The norms that established the procedure for transferring the over-paid amount of value added tax are incompatible with the right to property that is enshrined in the Satversme
On 11 April 2018, the Constitutional Court passed the judgement in case No. 2017-12-01 “On compliance of Part 123 and Part 125 of Section 12 of the Law “On Value Added Tax” (in the wording that was in force from 1 January 2010 until 31 December 2012), insofar as they restrict the right to have tax over-payment refunded within a reasonable term, with the first, second and third sentence of Article 105 of the Satversme [the Constitution] of the Republic of Latvia”.
The Contested Norms
Part 123 and Section 12 of the law “On Value Added Tax” in the wording that was in force from 1 January 2010 until 31 December 2012 (hereinafter – the law “On Value Added Tax”:
“The State Revenue Service, upon carrying out tax administration measures, shall, within 30 days following the receipt of the tax declaration for the taxation period, transfer the approved over-paid amount of tax to the subsequent taxation period until the end of the taxation year, covering the amount of tax payable into the State budget in subsequent taxation periods.”
Part 125 of Section 12 of the law “On Value Added Tax”:
“If a taxable person, after direction of the over-paid amount of tax referred to in Paragraph 124 of this Section, still has an over-paid amount of tax, it shall be transferred to the subsequent taxation periods in accordance with that specified in Paragraph 123 of this Section.”
The Norm of Higher Legal Force
The first, second and third sentence of Article 105 of the Satversme: “Everyone has the right to own property. Property shall not be used contrary to the interests of the public. Property rights may be restricted only in accordance with law.”
The Facts
The case was initiated on the basis of an application by the Supreme Court. It is examining an administrative case, in the framework of which a taxpayer has requested to recognise as being unlawful the decision by the Director General of the State Revenue Service, by which, on the basis of the contested norms, the taxpayers’ over-payment of the value added tax (hereinafter – VAT) was transferred to the following taxation period until the end of the taxation year.
The Supreme Court notes that, pursuant to the contested norms, the over-payment of VAT could have been repaid to the taxpayer within 10 months from the moment it occurred or even later. It is alleged that it follows from the judgements by the Court of Justice of the European Union that such a term could not be recognised as being reasonable. However, the financial burden caused for the taxpayer by this is not compensated for by interest payments. Such a procedure for transferring the over-paid VAT is said to be incompatible with the principle of tax neutrality and, thus, the restriction imposed by it on the taxpayer’s fundamental rights is said to be disproportionate to the public benefit from it. Thus, it is maintained that the contested norms are incompatible with the first three sentences of Article 105 of the Satversme.
The Court’s Findings and Ruling
On the procedure for repayment of VAT and the principle of the neutrality of VAT
The Constitutional Court noted that the contested norms had been adopted in accordance with Article 183 of the Council Directive 2006/112/EC of 28 November 2006 (hereinafter – the Directive), therefore the compliance thereof with the first three sentences of Article 105 of the Satversme had to be verified in compliance with the principles that followed from Article 183 of the Directive [13.].
The Constitutional Court underscored that the field of tax law was characterised by certain discretion of the legislator. However, the legislator does not enjoy as broad discretion in regulating issues that are related to the field of taxes but do not fall within it. In establishing the procedure, in which the over-paid VAT must be repaid to a taxpayer, the principle of the neutrality of VAT restricts the legislator’s discretion [14.].
The Constitutional Court noted that, pursuant to the principle of the neutrality of VAT, the procedure for repaying over-paid VAT, established by a Member State, could not create a financial burden for the taxpayer. This means that the over-paid VAT must be returned within a reasonable term and if a reasonable term is exceeded in returning it then the financial burden caused for the taxpayer must be compensated for by paying late-payment interest [15.].
On the existence of a restriction on fundamental rights
The Constitutional Court found that pursuant with the contested norms the State could temporarily keep at its disposal the financial assets of a taxpayer, and in such a case, within the respective period, the taxpayer was fully denied the possibility to handle the assets. Thus, the contested norms restrict the taxpayer’s right to property, enshrined in the first three sentences of Article 105 of the Satversme [16.].
On the constitutionality of the restriction on fundamental rights
The contested norms have been adopted and promulgated in the procedure established by the Satversme and the Saeima Rules of Procedure. The contested norms have been worded with sufficient clarity and the consequences of application thereof are predictable. Thus, the restriction on fundamental rights included in the contested norms has been established by law [17.].
The Constitutional Court recognised that the legitimate aim of the restriction established by the contested norms was the protection of public welfare, which, in the particular case, manifested itself as saving the resources of the State, through making the process of administering payments, established by the State, more effective. The Constitutional Court found that the measures chosen by the legislator were appropriate for reaching this legitimate aim because the procedure established by the contested norms allowed saving the resources of the State by not only decreasing the number of activities in administering taxes but also the frequency thereof, as well as allowing the State Revenue Service to ensure more effective control over VAT payments. There are no more lenient alternative measures that would allow saving the State’s resources in the same amount [18., 20., 21.].
The Constitutional Court noted: to establish, whether the public benefit from the restriction on fundamental rights established in the contested norms outweighs the damage inflicted upon a taxpayer, it must be verified:
1) whether the contested norms ensure that the over-paid VAT is repaid to the taxpayer within a reasonable term;
2) if the contested norms do not ensure this – whether the financial burden caused to the taxpayer by this is compensated for by interest payments [22.].
The Constitutional Court found that pursuant to the findings by the Court of Justice of the European Union, three months was a reasonable term for repaying over-paid VAT; however, a term that reached and exceeded six months was recognised by the Court of Justice of the European Union as being unreasonable. Pursuant to the contested norms, the term, within which the over-paid VAT is repaid to the taxpayer, may fluctuate between one month and one year, and even longer. However, the law “On Value Added Tax” does not envisage compensation for the financial burden created by this late-payment interest. This means that the contested norms are incompatible with the principle of neutrality of VAT. Hence, the restriction on fundamental rights established by them is not proportionate and the contested norms must be recognised as being incompatible with Article 105 of the Satversme [22.].
On the term of the judgement of the Constitutional Court coming into force
The Constitutional Court noted that the contested norms had already become void, however, they still could be applied in administrative legal proceedings that had been initiated but had not been concluded yet, assessing the legality of the decision by the State Revenue Service, adopted on the basis of these norms. Therefore the Constitutional Court provided that with respect to all persons, to whom the contested norms had been applied and who had begun protecting their rights in the procedure established by the Administrative Procedure Law and with respect to which the administrative proceedings had not been concluded yet, the contested norms, insofar they did not ensure that the over-paid VAT was returned to the taxpayer within a reasonable term, were to be recognised as being void as of the moment they entered into force [23.].
The Constitutional Court held:
- to recognise Part 123and Part 125 of Section 12 of the Law “On Value Added Tax” (in the wording that was in force from 1 January 2010 until 31 December 2012), insofar they did not ensure that the over-paid VAT was returned to the taxpayer within a reasonable term, as being incompatible with Article 105 of the Satversme of the Republic of Latvia;
- respect to all persons, to whom the contested norms had been applied and who had begun protecting their rights in the procedure established by the Administrative Procedure Law and with respect to which the administrative proceedings had not been concluded yet, to recognise Part 123and Part 125 of Section 12 of the Law “On Value Added Tax” (in the wording that was in force from 1 January 2010 until 31 December 2012), insofar they did not ensure that the over-paid VAT was returned to the taxpayer within a reasonable term, as being incompatible with Article 105 of the Satversme of the Republic of Latvia and void as of the moment they entered into force.
The judgement by the Constitutional Court is final and not subject to appeal, it will enter into force on the day of its publication.
The text of the judgement [in Latvian] is available on the homepage of the Constitutional Court:
https://www.satv.tiesa.gov.lv/wp-content/uploads/2017/04/2017-12-01_Spriedums.pdf
Open in PDF: 2017-12-01_PR_par spriedumu_ENG
Linked case: 2017-12-01