It is well known that for acquisitions of goods or services subject to the reverse charge rule, the recipient of the transaction is responsible for the VAT due, which results in a simultaneous self-assessment and deduction of said VAT. For taxable persons whose right to deduct input VAT is not limited, this transaction does not involve any financial burden. The same happens for the tax administration which, on the basis of the mechanism of self-assessment and deduction, does not have to collect any VAT. This means that where VAT is not correctly declared in those cases of reverse charge, there is no revenue shortfall for the tax authorities and therefore no financial loss.
Despite this, some member states impose penalties in cases where such transactions are not correctly declared. Spain is one of these countries. The Spanish VAT law establishes a single penalty equivalent to 10% of the VAT amount not included in the tax return. As mentioned, this is a single penalty that does not allow the non-existence of economic damage to be considered to determine the level of the penalty. In other words, it does not consider the proportion of the penalty and cannot be modulated in light of the circumstances.
In this regard, the Spanish Supreme Court, in a judgment handed down at the end of July and made public recently, stated that this type of penalty is not admissible under EU law because it does not respect the principle of proportionality which must govern any power to impose penalties. The Spanish Supreme Court points out that, irrespective of the fact that the penalty regime is not harmonised at EU level, member states do not have unlimited powers to legislate without reference to EU law. Because the penalty is not adjustable according to the conduct of the taxable person and does not consider the absence of economic loss for the administration, the principle of proportionality is not respected.
Notably, the Spanish tax penalty regime already provides for a penalty for non-compliance with formal obligations (e.g. failure to correctly file a VAT return) where there is no financial loss to the tax administration up to €200, which seems reasonable. However, for non-declaration of VAT amounts due to reverse charges, the penalty would be 10% of the VAT not correctly entered in a VAT return. The result for the tax administration is the same in both situations (no financial loss), however, the penalties are completely different. Depending on the VAT amounts involved, even though in neither case would there be any financial loss for the administration, the difference between one penalty and the other could be enormous. It is precisely this disparity that led the Spanish Supreme Court to consider that the sanction does not respect the principle of proportionality.
It is important to highlight that in a study carried out by the EU VAT Forum some years ago it was concluded that the principle of proportionality has been a key topic for the Court of Justice of the European Union (CJEU). The CJEU has always highlighted that said principle must be respected insofar as the penalties do not go beyond what is strictly necessary to achieve the objectives they pursue. Indeed, respecting the principle of proportionality is seen by the CJEU as a requirement for respecting the principle of VAT neutrality (cases C-210/91; C-284/11; C-259/12; C-272/13).
According to the above, the imposition of an excessively heavy penalty on the taxable person could fail to respect the principles of proportionality and neutrality. This seems to be the case with the penalty provided for in Spanish legislation.
Penalties that do not consider neither the behaviour of the offender nor the result for the administration have no place in EU law. In fact, for the Spanish Supreme Court, the question has been clear, and it has not deemed it necessary to refer the matter to the CJEU for a preliminary ruling.
The Spanish case is not unique. There are member states that impose penalties that in some cases can reach 50% of the VAT amounts. These cases would also likely feature penalties that can hardly respect the principle of proportionality. It becomes increasingly difficult for member states to maintain these types of sanctions.
We are aware that the power to impose penalties is the sole responsibility of the member states, but even in these cases, certain provisions of EU community law must be respected.
