OPINION OF ADVOCATE GENERAL

SZPUNAR

delivered on 11 September 2014 ( 1 )

Joined Cases C‑131/13, C‑163/13 and C‑164/13

Staatssecretaris van Financiën (C‑131/13)

v

Schoenimport ‘Italmoda’ Mariano Previti vof

and

Turbu.com BV (C‑163/13),

Turbu.com Mobile Phone’s BV (C‑164/13)

v

Staatssecretaris van Financiën

(Requests for a preliminary ruling from the Hoge Raad der Nederlanden (Netherlands))

‛VAT — Transitional arrangements for trade between Member States — Goods dispatched or transported within the European Union — Fraud carried out in the Member State of arrival — Fraud taken into account in the Member State of dispatch — Exemption’

Introduction

1. According to a recent study conducted for the European Commission, in 2011 the loss of revenues from value added tax (‘VAT’) in the Member States amounted to EUR 193 billion, representing 18% of the revenues due and 1.5% of gross domestic product (GDP). ( 2 ) Although there are many reasons for this loss, fraud is one of the main causes. It is not therefore surprising that the fight against VAT fraud is becoming a matter of particular concern for national administrative authorities and courts. For some time this problem has also been increasing in importance in the case-law of this Court.

2. The system of taxation of intra-Community trade is a particularly fertile ground for fraud, where the modus operandi is to use VAT mechanisms to obtain undue gains in the form of tax deductions, exemptions and refunds. Recently, too, several judgments delivered by this Court have addressed this problem. The present joined cases provide an opportunity to develop and supplement that case-law. The Hoge Raad der Nederlanden (Supreme Court of the Netherlands) asks about the extent of the powers and obligations of the Member States’ authorities and courts and tribunals in relation to this kind of fraud in the absence of explicit provisions concerning such powers and obligations in national law.

Legal framework

EU law

3. The right to deduct input tax is one of the primary mechanisms for the operation of VAT. At the time of the facts in the main proceedings, that right was established in Article 17 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, ( 3 ) as amended by Council Directive 95/7/EC of 10 April 1995 ( 4 ) (‘the Sixth Directive’), in the version resulting from Article 28f of that directive. Article 17(2)(a) and (d) and (3)(b) read as follows: ‘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) [VAT] 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; ... (d) [VAT] due pursuant to Article 28a(1)(a). 3. Member States shall also grant to every taxable person the right to the deduction or refund of the value added tax referred to in paragraph 2 in so far as the goods and services are used for the purposes of: ... (b) transactions which are exempt pursuant to Article ... 28c(A) ...’

4. The arrangements applicable to supplies of goods between taxable persons from different Member States are based on the principle of exemption in the Member State of supply (known as ‘intra-Community supply’), with retention of the right to deduct input tax, and taxation in the Member State of acquisition (known as ‘intra-Community acquisition’) at the rate in force in that State. This type of exemption is sometimes called ‘zero taxation’. It must be distinguished from ‘conventional’ exemption, which does not give rise to a right to deduct. The effect of this second type of exemption is to exclude the transaction from the field of application of the VAT system. That is not the case with exemption of intra-Community supplies, which merely transfers fiscal jurisdiction from the Member State of supply to the Member State of acquisition, whilst keeping the transaction within the VAT system. It is solely in this context that one can refer to a ‘right of exemption’. Furthermore, as intra-Community acquisition immediately gives rise to a right to deduct, the amount of tax due in respect of such acquisition is zero (reversal of VAT liability). It is only after a taxable output supply has been made that the purchaser will be liable to pay the tax charged in connection with that supply. These rules stem from, inter alia, Articles 28a, 28b and 28c of the Sixth Directive.

5. Thus, Article 28a of the Sixth Directive provides: ‘1. The following shall also be subject to value added tax: a) intra-Community acquisitions of goods for consideration within the territory of the country by a taxable person acting as such or by a non-taxable legal person where the vendor is a taxable person acting as such who is not eligible for the tax exemption provided for in Article 24 and who is not covered by the arrangements laid down in the second sentence of Article 8(1)(a) or in Article 28b(B)(1). ... 3. “Intra-Community acquisition of goods” shall mean acquisition of the right to dispose as owner of movable tangible property dispatched or transported to the person acquiring the goods by or on behalf of the vendor or the person acquiring the goods to a Member State other than that from which the goods are dispatched or transported. ...’

6. Under Article 28b(A) of that directive: ‘1. The place of the intra-Community acquisition of goods shall be deemed to be the place where the goods are at the time when dispatch or transport to the person acquiring them ends. 2. Without prejudice to paragraph 1, the place of the intra-Community acquisition of goods referred to in Article 28a(1)(a) shall, however, be deemed to be within the territory of the Member State which issued the [VAT] identification number under which the person acquiring the goods made the acquisition, unless the person acquiring the goods establishes that that acquisition has been subject to tax in accordance with paragraph 1. If, however, the acquisition is subject to tax in accordance with paragraph 1 in the Member State of arrival of the dispatch or transport of the goods after having been subject to tax in accordance with the first subparagraph, the taxable amount shall be reduced accordingly in the Member State which issued the [VAT] identification number under which the person acquiring the goods made the acquisition. For the purposes of applying the first subparagraph, the intra-Community acquisition of goods shall be deemed to have been subject to tax in accordance with paragraph 1 when the following conditions have been met: — the acquirer establishes that he has effected this intra-Community acquisition for the needs of a subsequent supply effected in the Member State referred to in paragraph 1 and for which the consignee has been designated as the person liable for the tax due in accordance with Article 28c(E)(3), — the obligations for declaration set out in the last subparagraph of Article 22(6)(b) have been satisfied by the acquirer.’

7. The first subparagraph of Article 28c(A)(a) of that directive provides: ‘Without prejudice to other Community provisions and subject to conditions which they shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions provided for below and preventing any evasion, avoidance or abuse, Member States shall exempt: (a) supplies of goods, as defined in Article 5, dispatched or transported by or on behalf of the vendor or the person acquiring the goods out of the territory referred to in Article 3 but within the Community, effected for another taxable person or a non-taxable legal person acting as such in a Member State other than that of the departure of the dispatch or transport of the goods.’

Netherlands law

8. The abovementioned provisions of the Sixth Directive were transposed into Netherlands law in Articles 9, 15, 17b and 30 of the Law on Turnover Tax (Wet op de omzetbelasting) of 28 June 1968. ( 5 )

9. According to the referring court, Netherlands law does not include any express provision making the right to tax deduction, exemption or refund subject to the condition that the transaction is not connected with tax fraud of which the taxable person was, or should have been, aware.

The facts in the main proceedings, the questions referred for a preliminary ruling and the course of the procedure

Case C‑131/13

10. Schoenimport ‘Italmoda’ Mariano Previti vof (‘Italmoda’), a company governed by Netherlands law, trades in shoes. At the time of the facts in the main proceedings, that is to say, between 1999 and 2000, it also effected transactions relating to computer hardware. That hardware, which was acquired by Italmoda in the Netherlands and in Germany, was sold and supplied to customers subject to VAT in Italy. The goods originating in Germany were purchased by Italmoda under its Netherlands VAT identification number (acquisition subject to VAT in the State which issued the identification number for the purposes of Article 28b(A)(2) of the Sixth Directive) but transported directly from Germany to Italy.

11. With regard to the goods acquired in the Netherlands, Italmoda made all the necessary declarations and deducted input tax from its VAT returns. By contrast, for the goods originating in Germany, Italmoda did not declare either the intra-Community supply in that Member State or the intra-Community acquisition in the Netherlands, even though that transaction had been exempted in Germany. In Italy, none of these intra-Community acquisitions was declared by the purchasers and VAT was not paid. The Italian tax authorities collected the tax due and refused those purchasers the right to deduct.

12. As the Netherlands tax authorities took the view that Italmoda had knowingly participated in a fraud with a view to evading VAT in Italy, they refused it the right of exemption in respect of the intra-Community supplies intended for that Member State, the right to deduct input tax and the right to a refund of the tax paid in respect of the goods originating in Germany, and therefore issued three additional assessments to Italmoda. The action brought by Italmoda against those assessments was upheld at first instance by the Rechtbank te Haarlem (District Court, Haarlem), which ordered the tax authorities to take a fresh decision. However, Italmoda brought an appeal against that decision before the Gerechtshof te Amsterdam (Regional Court of Appeal, Amsterdam). The latter, in its judgment of 12 May 2011, set aside the decision of the Rechtbank te Haarlem and the additional tax assessments.

13. The Staatssecretaris van Financiën (State Secretary for Finance) lodged an appeal in cassation against that judgment with the referring court. In these circumstances, the Hoge Raad der Nederlanden has asked the following questions: ‘(1) Should the national authorities and courts, on the basis of the law of the European Union, refuse to apply the exemption pertaining to an intra-Community supply, the right to the deduction of VAT in respect of the purchase of goods which, after the purchase, were dispatched to another Member State, or the refund of VAT pursuant to the application of the second sentence of Article 28b(A)(2) of the Sixth Directive, when, on the basis of objective data, it has been established that there has been VAT evasion in respect of the goods concerned, and that the taxable person knew, or should have known, that it was participating therein, if national law does not make provision for refusal of the exemption, the deduction or the refund under those circumstances? (2) If Question 1 is answered in the affirmative, should the aforementioned exemption, deduction or refund also be refused if the VAT evasion occurred in another Member State (other than the Member State from which the goods were dispatched) and the taxable person was, or should have been, aware of the VAT evasion, while the taxable person in the Member State from which the goods were dispatched has met all the (formal) conditions which national statutory provisions impose on the exemption, the deduction or the refund, and it has always provided the tax authorities in that Member State with all the required information in respect of the goods, the dispatch and the persons acquiring the goods in the Member State of arrival of the goods? (3) If Question 1 is answered in the negative, what should be understood by “subject to” [tax] in (the final part of) the first sentence of Article 28b(A)(2) of the Sixth Directive: the declaration in the statutorily prescribed VAT returns of the VAT payable in respect of intra-Community acquisitions in the Member State of arrival, or — in the absence of such a declaration — also the measures adopted by the tax authorities of the Member State of arrival to regularise the absence of that declaration? When answering that question, is it significant whether the transaction concerned forms part of a chain of transactions aimed at VAT evasion in the country of arrival and the taxable person was aware, or should have been aware, of it?’

Case C‑163/13

14. Turbu.com BV (‘Turbu.com’), a company governed by Netherlands law, operates a wholesale business dealing in computer hardware, communications equipment and software. In the period between August and December 2001, Turbu.com made a number of intra-Community supplies of mobile phones, applying the envisaged exemption and deducting input tax. Following an investigation by the Fiscal Information and Investigation Service, in 2005 the managing director of Turbu.com was convicted of forgery and for submitting an incomplete and inaccurate tax return.

15. On the basis of that investigation, the tax authorities took the position that Turbu.com had wrongly applied the exemption to those supplies and accordingly sent it a notice of additional assessment. Following the proceedings brought by the company concerned, that assessment was confirmed at first instance by the Rechtbank te Breda (District Court, Breda) and subsequently on appeal by the Gerechtshof te ’s-Hertogenbosch (Regional Court of Appeal, ’s-Hertogenbosch) in a judgment of 25 February 2011.

16. Turbu.com lodged an appeal in cassation against that judgment with the referring court. In these circumstances, the Hoge Raad der Nederlanden has asked the following question: ‘Should the national authorities and judicial bodies, on the basis of the law of the European Union, refuse to apply the VAT exemption in respect of an intra-Community supply where it is established, on the basis of objective evidence, that there was evasion of VAT in respect of the goods concerned and that the taxable person knew, or should have known, that it was participating therein, even if national law does not make provision under those circumstances for refusing the exemption?’

Case C‑164/13

17. Turbu.com Mobile Phone’s BV (‘TMP’), a company governed by Netherlands law, trades in mobile phones. In July 2003, it made intra-Community supplies of mobile phones, applying the envisaged exemption and applying for a refund of the input tax paid in respect of the acquisition of those phones from undertakings established in the Netherlands. After the Netherlands tax authorities had identified several irregularities in the declarations made by TMP with regard to both the input transactions and those intra-Community supplies, they refused to grant the refund. That decision was annulled by the Rechtbank te Breda, the ruling of which was in turn set aside by the Gerechtshof te ’s-Hertogenbosch in a judgment of 25 February 2011.

18. TMP lodged an appeal in cassation against that judgment with the referring court. In these circumstances, the Hoge Raad der Nederlanden has asked the following question: ‘Should the national authorities and judicial bodies, on the basis of the law of the European Union, refuse the right to deduct where it is established, on the basis of objective evidence, that there was evasion of VAT in respect of the goods concerned and that the taxable person knew, or should have known, that it was participating therein, even if national law does not make provision under those circumstances for refusing the right to deduct?’

The procedure before the Court

19. The requests for a preliminary ruling were lodged at the Registry of the Court, respectively, on 18 March 2013 (C‑131/13) and on 2 April 2013 (C‑163/13 and C‑164/13). The three cases were joined for the purposes of the written and oral procedures and of the judgment by decision of the President of the Court of 25 April 2013. Written observations were submitted by Italmoda, Turbu.com and TMP, by the Netherlands and United Kingdom Governments, and by the Commission. Italmoda, Turbu.com, TMP, the Netherlands, Italian and United Kingdom Governments, and the Commission were represented at the hearing, which was held on 5 June 2014.

Assessment

Admissibility

The first question in Case C‑131/13

20. Italmoda calls into question the admissibility of the first question in Case C‑131/13 as it is, in its view, a matter for national law.

21. It is not disputed that the interpretation and application of national law are a matter for national courts and tribunals. However, the question asked by the referring court concerns the extent of the powers and obligations of the Member States’ authorities and courts and tribunals resulting from the provisions of EU law in respect of the deduction, exemption and refund of VAT. Italmoda’s claim is therefore unfounded.

The second question in Case C‑131/13

22. The Commission calls into question the admissibility of the second question in Case C‑131/13. In its view, that question is based on the assumption that the taxable person has duly complied with all of its obligations to provide information to the tax authorities in the Member State of supply, which is not the position in the main proceedings.

23. However, as I will show below, in the case of VAT fraud in connection with intra-Community supplies, the fact that the taxable person involved in that fraud duly complied with all of its obligations in the Member State of supply is not necessarily relevant to the assessment of its right of deduction, exemption or refund in respect of that tax. I therefore consider that the second question in Case C‑131/13 is admissible.

The requests for a preliminary ruling in Cases C‑163/13 and C‑164/13

24. According to the Commission, the requests for a preliminary ruling in Cases C‑163/13 and C‑164/13 are inadmissible because the matters of fact and of law in the main proceedings have not yet been determined and because the questions posed are hypothetical.

25. It is true that, according to settled case-law, questions on the interpretation of EU law referred by a national court in the factual and legislative context which that court is responsible for defining, and the accuracy of which is not a matter for the Court to determine, enjoy a presumption of relevance. ( 6 ) It is for the national court to decide at what stage in the proceedings it is appropriate to refer a question to the Court of Justice for a preliminary ruling. ( 7 ) The Court may refuse to rule on a question referred by a national court only where it is quite obvious that the interpretation of EU law that is sought bears no relation to the actual facts of the main action or its purpose, where the problem is hypothetical, or where the Court does not have before it the factual or legal material necessary to give a useful answer to the questions submitted to it. ( 8 )

26. I note in this regard that, according to the orders for reference in Cases C‑163/13 and C‑164/13, the referring court found that all the grounds of appeal were well founded, either because the facts alleged had not been established or on account of the insufficient statement of reasons in the judgment under appeal. In particular, in Case C‑163/13 it has not been established, according to the referring court, whether the intra-Community supply for which the exemption had been requested had actually taken place. The referring court also found that the ground of appeal by which Turbu.com contested the allegation that it was knowingly involved in VAT evasion was well founded. In Case C‑164/13, the very existence of fraud has not, according to the referring court, been established to the requisite legal standard and TMP’s participation in that fraud was not raised by the tax authorities at second instance.

27. At the hearing, the representative of Turbu.com and of TMP stated that the questions referred in these two cases were relevant because, if they were answered in the negative by the Court, the referring court would be able to annul the additional assessments without referring the cases back to the court of second instance. However, that does not appear to be the intention of the referring court. In these two cases, the grounds of appeal raised by the appellants in the main proceedings do not in any way concern the problem raised in the questions, namely the possible power of national courts or tribunals to refuse to grant taxable persons, respectively, the right of deduction or exemption. It is only ‘if, after the reference, it were to be established’ ( 9 ) (in the court of second instance) that there had been fraud and that the appellants in the main proceedings knew, or should have known, about it that the questions would become relevant.

28. First of all, I therefore consider that the questions in Cases C‑163/13 and C‑164/13 are hypothetical. Second, I note that, in the two sets of main proceedings, the facts are still to be established and remain in dispute. It should be pointed out that it is not a case of facts that merely illustrate the application of rules of law, but of facts such as the existence of fraud, the reality or otherwise of a supply or the appellant’s knowing involvement in that fraud. Such factual circumstances are crucial to the assessment of the power of the national bodies to refuse to grant taxable persons the different rights stemming from the common system of VAT. Consequently, it seems to me that, in those two cases, the Court does not have before it the factual material necessary to give a useful answer to the questions submitted to it.

29. It should be added in this regard that, in the complex mechanism of VAT, tax payment, deduction and exemption often do not correspond to real financial transactions, but to mere accounting records. However, undertakings do not have the funds to allow them to cover unexpected tax payments. A refusal to grant the right to deduct may therefore present the undertaking with a serious financial problem, which is liable even to lead to insolvency. It is therefore of the utmost importance that the tax authorities and the courts and tribunals should take such refusal decisions on the basis of conclusive arguments and evidence that the taxable person knowingly participated in fraud. The rights stemming from the VAT system cannot be refused on the basis of mere suspicions or presumptions, with the taxable person then being required to prove its good faith.

30. For these reasons, it appears to me that the Court should declare the requests for a preliminary ruling in Cases C‑163/13 and C‑164/13 to be inadmissible. From a practical point of view, as the first question in Case C‑131/13 encompasses the questions in those two cases, if it were to prove that the answer to those questions is useful to the referring court or, as is much more likely, to the court of second instance, it will be capable of being inferred easily from the answer given, in the same judgment, in Case C‑131/13.

Analysis of the questions in Case C‑131/13

‘Missing trader’ fraud

31. The VAT system is, it must be said, fairly complex. That complexity has its benefits — taxation of all goods and services, the complete neutrality of taxation for undertakings and the relative ease with which the tax authorities can collect taxes, as it is the taxable persons themselves who do the bulk of the work. However, the correct operation of this system requires good faith on the part of those involved. The other side of the coin is that the complexity of the system makes it easier to perpetrate fraud using its own mechanisms.

32. Of the types of fraud based on the VAT mechanisms, one of the most common is so-called ‘missing trader’ fraud. The way in which it works has been described many times, ( 10 ) but, with a view to a sound understanding of the present Opinion, I think that it would be useful to recall its main characteristics.

33. Fraud often originates in an intra-Community supply. The arrangements for the taxation of trade between Member States introduced in Title XVIa of the Sixth Directive are particularly conducive to fraud, as they make it possible to make a supply which is exempt, but which gives rise to a right to deduct, without completing the complex formalities relating to export for example. Trader 1 thus makes a supply from Member State A to Member State B. He does not owe anything to the tax authorities of State A because the intra-Community supply is exempt. By contrast, he has a right to deduct the input tax paid on those same goods. He can deduct that tax from the tax for which he will be liable in respect of other transactions, or he can apply for a refund.

34. In Member State B, trader 2 makes an intra-Community acquisition. This is taxed at the rate in force in State B, but that tax is immediately deductible. In practice, in the case of fraud, this acquisition will not even be declared. Trader 2 resells the same goods to a trader 3 in the same Member State. As that transaction is taxed, trader 2 charges trader 3 the price plus VAT, and then, contrary to what he should do, does not pay that tax to the tax authorities, but pockets it and disappears. He is therefore the missing trader. Normally, the goods circulate further between several traders in order better to conceal the fraud from the tax authorities, and are then sold on the black market without VAT or legally, but at a knock-down price. The goods may also be the object of another intra-Community supply or be exported to a third country. This latter resale must allow the organisers of the fraud ultimately to avoid paying any VAT or to pay a very small amount. The same goods may also return to trader 1 who will reintroduce them into the circuit. This is known as ‘carousel fraud’.

35. This type of fraud can affect various categories of goods. Nevertheless, goods such as computer components or mobile phones are preferred by fraudsters, as they have a high unit value and are easy to transport.

36. The difficulty with preventing and combatting this type of fraud lies in the fact that all the transactions in the circuit are lawful and performed in accordance with tax obligations. Moreover, some traders in the supply chain may not even be aware that they are participating in a fraud and may be acting in good faith. It is only the missing trader who commits fraud per se by failing to pay the tax due to the tax authorities. In most cases, however, that trader either operates behind the VAT registration number of another undertaking, which is unaware of him, or takes the form of a company incorporated in the name of a ‘straw man’, generally someone from a disadvantaged background who has agreed to his identity being used without considering the implications of his actions. After the fraud has been committed, its organisers disappear and the tax authorities are confronted with someone who does not have any assets and is incapable of assuming any financial liability whatsoever.

37. This type of fraud should not be seen as a ‘normal’ supply chain which includes a fraudster who simply fails to pay the tax due to the tax authorities. Even though, in some cases, normal undertakings are used as links in the supply chain, of their own free will or without their knowledge, the whole chain is an activity organised solely in order to commit tax fraud. The tax authorities are not the only victims of the process. As the commercial transactions are carried out solely in order to commit fraud and VAT is evaded, the profit made by the fraudsters does not come from the profit margin, but from the fraud itself. They can therefore afford to have prices well below market prices, which is detrimental to honest economic operators. In extreme cases, lawful economic activity on a given market may become impossible because of the lack of profitability resulting from the knock-down prices made possible by the fraud. In addition, tax fraud often goes hand in hand with other wrongdoing, such as counterfeiting.

38. According to the Netherlands authorities, the transactions at issue in the main proceedings here are part of a missing trader fraud. The questions referred for a preliminary ruling should therefore be analysed in the light of the characteristics of this type of fraud, which are recalled above.

The first question

39. By its first question, the referring court is essentially seeking to ascertain whether a taxable person which knew, or should have known, that it was participating in fraud may be refused the right to VAT deduction, exemption and refund pertaining to an intra-Community supply, notwithstanding the absence of specific provisions to that effect in national law. Even though the legislation and the state of the case-law concerning each of the rights in question (deduction, exemption, refund) are different, it is possible and even desirable, in my view, to give a single answer to this question. I will begin with a brief overview of the relevant case-law of the Court.

– The case-law on the rights of taxable persons in the case of fraud

40. The proper functioning of the VAT system calls for a just and fair delimitation between, on the one hand, the principles of neutrality and territoriality of tax, with which the rights of deduction, exemption and, where appropriate, refund must permit observance, and, on the other, the fight against tax fraud. Thus, with regard to the right to deduct, the Court has consistently held that that right is an integral part of the VAT scheme and in principle may not be limited. ( 11 ) With respect to the right of exemption of intra-Community supplies, the Court has ruled that that right enables double taxation and, therefore, infringement of the principle of fiscal neutrality inherent in the common system of VAT to be avoided. ( 12 ) The case-law concerning refunds is less developed but it has been held, for example, with regard to the refund of input tax which could not be charged on the tax due, that, while the Member States have a certain freedom of manoeuvre in determining the conditions for refunds, those conditions cannot undermine the principle of neutrality of the VAT system by making the taxable person bear the burden of the VAT in whole or in part. ( 13 ) As any refund of tax not due contributes to respect for the principle of neutrality, that rule can have general application.

41. At the same time, the Court has repeatedly held that the prevention of tax evasion, avoidance and abuse is an objective recognised and encouraged by the Sixth Directive. ( 14 ) The Court concluded that the principle derived from case-law that Community law cannot be relied on for abusive or fraudulent ends also applies to the sphere of VAT. ( 15 )

42. It follows that, in the event of abuse or fraud, the taxable person may not rely on his right to deduct input tax. ( 16 ) In the specific case of a ‘carousel’ fraud connected with a missing trader fraud, that principle has been extended to all taxable persons who, even if they did not perpetrate fraud themselves, knew, or should have known, that they were participating in VAT fraud. According to the Court, such taxable persons must be regarded, for the purposes of the application of the Sixth Directive, as participants in that fraud, irrespective of whether or not they profited from it. ( 17 ) It is therefore for the national courts to refuse such taxable persons the right of deduction. ( 18 ) Such an interpretation, by making it more difficult to carry out fraudulent transactions, is apt to prevent them. ( 19 ) This case-law has recently been confirmed. ( 20 )

43. In addition, the Court has ruled that the case-law concerning the right to deduct was applicable by way of analogy to cases concerning the right of exemption for intra-Community supplies. In order for that right to be granted, the supplier may therefore be required to satisfy himself that the transaction which he is effecting does not result in his participation in tax evasion. ( 21 )

44. The decisive step in the development of this line of case-law was taken in a judgment delivered by the Grand Chamber in 2010. ( 22 ) Even though the fraud at issue in that case was not a typical missing trader fraud, the conclusions reached by the Court are universally applicable as regards the right of exemption for intra-Community supplies in the event of fraud. The central point of law in that case was expressed, very rightly in my view, by Advocate General Cruz Villalón in these terms: ‘... the issue to be determined is whether good faith is an essential element for entitlement to the exemption for intra-Community supplies’. ( 23 ) In his Opinion, following a detailed analysis of the relevant case-law, Advocate General Cruz Villalón answered that question in the negative, invoking the principles of territoriality, neutrality and proportionality. ( 24 ) However, that approach was not taken by the Court. In its judgment, it ruled that EU law does not prevent Member States from refusing to grant the exemption in the case of tax evasion, as such refusal has a deterrent effect which is intended to prevent any tax evasion or avoidance. ( 25 ) Furthermore, the Court considered that, where there are genuine reasons to assume that the intra-Community acquisition corresponding to the supply at issue might escape payment of the VAT, the Member State of departure is required to refuse to grant the exemption to the supplier. ( 26 ) Neither the principle of proportionality nor the principles of neutrality, legal certainty or protection of legitimate expectations call that finding into question. Those principles cannot legitimately be invoked by a taxable person who has intentionally participated in tax evasion and who has jeopardised the operation of the VAT system. ( 27 )

45. Whilst the requirement of good faith on the part of the taxable person was not expressly set out in the judgment mentioned in the preceding point, it was nevertheless an underlying principle, and it was confirmed in a recent judgment in which the Court ruled that in the event that the purchaser has committed tax fraud, it is justifiable to make the vendor’s right to exemption conditional upon its good faith. Consequently if a national court were to reach the conclusion that the taxable person concerned knew, or should have known, that the transaction which it had carried out was connected with a tax fraud committed by the purchaser and that the taxable person had not taken every step which could reasonably be asked of it to prevent that fraud from being committed, there would be no entitlement to exemption from VAT. ( 28 )

– Good faith of the taxable person as a general principle in respect of VAT

46. There is therefore a principle in the case-law that, if the transaction is connected with fraud, individuals are required to act in good faith in order to be able to benefit from the exemption for their intra-Community supply. Good faith here is construed broadly, going beyond the conventional meaning of that notion. The requirement of good faith is satisfied by a taxable person who not only did not participate actively in the fraud, but who did not even know, and could not have known, that he was involved. The taxable person is therefore required to be honest, but also, if necessary, to take certain precautions in order to satisfy himself that the transactions were performed properly and correctly. This second requirement, which I will call a duty of due diligence, can be explained by the specific role played by the taxable person in the VAT system, in which he is not only liable to pay tax, but also collects it. The proper functioning of the system therefore depends to a large extent on the conduct of the taxable persons themselves.

47. In addition, even though the term ‘good faith’ is not used in the context of the right to deduct input tax, that principle of good faith can be inferred from the case-law cited in point 42 of this Opinion. According to that case-law, if the transaction is connected with fraud, the benefit of the right to deduct is subject to the good faith and due diligence of the taxable person, that is to say, to the fact that he has not knowingly participated in the fraud and has taken the necessary measures to ascertain the regularity of the transaction carried out.

48. With regard to the right to a refund, which is also mentioned in the question, it should be noted, as a preliminary point, that in the VAT system, refund does not constitute an autonomous right in the same way as the right of deduction or exemption. Refund is a corrective mechanism used where it is not possible to ensure the neutrality of tax by applying the standard mechanisms of the VAT system, in particular deduction. ( 29 ) That is also true of the mechanism under Article 28b(A)(2) of the Sixth Directive, which provides for the taxable amount to be reduced in the Member State which issued the VAT number if the acquisition is subject to tax in the Member State of destination (where two different States are involved). It is only where tax is paid in the first Member State that it should be refunded, where necessary.

49. The right to refund is thus inseparably linked to the mechanism which it corrects. Consequently, it must naturally be subject to the same treatment as that mechanism from the point of view of the application of the principle of good faith. In other words, in the cases of transactions connected with fraud, if a taxable person who has not acted in good faith and with due diligence is refused the right of deduction or the right of exemption, he should also be refused any possible refund related to that right.

50. In my view, the same should hold for the other rights stemming from the VAT system, such as the right to a reduction of the taxable amount under Article 28b(A)(2) of the Sixth Directive. The requirement of the good faith of the taxable person who has carried out a transaction connected with fraud reflects the general principle that no one may benefit from the rights stemming from the European Union’s legal system for abusive or fraudulent ends. There is therefore no need to distinguish between the right of deduction and the right of exemption, on the one hand, and the other rights, on the other.

51. I am not convinced, in this regard, by the Commission’s argument that the rights of the taxable person under Article 28b(A)(2) of the Sixth Directive must be treated differently on the ground that that provision provides solely for a corrective mechanism which makes it possible to ensure the neutrality of tax in certain specific intra-Community supplies. As a general rule, the mechanisms of the VAT system such as deduction of input tax or exemption of intra-Community supplies are intended to ensure that the tax burden is borne by the consumer and that it is neutral for economic operators. However, it is clear from the case-law cited in points 40 to 45 of this Opinion, on which I rely in concluding that there is a general principle of good faith, that that neutrality of tax may not be reasonably relied upon by taxable persons who have wilfully or through negligence participated in fraud. Consequently, I cannot see any objective difference, from this point of view, between the different rights stemming from the mechanisms of the VAT system, such as the right of deduction, exemption or refund.

52. In my view, this principle of good faith is therefore intended to be applicable not only to the right of deduction and the right of exemption, but also to other rights existing in the VAT system and to the right to the refund of any tax paid pertaining to those rights.

53. However, the requirement which is thus imposed on taxable persons is not a requirement to achieve a specific result, but merely a requirement to make best efforts. In the words of the Court, traders who take every precaution which could reasonably be required of them to ensure that their transactions are not connected with fraud must be able to rely on the legality of those transactions. ( 30 ) Determination of the measures which may reasonably be required of a taxable person depends essentially on the circumstances of that particular case. However, taxable persons cannot be required to carry out the inspections which are normally the responsibility of the tax authorities. ( 31 ) The principle of good faith does not therefore operate solely to the detriment of taxable persons. On the contrary, in most cases heard by the Court, the fact that the taxable person did not know, and could not know, that its transaction was connected with fraud allowed it to retain its right of deduction or exemption. ( 32 ) Where necessary, it could even be granted that right where the substantive requirements for its creation are not met. ( 33 ) Thus, the principle of good faith makes it possible to ensure that the risk of fraud between the tax authorities and the taxable persons and between the different parties to the transaction is shared fairly. ( 34 )

54. It still remains to be clarified what is meant by ‘transaction connected with fraud’ in the context of missing trader fraud. As I have mentioned, this type of fraud consists in a series of supplies, at least one of which is an intra-Community supply, following which VAT is indeed charged (being included in the price) on the downstream supply but is not repaid to the tax authorities. It might therefore seem, at first sight, that only the intra-Community supply in question (and, of course, its corollary, the intra-Community acquisition of the same goods) is connected with the fraud. However, this would be to ignore the complexity of the fraud in question. The way in which it works requires several supplies to be made, both upstream and downstream. This is most evident in the case of a carousel fraud, where the same goods pass through the hands of the same traders several times. The successive supplies have no purpose other than to create opportunities to misappropriate the tax due and then to conceal the fraud. Whilst the circumstances of each case obviously must be assessed on a case-by-case basis, it is possible, at first sight, to take the view that all the transactions in a chain entailing a missing trader fraud are connected with that fraud.

55. Of course, a trader for whom the supply made constitutes a normal economic activity may possibly be involved unknowingly in such a fraudulent chain. If he acts in good faith and with due diligence, he will be protected.

– The need for explicit provisions in national law

56. The referring court is also seeking to ascertain whether different rights stemming from the VAT system may be refused despite the absence of specific provisions to that effect in the national legal order. In my view, recognition of the existence in that system of a general principle of good faith on the part of the taxable person as a condition for exercising those rights allows that question to be answered in the affirmative.

57. That requirement of good faith reflects the general prohibition of abuse and fraud and the principle that no one may benefit from the rights conferred by the European Union legal order for abusive or fraudulent ends. When applied to the VAT system, this principle flows from the broad logic of that system, with the result that it does not need to be specifically implemented in legislation. In the same way as the Court did not have need of specific provisions in the Sixth Directive to establish the existence of the principle of good faith, national courts and tribunals likewise do not require national provisions in order to apply that principle in specific cases.

58. I am not convinced by the argument, raised principally by the Commission in its written observations, that the situation of the right of deduction is different from the situation of the right of exemption for intra-Community supplies. The Commission argues that the mention in the first subparagraph of Article 28c(A)(a) of the Sixth Directive of ‘conditions which [the Member States] shall lay down for the purpose of ensuring the correct and straightforward application of the exemptions provided for below and preventing any evasion, avoidance or abuse’ means that the refusal to grant the right of exemption requires a specific provision in national law, unlike the refusal to grant the right of deduction, as there is no reference to national rules on deduction in the Sixth Directive.

59. Such an interpretation does not seem to me to be consistent with either the scheme or the purpose of the cited provision. In view of the fact that the arrangements for the taxation of trade between Member States are based on information provided by taxable persons, it was necessary to establish different formalities to allow them to prove that the substantive requirements for exemption are met. The Sixth Directive leaves it to the Member States to establish those procedural arrangements and, in exercising that competence, they must comply with the principles of neutrality, proportionality and legal certainty. ( 35 ) It is true that the purpose of these rules established by the Member States is, inter alia, to prevent tax evasion, avoidance or abuse. However, they are not intended to apply solely to transactions connected with fraud, but to govern all transactions, first and foremost lawful transactions. By contrast, the question of the consequences of the infringement or abuse of rules of law in connection with the operation of the system falls within the scope of EU law. Thus, the right of exemption in the case of fraud is part of the VAT mechanism itself and among the general principles derived from the case-law cited in this Opinion.

60. Refusal to grant the rights stemming from the VAT system in the case where a taxable person is involved in fraud is also not, as Italmoda claims in its observations, a ‘penalty in the substantive sense’, which, under Article 7 of the European Convention for the Protection of Human Rights and Fundamental Freedoms, signed in Rome on 4 November 1950, and Article 49 of the Charter of Fundamental Rights of the European Union, must be provided for by an earlier legislative provision. As the good faith of the taxable person is a prior condition for the acquisition of those rights, their refusal has to be regarded, not as a penalty, but as an element inherent in the VAT system.

61. Similarly, I cannot share the view, expressed by Italmoda, that the application to the present case of the Kittel and Recolta Recycling ( 36 ) and R. ( 37 ) case-law — the facts in the main proceedings here taking place prior to those judgments — amounts to a retroactive application of the law. The obligation of honesty and diligence in trade relations, including vis-à-vis public authorities, is intrinsic to any economic activity, with the result that taxable persons cannot legitimately rely on their lack of knowledge of such a duty.

62. It should be added in this regard that, according to settled case-law, the interpretation which, in the exercise of the jurisdiction conferred upon it by Article 267 TFEU, the Court gives to a rule of EU law clarifies and defines the meaning and scope of that rule as it must be, or ought to have been, understood and applied from the time at which it came into force. It follows that the rule, as thus interpreted, can, and must, be applied by the courts even to legal relationships arising and established before the judgment ruling on the request for interpretation. ( 38 ) The limitation in time on the effects of a preliminary ruling is possible, exceptionally, if the necessary conditions are satisfied. ( 39 ) That was not done in the judgments mentioned in point 61 of this Opinion.

63. In the light of these considerations, the answer to the first question in Case C‑131/13 must be that the provisions of the Sixth Directive must be interpreted to the effect that the national authorities are obliged to refuse to grant a taxable person which knew, or should have known, that it was participating in fraud the right to deduct input tax, the right of exemption of intra-Community supplies and the right to reduction of the taxable amount under the mechanism provided for in the second subparagraph of Article 28b(A)(2) of that directive, and any right to a possible related refund, even in the absence of express provisions to that effect in national legislation.

The second question in Case C‑131/13

64. By its second question, the referring court is essentially seeking to ascertain whether the fact that the fraud took place in a Member State other than that which would have the power to refuse the taxable person the different rights has a bearing on whether it is possible or necessary to make such a refusal.

65. In my view, this question must be answered in the negative for three reasons.

66. First, since the crucial criterion in assessing the right of the taxable person is his state of mind, the territory in which the fraud took place is immaterial. Whether it was committed in the Member State which had the power to refuse the taxable person the different rights or in another Member State, if the taxable person knew, or ought to have known, that it was involved in that fraud, it will not in any event have acted in good faith and with due diligence.

67. Second, although taxation remains within the specific competence of the Member States, the VAT system is none the less a common system, some of the revenues from which are repaid to the European Union budget. The Member States therefore have a duty to cooperate in order to safeguard the proper functioning of that system as a whole. It would not be consistent with that duty if they could, or were required to, merely prevent fraud taking place within their respective territories.

68. Third, and finally, certain types of fraud, such as missing trader fraud, are based precisely on the mechanisms of the system of taxation of intra-Community trade. It is the difference between the price of the intra-Community acquisition, on which VAT is not charged (as the resulting supply is exempt), and the price of the downstream supply of the same goods, plus VAT (which will not be repaid to the tax authorities) that is the main reason for the profitability of this type of fraud. In addition, the fact that the fraudulent transaction falls under the competence of the tax authorities of two different States makes the fraud more difficult to detect. The same fraud committed within a single Member State would earn the fraudsters only the difference between the input tax paid and that due and would be quickly discovered by the tax authorities by simply comparing the declarations and the related invoices. Consequently, prevention of missing trader fraud by the Member State directly injured alone would not be effective. Furthermore, in the case of fraudulent supply chains involving several Member States, it might be difficult to ascertain precisely the tax losses suffered by each affected Member State.

The third question in Case C‑131/13

69. By its third question, the referring court is seeking an interpretation of the term ‘subject to tax’ in Article 28b(A)(2) of the Sixth Directive in the event that its first question is answered in the negative. Its question seeks to ascertain, more precisely, whether being subject to tax must be the result of the declaration by the acquirer or whether it can result from other circumstances, in particular recovery action on the part of the tax authorities. Since I propose that the first question should be answered in the affirmative, an answer to the third question is redundant. Because the good faith of the taxable person is the crucial element in the recognition or refusal of the right stemming from the provision in question, the definition of this notion is irrelevant, as, in the absence of that good faith in this instance, the mechanism laid down in that provision will not be applicable.

70. If the Court were to answer the first question in the negative, at least as regards the right stemming from Article 28b(A)(2) of the Sixth Directive, I consider that the answer to the third question follows from the interpretation already given by the Court of the second and third subparagraphs of Article 28b(A)(2) of the Sixth Directive, according to which the application of the mechanism provided for in the second subparagraph is subject to the cumulative conditions set out in the third subparagraph, which include the condition that ‘the obligations for declaration … have been satisfied by the acquirer’. ( 40 )

71. The referring court also asks in its third question whether the fact that the supply in question was connected with a fraud of which the taxable person was, or should have been, aware has any bearing on the interpretation of the term ‘subject to tax’. However, the question arising here is not that of the interpretation of that term, but whether or not the mechanism laid down in the provision at issue is applicable. Such application depends on the answer to the first question.

Conclusion

72. In the light of the foregoing considerations, I propose that the Court declare the requests for a preliminary ruling in Cases C‑163/13 and C‑164/13 inadmissible and answer the questions posed in Case C‑131/13 as follows: (1) The provisions 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 95/7/EC of 10 April 1995, must be interpreted to the effect that the national authorities must refuse to grant a taxable person which knew, or should have known, that it was participating in fraud the right to deduct input tax, the right of exemption for intra-Community supplies and the right to a reduction of the taxable amount under the mechanism provided for in the second subparagraph of Article 28b(A)(2) of that directive, and any right to a possible related refund, even in the absence of express provisions to that effect in national legislation. (2) The fact that the fraud took place in a Member State other than that which has the power to refuse the taxable person the rights mentioned in paragraph 1 does not have any bearing on the national authorities’ obligation to issue such a refusal.

( 1 ) Original language: French.

( 2 ) See Commission press release of 19 September 2013, IP/13/844.

( 3 ) OJ 1977 L 145, p. 1.

( 4 ) OJ 1995 L 102, p. 18.

( 5 ) Staatsblad 1968, No 329.

( 6 ) Melki and Abdeli (C‑188/10 and C‑189/10, EU:C:2010:363, paragraph 27).

( 7 ) Schmidberger (C‑112/00, EU:C:2003:333, paragraph 39 and cited case-law).

( 8 ) Melki and Abdeli (EU:C:2010:363, paragraph 27 and cited case-law).

( 9 ) The exact wording used in the orders for reference in Cases C‑163/13 and C‑164/13.

( 10 ) I am basing my remarks primarily on a very detailed analysis of this phenomenon in: Limbourg, N., ‘Les différentes typologies répertoriées en matière de carrousel TVA’, La fraude à la TVA en matière pénale, Larcier, Brussels, 2013, pp. 63 to 93. See also, in particular, Griffioen, M., and van der Hel, L., ‘New European Approach to Combat VAT Fraud?’, Intertax, vol. 42, 2014, No 5, pp. 298 to 305; Wolf, R.A., ‘VAT Carousel Fraud: A European Problem from a Dutch Perspective’, Intertax, vol. 39, 2011, No 1, pp. 26 to 37; Pabiański, T., and Śliż, W., ‘Zorganizowane działania przestępcze wykorzystujące mechanizmy podatku VAT’, Przegląd podatkowy, No 1, 2007, pp. 18 to 27, and No 3, 2007, pp. 13 to 23. See also the Opinion of Advocate General Ruiz-Jarabo Colomer in Kittel and Recolta Recycling (C‑439/04 and C‑440/04, EU:C:2006:174, points 27 to 35).

( 11 ) See, in particular, BP Soupergaz (C‑62/93, EU:C:1995:223, paragraph 18); Sosnowska (C‑25/07, EU:C:2008:395, paragraph 15); and Maks Pen (C‑18/13, EU:C:2014:69, paragraph 24).

( 12 ) See, in particular, Collée (C‑146/05, EU:C:2007:549, paragraph 23).

( 13 ) Sosnowska (EU:C:2008:395, paragraph 17).

( 14 ) See, inter alia, Gemeente Leusden and Holin Groep (C‑487/01 and C‑7/02, EU:C:2004:263, paragraph 76); Halifax and Others (C‑255/02, EU:C:2006:121, paragraph 71); and Sosnowska (EU:C:2008:395, paragraph 22).

( 15 ) See, in particular, Halifax and Others (EU:C:2006:121, paragraphs 68 to 70 and cited case-law) and Maks Pen (EU:C:2014:69, paragraph 26).

( 16 ) See, in particular, Fini H (C‑32/03, EU:C:2005:128, paragraph 32) and Halifax and Others (EU:C:2006:121, paragraph 85).

( 17 ) Kittel and Recolta Recycling (C‑439/04 and C‑440/04, EU:C:2006:446, paragraph 56).

( 18 ) Ibid., paragraph 59.

( 19 ) Ibid., paragraph 58.

( 20 ) Maks Pen (EU:C:2014:69, paragraphs 26 and 27).

( 21 ) Teleos and Others (C‑409/04, EU:C:2007:548, paragraph 65).

( 22 ) R. (C‑285/09, EU:C:2010:742).

( 23 ) See his Opinion in R. (C‑285/09, EU:C:2010:381, point 43).

( 24 ) Ibid., points 57 to 109.

( 25 ) R. (EU:C:2010:742, paragraphs 49 and 50).

( 26 ) Ibid., paragraph 52.

( 27 ) Ibid., paragraphs 53 and 54.

( 28 ) Mecsek-Gabona (C‑273/11, EU:C:2012:547, paragraphs 50 and 54).

( 29 ) For example, in the case where the amount of input tax paid exceeds the amount of tax due during the taxable period in question.

( 30 ) Kittel and Recolta Recycling (EU:C:2006:446, paragraph 51).

( 31 ) Mahagében and Dávid (C‑80/11 and C‑142/11, EU:C:2012:373, paragraphs 59 to 65).

( 32 ) See, inter alia, Optigen and Others (C‑354/03, C‑355/03 and C‑484/03, EU:C:2006:16); Mahagében and Dávid (EU:C:2012:373); and VSTR (C‑587/10, EU:C:2012:592).

( 33 ) Teleos and Others (EU:C:2007:548, point 2 of the operative part). See also Mecsek-Gabona (EU:C:2012:547), in which it was not certain that the goods which were the object of the intra-Community supply at issue had actually left national territory. None the less, the Court made the possibility of refusing the right to exemption subject to the condition that the seller knew, or should have known, that the transaction was connected with fraud.

( 34 ) See, to this effect, Teleos and Others (EU:C:2007:548, paragraph 58).

( 35 ) See, to this effect, Teleos and Others (EU:C:2007:548, paragraphs 44 and 45).

( 36 ) EU:C:2006:446.

( 37 ) EU:C:2010:742.

( 38 ) See, in particular, Denkavit italiana (61/79, EU:C:1980:100, paragraph 16) and Brzeziński (C‑313/05, EU:C:2007:33, paragraph 55).

( 39 ) See, in particular, Brzeziński (EU:C:2007:33, paragraph 56).

( 40 ) X and fiscale eenheid Facet-Facet Trading (C‑536/08 and C‑539/08, EU:C:2010:217, paragraph 36).