Author: Tõnis Elling
The Value Added Tax Act sets forth four categories of goods or services on which a taxable person can voluntarily impose VAT. In general these cases involve tax-exempt supply, but VAT can also be imposed on the sale of these goods or services if the tax authority is notified of this in advance in writing. At first glance, it may seem curious why anyone should want to impose VAT voluntarily only to forward the tax to the state, but there is a reasonable explanation.
When might VAT be charged voluntarily?
If a taxable person has made expenditures including input VAT on goods it is selling and has filed for a VAT refund from the state (such as expenses on acquisition and improvement of an immovable property), a tax-exempt sale would mean they would have to recalculate the input VAT and pay all or a part of the input VAT back to the state. This is due to the fact that in the case of tax-exempt supply, there is no right to deduct input VAT and seek a refund. Adding VAT voluntarily to the taxable value of the transaction would do away with the obligation to recalculate input VAT, as this is 100% taxable supply.
A taxable person who notifies the Tax and Customs Board in writing, in the same taxation period or earlier, before the supply is effected, can charge VAT on the following:
- when renting, leasing or subjecting to usufruct an immovable (other than a dwelling) or a part thereof;
- on sale of an immovable or a part thereof.
In other words, tax can be imposed voluntarily on the sale and lease of an immovable other than dwellings. The sale of securities and various financial services specified in subsection 16 (2¹) of the Value Added Tax Act may also be taxed voluntarily, unless the financial services are rendered to the taxable person of another member state or a taxable person with limited liability. VAT can also be imposed voluntarily on investment gold.
Simple in theory, more complex in practice
In itself, there is not much more to take into consideration as far as the reasons for voluntarily imposing VAT on transactions; the circumstances in ordinary situations are sufficiently clear-cut. But problems arise with regard to application: although it seems like a formality, failure to comply with the notification obligation could run the risk of significant consequences under tax law. Large tax claims are possible.
An immovable and lease of an immovable constitute the field in which voluntary taxation is most common, and therefore this serves as our example in this guide. The Supreme Court has made a number of rulings under which refunds of input VAT to buyers have been denied because the seller did not notify the tax authority as required of the fact that VAT was charged and the VAT on the sale was not paid to the state. This results in a situation where the seller has charged VAT but did not provide notification, yet still has to pay the “erroneously” charged VAT pursuant to subsection 38 (1) of the Value Added Tax Act.
On the other side, the buyer has received an invoice with VAT but, since the seller has erroneously added the VAT, has no right to an input VAT refund. The state receives the VAT, but does not refund the input VAT.
Does the tax authority have to be notified of voluntary taxation? How?
Legislation does not go into much detail in this regard. The notification must be made in writing. In practice, various types of notification have been recognised. Notification can be made through the online e-Tax Board system, or by sending an e-mail or conventional letter to the tax authority. To this point the most common channel is e-mail and the e-Tax Board interface. Legislation does not rule out other options, though. No clear-cut judicial opinion has been finalised in this area yet.
On 12 June 2014, the Supreme Court issued judgement 3-3-1-25-14. One of the objects in dispute in this case was how a taxable person should report voluntary taxation and when it should do so. The decision gives no final answers, as the Supreme Court has returned the case to the circuit court for deliberation, but to a certain extent, the Supreme Court did express its stance on the basis of the facts in question.
Positions of various court instances can be identified on the basis of the court dispute, and it is instructive to bear these in mind even if there is no final opinion in a specific case. The circumstances of the case concerned VAT charged on the transfer of a registered immovable from one company to another. The Tax and Customs Board as the mortgagee and as a representative of the Estonian government was a party to the transaction. The tax authority issued a notice of assessment denying VAT refund to the buyer as the tax authority found it was not the primary building and the sale of the registered immovable in use should have been preceded by a written notification made to the tax authority that VAT had been charged on the transaction.
What makes this case interesting is that the representative of the tax authority was attending the transaction. The mortgagee and plaintiff also noted as the circumstance of the notification the fact that the draft contact of sale was sent for perusal and comment to the tax authority’s representative as well, and in this stage, the representative did not make any comment or suggestions with regard to VAT. The fact that the seller had not declared or paid the charged VAT to the state worked against the plaintiff. The Supreme Court has previously ruled that VAT refunds are precluded for tax-exempt supply if the VAT was not transferred to the state.
Was notification in the required form or not?
The tax authority argued that sending a draft notary contract to the representative of the tax authority for perusal is not a required form of notification of voluntary taxation in the sense of subsection 16 (3) of the Value Added Tax Act. The seller’s notification that VAT was charged on transfer of the registered immovable must be in written form, sent to the regional tax centre (such regional centres still existed at the time of the dispute) and be clear and unequivocally comprehensible to both parties. The seller did not provide written notification corresponding to these conditions. The tax authority felt that the notification of the mortgagee by way of sending off a draft contract and sales invoice could not constitute notification under subsection 16 (3) of the Value Added Tax Act; otherwise all persons wishing to sell an immovable in a transaction where VAT is charged would find various ways of notifying the tax authority and the tax authority would have to pass judgment on each specific manner of notification. This would be unreasonable and costly from the state’s perspective. The legislation stipulates quite clearly how and which authorities have to be notified of VAT added to an invoice.
Administrative court and circuit court are of a different opinion
The administrate court found the tax authority was aware of the VAT being charged on the purchase price, as it reviewed the draft contract. The tax official who reviewed the draft contract did not question the legitimacy of charging VAT. The addition of VAT was also evident from the sales invoice. The administrative court found that no definite form had been established for the written notification. The tax authority was involved in preparing and concluding the transaction and had to be aware that VAT was being charged on the sale price. As the tax authority was aware of the addition of VAT, submitting separate notice would have been a mere formality. Factually, the separate notification would not have changed anything. Submission of such a notification cannot guarantee that the VAT will be transferred to the state. The administrative court also added that the buyer is not bound by legal acts to check whether the seller has submitted the notification to the tax authority as required and later declared and paid the VAT. The buyer verified the identity of the seller and the buyer can be considered to be in good faith. Violations on the part of the seller do not restrict the right of the buyer to deduct input VAT.
The circuit court noted that sending a draft contract to the representative of the tax authority cannot be considered the required form of notification of voluntary taxation, as under subsection 78 (1) of the General Part of the Civil Code Act, a transaction document must be signed in order to be considered in written form pursuant to legislation. The seller did not sign the draft contract sent by the notary. An unsigned document presented to a tax authority cannot be treated as written notification communicating irrevocable intent on the part of the taxable person.
The Supreme Court added that if submission of notification is made in the required form, the right to deduct input VAT does not depend on whether the seller transfers the voluntarily charged VAT to the state or not. The Administrative Chamber of the Supreme Court did not agree with the circuit court opinion that the seller would, through notification, forfeit to revoke the addition of VAT and that the notification would be binding for the seller. The provisions of the Value Added Tax Act do not set forth such an imperative consequence. Sending the notification to the wrong tax authority representative (the wrong official) is not necessarily a factor that excludes voluntary taxation.
Conclusion: The administrative court found that the notification of the tax authority may also be done via the submission of a draft contract and that there is no difference as to which official is notified. The circuit court found that the written notification should be signed so that it could not be arbitrarily revoked and rescinded. The Supreme Court did not agree that there should be a requirement of signature and announced that notification of voluntary taxation is not binding for the taxpayer.
The Supreme Court sent the matter back to the circuit court for discussion; the court will have to establish when control of the registered immovable was transferred and whether the facts confirm that a written notification was submitted or not.