7) and (8) are worded as follows:

‘7. Member States shall take the measures necessary to ensure that those persons who, in accordance with Article 21(1)(a) and (b), are considered to be liable to pay the tax instead of a taxable person not established within the territory of the country … comply with the above obligations relating to declaration and payment.

8. Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, subject to the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.’

National legislation

10In Italian law, most of the relevant provisions relating to VAT are laid down by Presidential Decree No 633 of 26 October 1972 establishing and laying down rules on value added tax (Ordinary Supplement to the GURI No 292 of 11 November 1972), amended on several occasions (‘DPR No 633/72’) and Decree‑Law No 331 of 30 August 1993 (GURI No 203 of 30 August 1993) (‘Decree‑Law No 331/93’).

I ‑ 3483

11The first sentence of Article 17(3) of the DPR No 633/72 provides:

‘The obligations relating to … the supply of services in the territory of the State by non‑resident persons … shall be met by the purchasers resident in the territory of the State who … use the services in pursuit of business, artistic activities or professions.’

12Article 19(1) of the DPR No 633/72 provides:

‘… The right to deduct the tax on the goods and services purchased or imported shall arise at the time when the tax becomes chargeable and may be exercised, at the latest, in the tax return for the second year after the year in which the right to deduct arose and subject to the conditions applying at the time when the right arose.’

13According to Article 23(1) and (2) of the DPR No 633/72, entitled ‘Registration of invoices’, taxable persons must record invoices issued in an appropriate register within 15 days, indicating for each invoice the serial number, the date of issue, the taxable amount of the transaction(s) and the amount of VAT, shown separately for each rate, and the undertaking, the name or company name of the purchaser of the goods or services or, in the cases to which Article 17(3) refers, the seller or supplier’s name.

14Under the heading ‘Registration of purchases’, Article 25(1) of the DPR No 633/72 requires taxable persons to number sequentially invoices and customs dockets relating to goods and services purchased or imported in the course of their business,

I ‑ 3484 including invoices issued in accordance with Article 17(3) thereof, and to record them in a register before making the periodic payment or the annual return in which the right to deduct the VAT relating to those invoices is exercised.

15Pursuant to Article 47(1) of Decree‑Law No 331/93, entitled ‘Registration of intra‑ Community transactions’, invoices relating, in particular, to the supply of intra‑ Community transport of goods and related services must be recorded in the month in which they are received or subsequently, but in any event within 15 days of receipt, separately in the register of invoices issued referred to in Article 23(1) and (2) of the DPR No 633/72 and in the register of purchases, referred to in Article 25(1) thereof, with reference to the month of receipt or the month of issue respectively.

16Finally, the first sentence of the first paragraph of Article 57(1) of DPR No 633/72 provides:

‘Notices of reassessment and recovery … shall be served, on pain of loss of the related right, by 31 December of the fourth year after the year in which the tax return was submitted.’

The dispute in the main proceedings and the questions referred for a preliminary ruling

17Ecotrade is an Italian limited company specialising in granulated blast furnace slag and other ingredients, in particular synthetic gypsum and ashes used for the manu‑ facture of cement.

I ‑ 3485

18In the tax years 2000 and 2001 Ecotrade entrusted to operators established outside Italy the transport of those materials from Italy to other Member States of the Euro‑ pean Community. In the invoices issued by those operators for services supplied to Ecotrade, those services are described either as ‘chartering of the vessel’ or ‘shipping’ (‘the transactions in question’). However, the invoices did not indicate the amount of VAT, and some of them stated that the transactions were exempt.

19Ecotrade therefore regarded the relevant transactions as being exempt from VAT. Accordingly, it recorded the invoices relating to those transactions only in the register of purchases and not in the register of invoices issued, and did so on the basis of VAT exemption. The VAT relating to those transactions was therefore not mentioned in the returns drawn up by Ecotrade for the tax years 2000 and 2001.

20After an inspection in 2004, the Agenzia took the view that the transactions in ques‑ tion were services in the intra‑Community transport of goods subject to VAT, and that the reverse charge procedure was applicable to them, which, with the exception of one invoice, was not disputed by Ecotrade. The Agenzia also found that Ecotrade had not complied with the accounting requirements relating to the reverse charge procedure because the invoices concerned had been recorded only in the register of purchases and not in the register of invoices issued.

21Therefore, the Agenzia, by a number of tax recovery notices, reassessed for VAT purposes the tax returns submitted by Ecotrade for the tax years 2000 and 2001, claimed payment of undeclared taxes amounting to a total of approximately EUR 321 000 and imposed penalties in respect of those taxes of approximately EUR 361 000.

I ‑ 3486

22Subsequently, the Agenzia took the view that Ecotrade had lost its right to deduct VAT because it had not exercised that right within a period of two years from the time the VAT becomes chargeable, as provided in the second sentence of Article 19(1) of the DPR No 633/72, whereas the tax authorities were still within the time‑limits for recovering the VAT relating to the services concerned since, under the first sentence of Article 57 of the DPR No 633/72, notices of reassessment and recovery may be served within a period of four years calculated from the date on which the tax returns relating to disputed taxes were submitted.

23By various appeals lodged on 13 February 2005 before the Commissione tributaria provinciale di Genova, Ecotrade challenged the recovery notices concerned and sought to have them annulled. In order to justify its accounting practice Ecotrade submitted that the invoices relating to the transactions in question had been duly recorded in the register of purchases, but that, because those transactions had been mistakenly regarded as exempt from VAT, they had not been recorded in the register of invoices issued. That irregularity should not however have compromised the exer‑ cise of the right to deduct, since no debt to the tax authority was generated. There‑ fore, any temporal limit on the right to deduct was inapplicable in this case.

24Before the national court the Agenzia replied that Ecotrade should have invoiced itself for the transactions in question, calculated the VAT payable, and recorded the invoice in the register of invoices issued and the register of purchases so that it would have had a VAT credit for the purposes of deducting the input tax calculated. In accordance with that method, the VAT payable is not actually paid by the purchaser in so far as it is offset by the corresponding VAT credit. The right to deduct must be exercised in the period prescribed or it will lapse. Consequently, Ecotrade, which did not comply with the accounting procedure provided for under the national legisla‑ tion, is required to pay the VAT due, while it has lost the right to deduct VAT on account of the time‑bar.

I ‑ 3487

25In those circumstances, the Commissione tributaria provinciale di Genova decided to stay proceedings and refer the following questions to the Court for a preliminary ruling:

‘(1) D oes a correct interpretation of Articles 17, 21(1) and 22 of the Sixth Directive … preclude national legislation (in particular Article 19 of DPR No 633/72) that makes the exercise of the right to deduct [VAT], payable by a taxable person in the pursuit of his business activities, dependent on compliance with a (two‑ year) time‑limit and penalises non‑compliance with annulment of that right? That question is asked with reference, in particular, to cases where the liability to VAT on the purchase of the good or service stems from the application of the reverse charge procedure, which allows the authorities a longer period (of four years under Article 57 of DPR No 633/72) in which to demand payment of the duty than the period allowed to the trader for deduction of the duty, on expiry of which the trader’s right to such deduction lapses.

(2) Does it follow from a correct interpretation of Article 18(1)(d) of the Sixth Directive … that national legislation may not, in regulating the ‘formalities’ referred to in that provision by means of the reverse charge procedure governed by the combined provisions of Articles 17(3), 23 and 25 of DPR No 633/72, make (solely to the detriment of the taxable person) the exercise of the right to deduct permitted by Article 17 of the Directive conditional upon compliance with a time‑limit such as that laid down in Article 19 of DPR No 633/72?’

26By order of the President of the Court of 27 April 2007, Cases C‑95/07 and C‑96/07 were joined for the purposes of the written and oral procedure and of the judgment.

I ‑ 3488

The questions referred for a preliminary ruling

Observations submitted to the Court

27Ecotrade submits that the Sixth Directive does not impose any time‑limit on the right to deduct, since the entire VAT system, which is founded on the principle of neutrality is designed to guarantee the taxable person, in all circumstances, that fundamental right inherent in the overall VAT system. Furthermore, the national legislation at issue in the main proceedings cannot be justified by reliance on Art‑ icles 17(6) and (7) and 22(7) and (8) of the directive, which are not applicable in the cases in the main proceedings.

28As regards the ‘formalities’ laid down by the Member States in accordance with Article 18(1)(d) of the Sixth Directive, with which the taxable person must comply in order to exercise the right to deduct under the reverse charge procedure, Ecotrade submits that those formalities may not be disproportionate to or incompatible with the general VAT mechanism. Accordingly, compliance with those formalities cannot lead to the taxable person definitively losing the right to deduct. In any event, the limitation on the right to deduct in Italian law is not proportionate, because the tax authority has a longer period in which to reassess incorrect tax returns than that accorded to the taxable person to claim deduction.

29The Italian and Cypriot Governments point out that the period prescribed for the exercise of the right to deduct is a formality that the Member States may determine under Article 18(1)(d) and (3) and Article 22(8) of the Sixth Directive. Article 18 does not contain any provision inconsistent with the Member States’ discretion to set temporal limits on deduction. According to Article 18(2), which refers to ‘the same period’, the right to deduct should be exercised as soon as possible, so that if

I ‑ 3489 the taxable person does not exercise his right to deduct during that period, the possi‑ bility of doing so later may be coupled with conditions that the Member States can impose in accordance with Article 18(3).

30Furthermore, the Italian and Cypriot Governments take the view that the period allowed to the authority to recover tax cannot be the same as that allowed to the taxable person to exercise his right to deduct for objective and practical reasons, since the authority needs time after the tax return is lodged to check it and verify its contents.

31The Italian Government acknowledges, moreover, that the Member States must comply with the principle of effectiveness, so as not to render exercise of the right to deduct impossible or excessively difficult. However, it submits that the period of two years is perfectly appropriate in that respect.

32The Commission of the European Communities maintains that the deduction should be exercised in compliance with the tax deadlines prescribed. Its exercise cannot therefore be deferred indefinitely. It concludes that the determination of limitation periods for the exercise of the right to deduct is not incompatible with the object‑ ives pursued by the Sixth Directive, provided that those limitation periods are not less favourable than those laid down for the exercise of analogous rights in matters relating to tax (principle of equivalence) and are not such as to render the exercise of the rights conferred by Community law virtually impossible or excessively diffi‑ cult (principle of effectiveness). It concludes that the principle of equivalence has not been complied with on account of the fact that the legislation at issue in the main proceedings allows a period of four years to the tax authority for reassessments and recovery, whereas it provides for a period of only two years for deduction of VAT paid. As regards compliance with the principle of effectiveness, the Commission points out that a two‑year limitation period for the exercise of the right to deduct is likely, for the same reasons, to render the exercise of that right excessively difficult.

I ‑ 3490

33In addition, the Commission takes the view that it is wholly excessive and dispropor‑ tionate for the Member State concerned to seek unduly to enrich itself because mere accounting formalities have not been carried out, although the latter must be allowed the possibility of penalising the irregularities concerned in an appropriate manner.

34Should the Court decide that Article 19 of the DPR No 633/72 is not compatible with this Sixth Directive, the Cypriot Government proposes that the temporal effects of its judgment should be limited, so that it would apply solely from the date of its delivery.

The Court’s reply

35As a preliminary point, it must be noted that the national court’s questions seek to establish whether Articles 17, 18(1)(d), 21(1) and 22 of the Sixth Directive preclude national legislation such as that at issue in the main proceedings which, where the reverse charge procedure applies, makes the exercise of the right to deduct VAT subject to compliance with a limitation period which is shorter than that available to the tax authority for recovering tax.

36However, it is clear from the order from reference that the main dispute arises from the accounting irregularity committed by Ecotrade, that is to say, the incorrect recording of the transactions in question only in the register of purchases exempt from VAT, that irregularity also affecting the tax returns relating to VAT drawn up by Ecotrade, which led the Agenzia to reassess them. That situation is clearly different from the case in which a taxable person who is aware of the taxable nature of a supply fails on account of delay or carelessness to claim deduction of input tax within the period prescribed by the national legislation.

I ‑ 3491

37It should be recalled in that regard that, according to settled case‑law, it is for the Court of Justice to provide the national court with all the elements of interpretation of Community law which may be of assistance in adjudicating on the case pending before it, whether or not that court has specifically referred to them in its questions (see, in particular, Case C‑315/92 Verband Sozialer Wettbewerb, ‘Clinique’ [1994] ECR I‑317, paragraph 7; Case C‑87/97 Consorzio per la tutela del formaggio Gorgon-zola [1999] ECR I‑1301, paragraph 16; Case C‑456/02 Trojani [2004] ECR I‑7573, paragraph 38; and Case C‑452/03 RAL (Channel Islands) and Others [2005] ECR I‑3947, paragraph 25).

38Accordingly it is necessary to reformulate the national court’s questions, which it is appropriate to examine together, to the effect that it is asking, first, whether Art‑ icles 17, 18(2) and (3) and 21(1)(b) of the Sixth Directive preclude the introduction of a limitation period for the exercise of the right to deduct VAT, such as that laid down by the national legislation at issue in the main proceedings, in the case of a reverse charge procedure(‘the limitation period’), and, secondly, whether Articles 18(1)(d) and 22 preclude a practice whereby declarations are reassessed and VAT recovered which penalises an irregularity in the accounts and tax returns, such as that at issue in the main proceedings, by denying the right to deduct in the case of a reverse charge procedure (‘the reassessment and recovery practice’).

The limitation period

39It must be pointed out at the outset that a taxable person liable for VAT as the recipient of goods or services is able to rely on the right to deduct contained in Article 17(2)(a) of the Sixth Directive (see Case C‑90/02 Bockemühl [2004] ECR I‑3303, paragraph 37). According to consistent case‑law, the right to deduct laid down in Article 17 forms an integral part of the VAT mechanism and in principle cannot be limited (see Joined Cases C‑110/98 to C‑147/98 Gabalfrisa and Others [2000] ECR I‑1577, paragraph 43, and Bockemühl, paragraph 38).

I ‑ 3492

40It is also settled case‑law that the right to deduct must be exercised immediately in respect of all the taxes charged on transactions relating to inputs (see, in particu‑ lar, Case 50/87 Commission v France [1988] ECR 4797, paragraphs 15 to 17; Case C‑37/95 Ghent Coal Terminal [1998] ECR I‑1, paragraph 15; Gabalfrisa and Others, paragraph 43; and Bockemühl, paragraph 38).

41As it is clear from the wording of Article 18(2) of the Sixth Directive, the right to deduct must be exercised in principle ‘during the same period’ as that in which it arose.

42A taxable person may nevertheless be authorised to make a deduction, pursuant to Article 18(3) of the Sixth Directive, even if he did not exercise his right during the period in which the right arose. However, in that case, the right to deduct is coupled with certain conditions and procedures determined by the Member States.

43It follows that the Member States may require the right to deduct to be exercised either during the period in which it arose or over a longer period, subject to compli‑ ance with certain conditions and procedures determined by their national legislation.

44Furthermore, the possibility of exercising the right to deduct without any temporal limit would be contrary to the principle of legal certainty, which requires the tax position of the taxable person, having regard to his rights and obligations vis‑à‑vis the tax authority, not to be open to challenge indefinitely.

45Consequently, the argument that the right to deduct may not be coupled with any limitation period cannot be accepted.

I ‑ 3493

46It must be added that a limitation period the expiry of which has the effect of penal‑ ising a taxable person who has not been sufficiently diligent and has failed to claim deduction of input tax by making him forfeit his right to deduct cannot be regarded as incompatible with the regime established by the Sixth Directive, in so far as, first, that limitation period applies in the same way to analogous rights in tax matters founded on domestic law and to those founded on Community law (principle of equivalence) and, second, that it does not render virtually impossible or excessively difficult the exercise of the right to deduct (principle of effectiveness) (see, Case C‑327/00 Santex [2003] ECR I‑1877, paragraph 55, and Case C‑241/06 Lämmerzahl [2007] ECR I‑8415, paragraph 52).

47As regards the principle of equivalence, it does not appear from the file, nor has it been argued before the Court, that the limitation period provided for in Article 19(1) of the DPR No 633/72 does not comply with that principle.

48With respect to the principle of effectiveness, it should be pointed out that a two‑ year time‑limit, such as that at issue in the main proceedings, cannot, in itself, render the exercise of the right to deduct virtually impossible or excessively difficult, since Article 18(2) of the Sixth Directive allows Member States to require that the taxable person exercise his right to deduct during the same period as that in which it arose.

49It is also appropriate to examine whether that conclusion is not invalidated by the fact that, under the national legislation, the tax authority has a longer period in which to demand recovery of the VAT due than that accorded to taxable persons to claim deduction of VAT.

50In that regard, it should be pointed out that the tax authority does not have the infor‑ mation necessary to determine the amount of the tax chargeable and the deductions

I ‑ 3494 to be made until it receives the taxable person’s tax return. In the case of an inaccu‑ rate return, or where it turns out to be incomplete, it is therefore only from that time that the authorities can reassess the tax return and, where necessary, recover unpaid tax (see, to that effect, Case C‑85/97 SFI [1998] ECR I‑7447, paragraph 32).

51Thus the position of the tax authority cannot be compared with that of a taxable person (SFI, paragraph 32). As the Court has already held, the fact that a limitation period begins to run as regards the tax authority at a date subsequent to the date from which the limitation period applicable to the right to deduct of a taxable person begins to run is not such as to infringe the principle of equality (see, to that effect, SFI, paragraph 33).

52Therefore, a limitation period, such as that the issue in the main proceedings does not render impossible or excessively difficult the exercise of the right to deduct merely because the tax authority has a longer period in which to recover unpaid VAT than that accorded to the taxable person for the exercise of such a right.

53That conclusion remains valid where, as in the cases in the main proceedings, the reverse charge procedure applies. Article 18(2) and (3) of the Sixth Directive is also applicable to such a procedure. That follows unequivocally from the wording of those provisions, both of which refer expressly to Article 18(1)(d), which covers the case of the reverse charge procedure.

54In light of the foregoing, the answer to the national court must be that Articles 17, 18(2) and (3) and 21(1)(b) of the Sixth Directive do not preclude national legislation which lays down a limitation period for the exercise of the right to deduct, such as

I ‑ 3495 that at issue in the main proceedings, provided that the principles of equivalence and effectiveness are respected. The principle of effectiveness is not infringed merely because the tax authority has a longer period in which to recover unpaid VAT than the period granted to taxable persons for the exercise of their right to deduct.

The reassessment and recovery practice

55It is appropriate to consider whether the Sixth Directive precludes a reassessment and recovery practice which penalises an accounting irregularity consisting, as described in paragraph 36 of this judgment, of the incorrect recording of the relevant transactions only in the register of purchases exempt from VAT, that irregularity also affecting the tax returns drawn up by Ecotrade, by denying the right to deduct where the reverse charge procedure applies.

56It must be pointed out in that regard that, in accordance with the reverse charge procedure introduced by Article 21(1)(b) of the Sixth Directive, Ecotrade, as the recipient of services supplied by taxable persons established abroad, was liable for VAT on the transactions effected, that is to say the input tax, although it could, in principle, deduct exactly the same amount of tax so that no tax was due to the Exchequer.

57However, where the reverse charge procedure is applicable, as in the cases in the main proceedings, Article 18(1)(d) of the Sixth Directive authorises the Member States to establish the formalities with which the taxable person must comply in order to be able to exercise his right to deduct.

I ‑ 3496

58It follows from the application of such a formality, introduced into Italian law by Article 47(1) of Decree‑Law No 331/93, that Ecotrade should have invoiced itself for the relevant transactions and recorded that invoice separately, together with the invoice issued by the supplier of the relevant services, in the register of invoices issued and in the register of purchases, so that it would have had a VAT credit corres‑ ponding precisely to the tax due.

59Furthermore, according to Article 22(2) and (4) of the Sixth Directive, every taxable person is to keep accounts in sufficient detail for VAT to be applied and inspected by the tax authority and to submit a return which must set out all the information needed to calculate the tax that has become chargeable and the deductions to be made. In order to ensure that every taxable person complies with those obligations, Article 22(7) authorises Member States to take the necessary measures for that purpose, including in the case of the reverse charge procedure.

60The cases in the main proceedings concern the fact that Ecotrade failed to comply with its obligations arising, first, from the formalities laid down by the national legis‑ lation pursuant to Article 18(1)(d) of the Sixth Directive, and, second, its obligations relating to accounts and tax returns under Article 22(2) and (4) respectively (‘failure to comply with accounting obligations’).

61It is therefore appropriate to consider whether such a failure may validly be penalised by denying the right to deduct in the case of a reverse charge procedure.

62As far as concerns the obligations arising from Article 18(1)(d) of the Sixth Directive, although it is true that that provision allows Member States to lay down the formal‑

I ‑ 3497 ities relating to the exercise of the right to deduct in the case of the reverse charge procedure, a failure to comply with those formalities by the taxable person cannot deprive him of his right to deduct.

63Since the reverse charge procedure was indisputably applicable to the cases in the main proceedings, the principle of fiscal neutrality requires deduction of input tax to be allowed if the substantive requirements are satisfied, even if the taxable person has failed to comply with some of the formal requirements (see, by way of analogy, Case C‑146/05 Collée [2007] ECR I‑7861, paragraph 31).

64Therefore, where the tax authority has the information necessary to establish that the taxable person is, as the recipient of the supply of services in question, liable to VAT, it cannot, in relation to the right of that taxable person to deduct that tax, impose additional conditions which may have the effect of rendering that right inef‑ fective for practical purposes (see Bockemühl, paragraph 51).

65The same is true of Article 22(7) and (8) of the Sixth Directive, pursuant to which the Member States are to take the necessary measures to ensure that taxable persons comply with their obligations relating to declaration and payment or impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion.

66Although those provisions allow Member States to take certain measures, they must not however go further than is necessary to attain the objectives mentioned in the preceding paragraph. Such measures may not therefore be used in such a way that they would have the effect of systematically undermining the right to deduct VAT, which is a fundamental principle of the common system of VAT established by the

I ‑ 3498 relevant Community legislation (see Joined Cases C‑286/94, C‑340/95, C‑401/95 and C‑47/96 Molenheide and Others [1997] ECR I‑7281, paragraph 47, and Gabalfrisa and Others, paragraph 52).

67A reassessment and recovery practice, such as that at issue in the main proceedings, which penalises non‑compliance on the part of the taxable person with the obliga‑ tions relating to accounts and tax returns by a denial of the right to deduct, clearly goes further than is necessary to attain the objective of ensuring the correct applica‑ tion of such obligations within the meaning of Article 22(7) of the Sixth Directive, since Community law does not prevent Member States from imposing, where neces‑ sary, a fine or a financial penalty proportionate to the seriousness of the offence in order to sanction a failure to comply with those obligations.

68That practice also goes further than is necessary for the correct collection of the tax and for the prevention of evasion within the meaning of Article 22(8) of the Sixth Directive, since it may even lead to the loss of the right to deduct if the reassess‑ ment of the tax return by the tax authorities is made after the expiry of the limita‑ tion period available to the taxable person in which to make the deduction (see, by analogy, Gabalfrisa and Others, paragraphs 53 and 54).

69Nor can such a reassessment and recovery practice be justified under Article 17(6) and (7) of the Sixth Directive. Those two provisions are not applicable to a situation such as that at issue in the cases in the main proceedings, since they govern the exist‑ ence of the right to deduct itself and not the procedure for exercising it. Moreover, Article 17(6) applies only to expenditure which is not strictly business expenditure, such as luxuries, amusements or entertainment, whereas it is common ground that no such expenditure is involved in the cases in the main proceedings. As to the possi‑ bility open to the Member States under Article 17(7), it need merely be pointed out that they cannot avail themselves of it unless they have first used the consultation

I ‑ 3499 procedure provided for in Article 29 (see, to that effect, Case C‑409/99 Metropol and Stadler [2002] ECR I‑81, paragraphs 61 to 63, and Case C‑228/05 Stradasfalti [2006] ECR I‑8391, paragraph 29), which, according to the file, is not the case in the Italian Republic.

70Furthermore, it is not apparent from the orders for reference, nor indeed was it alleged before the Court, that Ecotrade’s failure to comply with its accounting obliga‑ tions was the result of bad faith or evasion.

71In any event, the good faith of a taxable person is relevant for the answer to be given to the national court only in so far as there is, on account of the conduct of that taxable person, a risk of a loss of tax revenues for the Member State concerned (see, to that effect, Collée, paragraphs 35 and 36). However, a failure to comply with accounting obligations, such as that at issue in the main proceedings, cannot be regarded as giving rise to a risk of loss of tax revenues, since, as stated in paragraph 56 of this judgment, in the context of the application of the reverse charge procedure, no tax is due in principle to the Exchequer. For those reasons, such a failure also cannot be treated as a transaction designed to evade tax or as a misuse of Community rules, since it was not intended to obtain a tax advantage to which there was no entitlement (see, to that effect, Collée, paragraph 39).

72Therefore the answer to be given to the national court must be that Articles 18(1)(d) and 22 of the Sixth Directive do preclude a reassessment and recovery practice which penalises a failure to comply, first, with obligations arising from formalities laid down in national legislation pursuant to Article 18(1)(d) and, second, with the obligations

I ‑ 3500 relating to accounts and tax returns under Article 22(2) and (4) respectively, such as that at issue in the main proceedings, by denying the right to deduct in the case of a reverse charge procedure.

73Having regard to the answer given in paragraph 54 of this judgment, there is no need to give a ruling on the Cypriot Government’s proposal to limit the temporal effects of this judgment.

Costs

74Since these proceedings are, for the parties to the main proceedings, a step in the action pending before the national court, the decision on costs is a matter for that court. Costs incurred in submitting observations to the Court, other than the costs of those parties, are not recoverable.

Operative part

On those grounds, the Court (Third Chamber) hereby rules:

1. Articles 17, 18(2) and (3) and 21(1)(b) of Sixth Council Directive 77/388/ EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment, as amended by Council Directive 2000/17/EC of 30 March 2000, do not preclude national legislation which lays down a

I ‑ 3501 limitation period for the exercise of the right to deduct, such as that at issue in the main proceedings, provided that the principles of equivalence and effectiveness are respected. The principle of effectiveness is not infringed merely because the tax authority has a longer period in which to recover unpaid value added tax than the period granted to taxable persons for the exercise of their right to deduct.

2. However, Articles 18(1)(d) and 22 of Sixth Directive 77/388, as amended by Directive 2000/17, do preclude a practice whereby tax returns are reassessed and value added tax recovered which penalises a failure to comply, first, with obligations arising from formalities laid down in national legislation pursuant to Article 18(1)(d), and, second, with the obligations relating to accounts and tax returns under Article 22(2) and (4) respectively, such as that in the main proceedings, by denying the right to deduct in the case of a reverse charge procedure.

[Signatures]

I ‑ 3502

Opinion of the Advocate-General

1A company established in Italy received shipping services from operators established elsewhere, who did not charge VAT on their invoices. It mistakenly believed those services to be exempt, and did not include them in its VAT accounts. It should in fact, under the ‘reverse charge’ mechanism, have declared itself liable for input VAT on the supplies, which it should then have deducted from its output tax. That would have involved two accounting entries, cancelling each other out, so that no payment would have been due to the tax authority.

2It none the less achieved the same result by not declaring or deducting any input tax but paying output tax in full.

3Discovering the error, the tax authority seeks to recover the undeclared input tax, on the basis of its right under national law to reassess VAT returns made in the four preceding years, but refuses to allow any deduction which had not been claimed in the return for the second year following that in which the right to deduct arose, again on the basis of a limitation period under national law.

4The question raised in the present references for a preliminary ruling, from the Commissione Tributaria Provinciale (Provincial Tax Court, Genoa) is therefore whether the situation arising out of that discrepancy between the two periods, leading to VAT being claimed by the tax authority which would not have been due if the procedures had been properly followed, is compatible with Community VAT law.

Relevant Community legislation

5Community VAT law is now governed by Council Directive 2006/112/EEC, (2) which, with effect from 1 January 2007, repealed and replaced the existing legislation, with the aim of presenting all the applicable provisions clearly and rationally in a recast structure and wording without, in principle, bringing about material changes. (3)

6The present case concerns the years 2000 and 2001, when the main provisions were contained in the First and Sixth Directives. (4) In what follows, I shall refer to the provisions of those directives and, for the sake of readability, I shall do so in the present tense even though they are no longer in force. Their substance and, to a large extent, their wording are unchanged in Directive 2006/112, and for reference purposes I shall indicate also the equivalent provisions of the latter.

7The fundamental features of the common VAT system are set out in Article 2 of the First Directive: (5)

‘The principle of the common system of value added tax entails the application to goods and services of a general tax on consumption exactly proportional to the price of the goods and services, whatever the number of transactions which take place in the production and distribution process before the stage at which the tax is charged.

On each transaction, value added tax, calculated on the price of the goods or services at the rate applicable to such goods or services, shall be chargeable after deduction of the amount of value added tax borne directly by the various cost components.

The common system of value added tax shall be applied up to and including the retail trade stage.

…’

8The deduction mechanism is regulated, for transactions internal to a Member State, by Article 17(1) and (2)(a) of the Sixth Directive: (6)

‘1. The right to deduct shall arise at the time when the deductible tax becomes chargeable.

2. In so far as the goods and services are used for the purposes of his taxable transactions, the taxable person shall be entitled to deduct from the tax which he is liable to pay:

(a) value added tax due or paid within the territory of the country in respect of goods or services supplied or to be supplied to him by another taxable person;

…’

9Thus, taxable persons at any intermediate stage in a chain of supply are normally charged VAT (input tax) by their suppliers and charge VAT (output tax) to their customers. They then pay to the tax authority the amount of that output tax, after deducting the amount of their relevant input tax.

10However, that is not always the case.

11First, Article 17(6) and (7) of the Sixth Directive provide for certain exceptions to the right to deduct. Paragraph 6 provides that (while VAT is in no circumstances to be deductible on expenditure which is not strictly business expenditure, such as that on luxuries, amusements or entertainment), until the Council has decided what expenditure is not to be eligible for deduction, Member States may retain all the exclusions provided for under their national laws when the Directive came into force. Paragraph 7 allows Member States, for cyclical economic reasons and subject to a consultation procedure, to exclude all or some capital goods or other goods totally or partly from the system of deductions, or instead to tax the goods manufactured by the taxable person himself or which he has purchased in the country or imported, in such a way that the tax does not exceed the VAT which would have been charged on the acquisition of similar goods.

12Second, some transactions are exempted from VAT, in which case there is nothing which the customer can deduct even if he uses the supplies for the purposes of his taxable output transactions.

13Among such exempted transactions are the chartering and hiring of vessels used for navigation on the high seas, for the purpose of commercial activities. (7)

14Third, for certain categories of supply, it is not the supplier but the customer who is liable for VAT. In such cases, the supplier deducts input tax as appropriate, but charges no output tax to the customer. The customer must himself account for the VAT on the transaction but, in so far as the supply is used for his own taxable outputs, the amount becomes immediately deductible pursuant to Article 17(1) and (2).

15Thus, under Article 21(1)(b) of the Sixth Directive, (8) ‘persons who are identified for value added tax purposes within the territory of the country to whom services covered by Article 28b(C) … are supplied, if the services are carried out by a taxable person established abroad’, are liable to pay the tax on such services which they receive. (9) Article 28b(C) (10) covers ‘services in the intra-Community transport of goods’, which is defined in paragraph 1 as ‘transport where the place of departure and the place of arrival are situated within the territories of two different Member States’ and for which, under paragraph 2, the place of supply is the place of departure.

16As regards the exercise of the right to deduct in such circumstances, Article 18(1)(d) (11) provides: ‘To exercise his right of deduction, a taxable person must: … when he is required to pay the tax as a customer or purchaser where Article 21(1) applies, comply with the formalities laid down by each Member State …’

17Under Article 18(2) and (3): (12)

‘2. The taxable person shall effect the deduction by subtracting from the total amount of value added tax due for a given tax period the total amount of the tax in respect of which, during the same period, the right to deduct has arisen and can be exercised under the provisions of paragraph 1.

…

3. Member States shall determine the conditions and procedures whereby a taxable person may be authorised to make a deduction which he has not made in accordance with the provisions of paragraphs 1 and 2.’

18Article 22 of the Sixth Directive (13) lays down a wide-ranging series of obligations on persons liable for payment of VAT, of which however only the following appear potentially relevant to the present case:

‘2. (a) Every taxable person shall keep accounts in sufficient detail for value added tax to be applied and inspected by the tax authority.

…

4. (a) Every taxable person shall submit a return by a deadline to be determined by Member States. That deadline may not be more than two months later than the end of each tax period. The tax period shall be fixed by each Member State at one month, two months or a quarter. Member States may, however, set different periods provided that they do not exceed one year.

(b) The return shall set out all the information needed to calculate the tax that has become chargeable and the deductions to be made including, where appropriate, and in so far as it seems necessary for the establishment of the basis of assessment, the total value of the transactions relative to such tax and deductions and the value of any exempt transactions.

…

7. Member States shall take the measures necessary to ensure that those persons who, in accordance with Article 21(1) … (b), are considered to be liable to pay the tax instead of a taxable person established abroad … comply with the above obligations relating to declaration and payment.

8. Member States may impose other obligations which they deem necessary for the correct collection of the tax and for the prevention of evasion, subject to the requirement of equal treatment for domestic transactions and transactions carried out between Member States by taxable persons and provided that such obligations do not, in trade between Member States, give rise to formalities connected with the crossing of frontiers.’

Relevant national legislation

19The Community VAT directives are currently implemented in Italian law essentially in Decreto del Presidente della Repubblica (Presidential Decree) No 633 of 26 October 1972 (‘DPR 633/72’), as amended.

20The first sentence of Article 17(3) of that decree reads: ‘The obligations relating to … the supply of services in the territory of the State by non-resident persons … shall be met by the purchasers resident in the territory of the State who … use the services in the pursuit of business, artistic activities or professions.’

21Article 19(1) of the same decree provides, inter alia: ‘The right to deduct the tax on the goods and services purchased or imported shall arise at the time when the tax becomes chargeable and may be exercised, at the latest, in the tax return for the second year after the year in which the right to deduct arose and subject to the conditions applying at the time when the right arose.’

22Article 23(1) and (2) require taxable persons to record their invoices in an appropriate register within 15 days, indicating the serial number, the date of issue, the taxable amount and the amount of tax, shown separately for each rate, and, in cases to which Article 17(3) refers, the supplier’s name.

23Article 25(1) requires taxable persons to number invoices relating to goods and services purchased or imported, including those issued in accordance with Article 17(3), sequentially and to record them in the appropriate register before making the periodic payment or the annual return in which the right to deduction of the related tax is exercised.

24Under Article 54(5): ‘Where [there is] evidence of amounts that are wholly or partially undeclared or deductions that are wholly or partially ineligible, the value added tax office may confine itself to assessing the tax, or the additional tax payable, or the reduced credit due, on the basis of the aforementioned evidence, without prejudice to further assessment within the time-limits laid down in Article 57.’

25Finally, the first sentence of Article 57(1) reads: ‘The notices of amendment and assessment provided for in [Article 54] shall be served, on pain of loss of the related right, by 31 December of the fourth year after the year in which the tax return was submitted.’

Main proceedings and questions referred

26Ecotrade SpA (‘Ecotrade’) is an Italian company engaged in international trade in granulated blast furnace slag and other ingredients for the manufacture of cement. In 2000 and 2001, (14) it made a number of shipments of such materials by sea from Italy to other Member States, using the services of shipping companies not established in Italy. Those companies invoiced Ecotrade for their services, which they described either as ‘chartering of a vessel’ or as ‘shipping’. None of the invoices indicated any VAT, and some specifically stated that the supply of services was exempt.

27Ecotrade consequently took all those services to constitute chartering or hiring of seagoing vessels, exempt from VAT by virtue of the national provisions implementing Article 15(5) of the Sixth Directive. (15) It therefore entered them normally as purchases in its accounts, but did not include them in its VAT records or returns.

28Following an inspection, the tax authority decided that the shipping services were in fact services in the intra-Community transport of goods on which, pursuant to the national provisions implementing Articles 21(1)(b) and 28b(C) of the Sixth Directive, Ecotrade was itself liable for VAT. With some minor reservations, Ecotrade accepts that reclassification. There is no suggestion of fraud or bad faith on its part.

29Ecotrade should thus have declared VAT on the shipping services and entered it as input tax. It would have been liable to pay that tax but would at the same time have been able to deduct it from its output tax. Its overall tax liability would therefore not have been affected.

30In December 2004, pursuant to Articles 54(5) and 57(1) of DPR 633/72 and within the time-limit laid down by the latter provision, the tax authority claimed payment of the VAT concerned, amounting to the equivalent of approximately EUR 320 000 for the two tax years, apparently representing VAT at the standard rate of 20% on invoices to a value equivalent to approximately EUR 1 600 000. (16) It refused, however, to allow Ecotrade to deduct the same amounts, on the ground that the time-limit for doing so, under Article 19(1) of DPR 633/72, had expired. It further imposed on Ecotrade administrative fines amounting to slightly over EUR 360 000.

31Ecotrade has challenged that refusal and those fines before the referring court, which seeks a ruling on the following questions:

‘(1) Does a correct interpretation of Articles 17, 21(1) and 22 of Sixth Council Directive 77/388/EEC … preclude national legislation (in particular Article 19 of DPR 633/72 …) that makes the exercise of the right to deduct VAT, payable by a taxable person in the pursuit of his business activities, dependent on compliance with a (two-year) time-limit and penalises non-compliance with annulment of that right? That question is asked with reference, in particular, to cases where the liability to VAT on the purchase of the good or service stems from the application of the reverse charge procedure, which allows the authorities a longer period (of four years under Article 57 of DPR 633/72) in which to demand payment of the duty than the period allowed to the trader for deduction of the duty, on expiry of which the trader’s right to such deduction lapses.

(2) Does it follow from a correct interpretation of Article 18(1)(d) of Sixth Council Directive 77/388/EEC … that national legislation may not, in regulating the “formalities” referred to in that provision by means of the reverse charge procedure governed by the combined provisions of Articles 17(3), 23 and 25 of DPR 633/72, make (solely to the detriment of the taxpayer) the exercise of the right to deduct permitted by Article 17 of the Directive conditional upon compliance with a time-limit such as that laid down in Article 19 of DPR 633/72?’

32Written observations have been submitted by Ecotrade, the Italian and Cypriot Governments and the Commission, all of whom, apart from the Cypriot Government, were represented at the hearing.

Assessment

Preliminary remarks

33The order for reference might be interpreted broadly as raising first and foremost the general question whether a two-year time-limit on the exercise of the right to deduct is compatible with Community VAT law, and only secondarily whether that is so in the specific case where the reverse charge mechanism applies and the tax authority enjoys a longer period in which to recover tax not properly accounted for.

34However, I agree with the Italian Government and the Commission that it is unnecessary to focus too closely on the general question, which is not in itself central to the main proceedings. The essential issue is the compatibility with Community law of the result produced by the application of the Italian rules in circumstances such as those in which Ecotrade finds itself.

35The factors stressed by the national court as combining to produce that result are: (i) the ‘two-year’ time-limit (17) on the exercise of the right to deduct, (ii) the ‘four-year’ time-limit (18) on the tax authority’s right to recover and (iii) the reverse charge mechanism under which a taxable person’s liability to pay input tax is, normally, exactly counterbalanced by his right to deduct the same tax.

36However, and although the context of that mechanism is undoubtedly a key feature of this case, it is in my view at least as important to note that the result to which Ecotrade objects was triggered not by the mere combination of those three factors but by the reclassification of its input transactions from exempt to taxable.

37Finally, although the referring court formally poses two questions, directed at assessing the Italian rules against different provisions of the Sixth Directive, I find it more helpful to address the two together.

Possibility of a time-limit on the exercise of the right to deduct

38Nothing in any of the provisions cited by the national court in its questions – or indeed elsewhere in the Sixth Directive – imposes any specific time-limit on the exercise of the right to deduct or refers explicitly to the possibility, or otherwise, of imposing such a time-limit in national law.

39Of those provisions, at least one may none the less be seen as implicitly authorising the imposition of a time-limit: Article 18(1)(d) refers to formalities laid down by Member States for the exercise of the right to deduct. That a time-limit may be set seems, moreover, clear from the combined provisions of Article 18(2) and (3). The former indicates that the right to deduct is to be exercised in relation to amounts due for the same tax period as that in which the right arose, and the latter allows Member States to determine the conditions in which a taxable person may be authorised to deduct when he has not respected, inter alia, that condition. Taken together, they imply that it is open to a Member State to require that the right to deduct be exercised in respect of the tax period in question, (19) or to allow a longer period.

40I disagree, therefore, with Ecotrade’s contention that the right to deduct is so fundamental that no time-limit can ever be placed on its exercise. The right is indeed fundamental but it is also important, for reasons of legal (and financial) security, that settled fiscal situations should not be liable to be called in question indefinitely.

41If the Sixth Directive thus allows a Member State to require the right to deduct to be exercised in the tax period in which it arose, the question does not arise whether a longer period, such as the clear two years allowed by the Italian legislation, is unduly restrictive as a general rule.

42Suffice it to bear in mind that such a time-limit (which is in many ways comparable to that for bringing proceedings for the recovery of national charges levied in breach of Community law) should in any event comply with the principles of equivalence and effectiveness. (20) It should thus not be less favourable than those applicable to similar domestic situations (21) or render virtually impossible or excessively difficult the exercise of rights conferred by Community law. In the submissions to the Court in the present case, there has been no comparison with any time-limit applicable to similar domestic situations, nor has it been argued that a time-limit of two clear years renders in general – rather than in the specific circumstances – the exercise of the right to deduct virtually impossible or excessively difficult.

Possibility of reassessment by the tax authority after such a time-limit has expired

In general

43That tax authorities should have at their disposal a period within which to verify taxable persons’ VAT declarations and, where appropriate, reassess their liability, and that the period may be subject to some limit in the interests of legal certainty, seem unassailable propositions.

44Nor can it be objectionable that the period allowed to the tax authority for verification and reassessment should extend beyond that within which the taxable person is required to make a definitive statement of his liabilities and claims for deduction. Until such a statement has been submitted, it cannot be verified. (22)

45Where such verification reveals a liability to VAT which was not declared, clearly that liability may – and indeed should – be enforced, and the corresponding sum collected.

46Nor does the discovery of liability impinge on any existing right to deduct input tax which is not dependent on the liability. Whether the taxable person has or has not exercised such a right within any applicable national time-limit of the kind I have outlined is a matter quite separate from the reassessment of his liability for output tax.

In circumstances such as those of the present case

47However, that is not true where verification brings to light an undeclared liability to VAT which, if it had been correctly declared, would have entailed a concomitant right to deduct but, in the absence of such liability, no right to deduct could exist. In such cases, the failure to exercise the right to deduct is indissociable from the failure to declare the tax liability which the authority now seeks to enforce. (23)

48Where deduction and liability are thus two sides of the same coin, any reassessment by the tax authority must logically take both into account. To enforce the liability without allowing the concomitant right to deduct would, moreover, run completely counter to the principle of neutrality which is fundamental to the whole VAT system.

49As the Court has repeatedly stated, the rules governing deduction are meant to relieve the trader entirely of the burden of the VAT payable or paid in the course of all his economic activities. The system ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject in principle to VAT. (24)

50By contrast, application of the Italian rules in the way sought by the tax authority in the present case would replace the neutrality of taxation which had been achieved (albeit on an incorrect basis) by a significant burden of which the trader should in principle have been relieved – and would lead to a greater amount of tax being collected overall than should have been collected.

Possible justifications for recovering undeclared tax while refusing the exercise of a linked right to deduct

51The question arises whether there can none the less be any justification for overriding the fundamental requirement of neutrality on the basis of any Community provision. The national court refers in its questions to Articles 17, 18(1)(d), 21(1) and 22 of the Sixth Directive. (25) Of those, Articles 17(6) and (7), 18(1)(d) and 22(7) and (8) have been cited, at various stages in the proceedings, as capable of providing justification for applying the Italian rules in the manner sought by the tax authority.

52However, with regard to Article 17(6) and (7), as the Cypriot Government rightly notes, the issue in the present case is not one of exclusion of the tax in issue from the right to deduct but a limitation of the exercise of that right in certain circumstances. Such a limitation does not fall within the scope of Article 17(6) or (7), which concern the complete exclusion of certain types of input.

53Of the other provisions cited, Article 18(1)(d) authorises Member States to lay down formalities for the exercise of the right to deduct; Article 22(7) requires them to take measures to ensure that traders liable for input tax under the reverse charge mechanism comply with their obligations relating to declaration and payment; and Article 22(8) authorises them to impose other obligations for the correct collection of tax and prevention of evasion.

54The Italian and Cypriot Governments have referred to these as capable of justifying the application of the Italian rules in the way sought by the tax authority in the present case, particularly in so far as it is likely to encourage proper, timely and accurate declaration and to preclude fraud or evasion.

55I disagree. Whilst the provisions in question certainly authorise the imposition of formalities, and of penalties in the event of non-compliance with those formalities (it will be remembered that substantial fines were imposed on Ecotrade in the present case, although their compatibility with Community law is not raised by the referring court), they do not justify a distortion of the VAT system itself.

The judgment in Collée

56In that connection, it may be useful to recall the Court’s recent judgment in Collée . (26) Because it displays several parallels with the present case, I shall summarise it at some length.

57A car dealer was entitled to commission only on sales to customers in his area. In order to claim commission on sales to a customer in another Member State, he engaged an intermediary to purchase and resell the vehicles for form’s sake. He invoiced VAT to that intermediary, who sought to deduct it. The tax authority refused the deduction, because the transaction was a sham. The dealer then adjusted his records to show the true situation. The tax authority increased his taxable turnover by the sale price of the cars, but refused to allow exemption (with deduction of input tax, as would normally have been the case for an intra-Community supply), on the ground that his records had not been updated regularly and immediately after the relevant transaction, in accordance with rules flowing from national case-law. (27)

58The Court noted that the exemption of intra-Community supplies in the Member State of dispatch, with (reverse charge) taxation of the corresponding intra-Community acquisition in the Member State of arrival, avoids double taxation and infringement of fiscal neutrality. (28)

59Article 22 of the Sixth Directive imposes formal obligations relating to accounts, invoicing, returns and recapitulative statements, and Article 22(8) allows Member States to impose other obligations deemed necessa ry for the correct levying and collection of the tax and to prevent evasion. However, such measures must not go further than necessary to attain such objectives, or undermine VAT neutrality. (29)

60A national measure which makes the right of exemption subject to compliance with formal obligations, without taking account of whether the substantive requirements have been satisfied, goes further than is necessary to ensure the correct levying and collection of the tax. (30)

61Transactions should be taxed taking into account their objective characteristics. If a supply meets the conditions laid down for exemption, no VAT is payable. (31)

62In the main case, since there was no dispute that an intra-Community supply was made, fiscal neutrality required that exemption be allowed if the substantive requirements were satisfied, even if the taxable person had failed to comply with some of the formal requirements. The only exception would be if non-compliance with such formal requirements would effectively prevent the production of conclusive evidence that the substantive requirements have been satisfied. (32)

63It is important to allow amendments to the categorisation of an intra-Community supply made after the transaction has taken place to be reflected in taxable persons’ accounts. The intra-Community nature of a supply must therefore be recognised if the accounts are subsequently adjusted, provided that the objective criteria are met. (33)

64Whether the fact that the taxable person initially concealed the intra-Community supply is relevant, and whether the exemption may be conditional upon his good faith, depends on whether the Member State concerned is at risk of losing any tax revenue. To ensure VAT neutrality, Member States must provide for correcting any tax improperly invoiced where the person who issued the invoice shows that he acted in good faith. However, where that person has in sufficient time wholly eliminated the risk of any loss in tax revenues, the principle of neutrality requires that VAT which has been improperly invoiced can be adjusted without adjustment being conditional on his having acted in good faith. The same applies to an account adjustment made to obtain exemption in respect of an intra-Community supply. (34)

65Non-collection of VAT on an intra-Community supply which initially was incorrectly described as a supply within the territory of the country – giving rise, in principle, to the collection of VAT – cannot be regarded as a loss in tax revenue. The revenue belongs to the Member State of final consumption. (35)

66Finally, Community law does not prevent Member States, in certain circumstances, from treating concealment of the existence of an intra-Community transaction as an attempt to evade VAT and from imposing penalties prescribed by domestic law. However, such penalties should always be proportionate to the gravity of the abuse. (36)

Transposition to the present case

67It seems to me that the Court’s reasoning in Collée can be transposed very neatly to the present case. I would do so as follows.

68The reverse charge mechanism seeks to avoid double taxation and to ensure fiscal neutrality. Measures under Articles 18(1)(d) or 22(7) or (8) of the Sixth Directive must not go further than necessary to attain the objectives for which they are authorised, or undermine neutrality. A measure which subjects the right to deduct to compliance with formal obligations, regardless of whether the substantive requirements have been satisfied, goes further than is necessary. Transactions should be taxed on the basis of their objective characteristics. If a transaction meets the conditions for deduction, VAT is deductible. Where it is clear that liability under the reverse charge mechanism gives rise to a right to deduct, fiscal neutrality requires that deduction be allowed if the substantive requirements were satisfied, even if the taxable person failed to comply with some of the formal requirements. It is important to allow the categorisation of a supply to be amended in taxable persons’ accounts. Its true nature must therefore be recognised if the accounts are subsequently adjusted, provided that the objective criteria are met. Where there is no risk of any loss in tax revenue, the principle of neutrality requires that VAT returns which have been erroneously completed can be adjusted. There is no such risk where liability and the right to deduct cancel each other out. Appropriate and proportionate penalties may none the less be imposed for failure to declare transactions correctly.

Conclusion

Conclusion

69In the light of all the foregoing, I am of the opinion that the Court should answer the questions raised by the Commissione Tributaria Provinciale di Genova as follows:

(1) The provisions of the Community VAT directives do not preclude the imposition in national law of a limitation period for the exercise of a taxable person’s right to deduct input tax on goods and services which he uses for the purpose of his taxable transactions, provided that the period in question is not less favourable than those applicable to similar domestic situations and that it does not render the exercise of the right virtually impossible or excessively difficult.

(2) The provisions of the Community VAT directives do not preclude a tax authority from verifying taxable persons’ VAT returns, even after the expiry of any such limitation period imposed, and claiming tax due but not paid.

(3) However, in a situation where such verification reveals an undeclared liability to VAT which, had it been declared, would have entailed a concomitant right to deduct, the liability may not be enforced without taking account of the right to deduct.

(1) .

(2) – Directive of 28 November 2006 on the common system of value added tax (OJ 2006 L 347, p. 1).

(3) – See recital 3 in the preamble.

(4) – First Council Directive 67/227/EEC of 11 April 1967 on the harmonisation of legislation of Member States concerning turnover taxes (OJ, English Special Edition 1967 (I), p. 14); Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment (OJ 1977 L 145, p. 1, amended on numerous occasions).

(5) – Article 1(2) of Directive 2006/112.

(6) – At the material time, the text of Article 17(2) was in Article 28f. The equivalents of Article 17(1) and (2) are now contained in Articles 167 and 168(a) of Directive 2006/112.

(7) – Article 15(5), read in conjunction with Article 15(4)(a), of the Sixth Directive; Article 148(a) and (c) of Directive 2006/112.

(8) – In Article 28g at the material time; see Article 196 of Directive 2006/112.

(9) – This mechanism is commonly known as the ‘reverse charge’ procedure. Under other provisions of Article 21(1), it applies also to other types of supply of goods or services where the supplier is not established in the customer’s Member State (or the Member State in which the supply takes place), whether he is established within the Community or not.

(10) – See Articles 47 and 48 of Directive 2006/112.

(11) – In Article 28f(2); Article 178(f) of Directive 2006/112.

(12) – Articles 179 and 180 of Directive 2006/112.

(13) – In Article 28h at the material time; see Articles 213 to 271 of Directive 2006/112.

(14) – Case C-95/07 concerns tax year 2001, Case C-96/07 concerns 2000.

(15) – See point 13 above.

(16) – The figures given in the order for reference in Case C-95/07 appear to reflect the application of a VAT rate of slightly over 20%. No explanation is given, but the discrepancy does not appear relevant to the resolution of the problem.

(17) – More accurately, the limit is the submission of the declaration for the second year following that in which the right to deduct arose.

(18) – In fact, the end of the fourth year following that in which the declaration was made. Ecotrade stated at the hearing, without contradiction, that the period was regularly extended by temporary legislation to five, six or seven years.

(19) – Subject to the requirements of equivalence and effectiveness – see point 42 below.

(20) – Compare, for example, Case C-62/00 Marks & Spencer [2002] ECR I-6325, paragraph 34 et seq.

(21) – It seems to me that the Commission is misguided in arguing (if I have understood it correctly) that the principle of equivalence applies as between the respective periods available to the taxable person and to the tax authority.

(22) – Compare Case C-85/97 SFI [1998] ECR I-7447, paragraph 32.

(23) – In the present proceedings, Ecotrade finds itself in such a situation because of the reverse charge mechanism, but a similar situation could exist where a taxable person had classified his output supplies as exempt (when they were in fact taxable) and had therefore not been in a position to deduct any input tax on goods or services used for the purposes of those supplies.

(24) – See, most recently, Case C-435/05 Investrand [2007] ECR I-1315, paragraph 22.

(25) – See points 8, 11 and 15 to 18 above.

(26) – Case C-146/05 [2007] ECR I-0000.

(27) – See paragraphs 12 to 18 of the judgment.

(28) – Paragraphs 21 to 23 (citing Case C‑62/93 BP Supergas [1995] ECR I‑1883, paragraph 16, Joined Cases C‑354/03, C‑355/03 and C‑484/03 Optigen [2006] ECR I‑483, paragraph 54, Joined Cases C‑439/04 and C‑440/04 Kittel and Recolta Recycling [2006] ECR I‑6161, paragraph 49, and Case C‑184/05 Twoh International [2007] ECR I‑0000, paragraph 22).

(29) – Paragraphs 25 and 26 (citing Joined Cases C-110/98 to C-147/98 Gabalfrisa [2000] ECR I-1577, paragraph 52, Case C-395/02 Transport Service [2004] ECR I-1991, paragraph 29, Case C‑454/98 Schmeink & Cofreth [2000] ECR I‑6973, paragraph 59, and Case C‑255/02 Halifax [2006] ECR I‑1609, paragraph 92).

(30) – Paragraph 29.

(31) – Paragraph 30 (citing Optigen , paragraph 44, Kittel and Recolta Recycling , paragraph 41, and Transport Service , paragraphs 18 and 19).

(32) – Paragraph 31.

(33) – Paragraph 33.

(34) – Paragraphs 34 and 35 (citing Schmeink & Cofreth , paragraphs 60 and 63, and Joined Cases C‑78/02 to C‑80/02 Karageorgou [2003] ECR I‑13295, paragraph 50). The apparent discrepancy between the two statements concerning the need for good faith stems from the fact that in Schmeink & Cofreth the Court considered that the requirement of good faith which it had mentioned in Case C-342/87 Genius Holding [1989] ECR 4227 was not essential (see Schmeink & Cofreth , in particular at paragraphs 50 to 58 of the judgment).

(35) – Paragraph 37.

(36) – Paragraph 40 (citing Schmeink & Cofreth , paragraph 62).