Euromak Metal DOO v. the former Yugoslav Republic of Macedonia: Principle of fairness and equity in taxation

Analysis by Elena Neshovska Kjoseva on the ECtHRs judgement "Euromak Metal DOO v. Republic of Macedonia" (application no. 68039/14).

This analysis refers to the judgment in the case of “EUROMAK METAL DOO v. REPUBLIC OF MACEDONIA”, that the European Court of Human Rights (hereafter “the Court”) delivered in favor of the applicant company at the session on 22.5.2018. In this case, the Court unanimously held that there had been a violation of Article 1 of Protocol No.1 to the European Convention on Human Rights (Protection of property).
The case originated in an application against Republic of Macedonia lodged with the Court by the company EUROMAK METAL DOO (hereafter “the applicant company”), family business which traded in scrap metal. The applicant company was represented by Mr. Igor Spirovski, a lawyer from Skopje.
In this case, the applicant company complained that it had been ordered to pay, with interest, value added-tax that had previously deducted from its tax obligations. Following the audit in 2009, the Public Revenue Office brought a tax assessment, establishing that the applicant company had made errors in calculating its VAT deductions on received goods because some of its suppliers had failed to declare or pay tax to the State. As a result, the applicant company could not receive VAT refund, as it had done in the past. Later on, these findings and conclusions of the tax authorities were upheld by the Macedonian Ministry of Finance and the administrative courts.
Relying on Article 1 of Protocol No.1, the applicant company complained that, in spite of the fact that it had timely and fully complied with its own obligation as VAT taxpayer according the Law on Value Added Tax[1], the Macedonian tax authorities had deprived it of its right to deduct the input VAT, because its suppliers had failed to meet their own VAT obligations – circumstances beyond the applicant company`s control.    


Facts of the case
The applicant company was set up in 1998 as a limited liability company, owned by the married couple Ms. Zhaneta and Mr. Rashko Pavlovski. It traded in scrap metal and for that purpose it purchased waste aluminium, cooper, iron and other metals, processed them and then   sold the product.
The applicant company was registered as a taxpayer for VAT purposes and timely and fully completed all VAT obligations (declaring VAT in all issued invoices, fulfilling VAT returns and requesting VAT deductions according the tax credit method).
During October – November 2009, the applicant company was subjected to a tax audit by the Public Revenue Office, examining the period from 1.1.2005 – 30.6.2009. On November the 6th 2009, the tax authorities brought a tax assessment finding that, due to previous audits in some of the applicant company’s suppliers, registered as VAT taxpayers, they had not declared or paid VAT to the State, although it was clearly declared in the invoices issued to the applicant company. Additionally, the audit established that some of the invoices did not contain the suppliers` addresses. And finally, the audit found that the applicant company had paid all the invoices received from the suppliers and that it had declared VAT in all issued invoices. Regarding all issues related to the suppliers, the tax authorities concluded that the applicant company had failed to fulfill all requirements to have the right on VAT deductions, according the Law on VAT, article 33 and 34.
On the basis of the tax audit, the applicant company was ordered to pay an additional amount of 3,827,546 Macedonian denars, including interest, as VAT to the State because in the period that was examined it had wrongly calculated the VAT deductions. On March 22nd 2010, the Public Revenue Office issued a written reprimand, ordering the applicant company to pay the amount of 6,050,124 denars (the full amount plus the interest).
The applicant company had appealed the decision, at first to the Ministry of finance, and after that the applicant company lodged two appeals to the administrative courts. The Higher Administrative Court dismissed the appeal and stated that the applicant company failed to fulfill the cumulative conditions, given in article 33 and 34 of the Law on VAT, to obtain the VAT deductions because some of its suppliers did not declare or pay the VAT to the State. Furthermore, the Court reiterated that it was the applicant company`s obligation to choose its business partners carefully and, in this sense, it should bear the responsibility. Meanwhile, the Public Prosecutor`s Office for Prosecuting Organized Crime and Corruption filed an indictment against several individuals, who were applicant company`s suppliers, for abuse of service and tax evasion. It was alleged that they used the companies to issue false invoices which were not a result of real commercial activity. However, the companies, as legal entities, were not indicted.
In February 2017, the applicant company was removed from the Central Register of companies, because it had not submitted an annual financial report for 2014, and ceased to exist. At that time, the applicant company`s bank account was blocked by the Public Revenue Office, but due to lack of money, the tax authorities did not succeed to collect any money as VAT.
In 2014, the applicant company lodged an application with the Court under Article 1 of Protocol No.1[2]. The applicant company complained that it had a legitimate expectation with regard to its right to obtain VAT deductions, but, due to circumstances beyond its control, its right of peaceful enjoyment of his possessions was violated by the State.    


Judgment
Proceeding in this case, the Court declared that the application: (1) was not manifestly ill-founded and (2) was admissible.
Deciding on the admissibility, the Court rejected the Government objection, stating that the applicant company existed at the time the application was introduced and that its founders and sole shareholders had a legitimate interest in obtaining a final decision of the case by the Court. Additionally, the Court concluded that the applicant company, by appealing against the tax assessment before the domestic tax authorities and the administrative courts, used all available domestic legal remedies in respect of the submitted complain to the Court.
The Court found a violation of Article 1 of Protocol No.1 to the European Convention on Human Rights. As the State`s interferences in this case was clearly “necessary to secure the payment of taxes”, the Court reiterated that although the State has a wide margin of appreciation in the field of taxation, an instance of interference must strike a “fair balance” between the demands of the general interest of the community and the requirements of protection of the individual`s fundamental rights.
The Court noted that there was no doubt that the applicant company had the right to obtain VAT deductions amounted to at least a legitimate expectation of obtaining an effective enjoyment of the property right. Moreover, the Court observed that the applicant company timely and fully fulfilled its own VAT obligations according the Law; that it was not alleged that it had participated in any criminal activity, nor it had or could have had knowledge of whether its suppliers had completed their tax obligations. The Court found that the applicant company should not have been required to bear the full consequences of its suppliers` mistakes by being refused to have a right on VAT deductions and being ordered to pay the VAT again plus interest. Regarding the payment required by the State, the Court considered that it imposed an excessive individual burden on the applicant company which breaches the principle of fair balance between the demands of the general interest of the community and the requirements of the protection of the right of property. And finally, the Court considered that the State should pay to the applicant company an award of EUR 4,000 as non-pecuniary damage, and the amount of EUR 1,500 covering costs and expenses.


Judgment significance
The most significant characteristic of the Value Added Tax is the self-control mechanism, which enables this tax o be the most difficult for tax evasion. In this sense, taxpayers control each other in the process of purchasing and selling products. They are motivated to beware whether their predecessor, in the process of production, sales or distribution, has calculated and declined the VAT in the invoices issued. The record and documentation constitute the conditio sine qua non for easy functioning of VAT. As a result, taxpayers acquire the right to deduct the previously paid VAT, according to the tax credit method as the most vital element of this tax.
According to the current tax legislation of Republic of Macedonia, which is mostly harmonized with the EU VAT legislation, the right to deduct previously paid VAT is not obtained automatically, but if the following conditions are met cumulatively: (1) if the taxpayer purchases or imports goods for the purposes of his commercial activity, and (2) on the basis of invoices issued where the paid tax is separately stated, and these invoices are recorded in the taxpayer's accounting. This confirms the applicant-company claimants that, having fulfilled the conditions prescribed by the Law, it had a legitimate right to claim and receive the VAT refund, and that it did not violate the Law by any means, which, on the other hand, was confirmed through the long-standing work of the company and in the explanation given in the tax assessment by the Macedonian tax authorities.
Furthermore, fulfillment of the VAT obligations by the taxpayers – suppliers is not prescribed by the Law on VAT as a condition for obtaining the right to deduct the input VAT. Still, this was the main argument for the sanction in the tax assessment imposed by the Macedonian Public Revenue Office.
The Court, with this judgment, have once again confirmed the principle that one conscientious VAT taxpayer who timely and fully fulfill all legal obligations, has the right to deduct the input VAT, according the so-called tax credit method, that cannot be conditioned with the actions of the other taxpayers in the VAT system. A taxpayer cannot be responsible whether his suppliers have declared or paid the VAT to the State. In fact, the Public Revenue Office is the competent and responsible authority, both for determining and collecting taxes, as well as for controlling taxpayers for compliance with tax rules and regulations and fulfilling their legal VAT obligations.
  On the other hand, this judgment has a significant importance for other companies - registered VAT payers for tax purposes, guaranteeing legal certainty in obtaining the right to deduction of the previously paid VAT, in terms when they have fulfilled all their tax obligations to the State.       
And finally, in tax sense, this judgment is fair, proportional and justified. In future, in procedure of determination and collection of taxes, the Macedonia tax authorities and administrative courts should take into account the application of the principle of fairness and equity in taxation. Taxation, in any case, should not be an excessive burden to the taxpayer.


[1] Official Gazette of Republic of Macedonia, no. 44/99, 59/99, 86/99, 11/00, 8/01, 21/03, 19/04, 33/06, 45/06, 101/06, 114/07, 103/08, 114/09, 133/09, 95/10, 102/10, 24/11, 135/11, 155/12, 12/14, 112/14, 130/14, 15/15, 129/15, 225/15, 23/16, 189/16 and 198/18.
[2] Article 1 of Protocol No.1 (Protection of property):
(1) Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.
(2) The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties.