Determination of the status of taxpayer for value added tax to a natural person
27.09.2023
SUBJECT MATTER AND CONTENT OF
THE CASE
This document serves as an analysis of Judgment U-5 No. 1420/2020 (hereinafter: The Judgment) adopted by the Administrative Court (hereinafter: the Court) on 28 January 2022. It is a judgment by which the Court dismissed X's lawsuit filed against Decision No. 28-32/02037 of 01.08.2018 brought by administrative body within the Ministry of Finance of the Republic of Macedonia, The Public Revenue Administration (hereinafter: the PRO) to register him/her in the Register of Value Added Tax Bonds. Given that the registration of natural persons in the Register of Taxpayers of Value Added Tax of the PRO and thus the determination of the status of taxpayers for paying value added tax (hereinafter: VAT) is particularly specific due to the unequal status that natural persons have with legal entities in relation to this tax, because the law does not recognise vat refunds, as permitted for legal entities, which is why it can be concluded that this law is regulating primarily legal entities, and applies to natural persons, only in the part that imposes obligations on them, but not that part that gives rights. Hence the legal practice to be established in this particular case is of particular importance to the equality of citizens before the law and legal certainty in the state, and thus to the constitutional principle of rule of law.
STATE OF PLAY
The plaintiff is a natural person from Skopje to whom decision No. 28-32/02037 from 01.08.2018 was submitted to him on 01.10.2018 by the PRO with which the plaintiff was registered in the VAT Register. The Decision states that the period for filing a tax return is quarterly and that the first tax period is 01.01.2018-31.03.2018. Against the Decision, the plaintiff filed a lawsuit Infront of the Administrative Court, which on 05.09.2019 passed the Judgment of U-5.br. 1876/2018 and annulled the Decision of the PRO. The PRO, through the State Attorney for the Area of the City of Skopje to the Higher Administrative Court, appealed against the U-5.no. 1876/2018 of 05.09.2019, after which the Higher Administrative Court on 07.10.2020 adopted judgment UJ-3br.319/2020, rejecting the appeal as unfounded.
On 27 January 2020, the PRO adopted a new Decision No. 27–32/01307/2, re-enrolling the plaintiff in the VAT Register again with obligation to pay VAT from 01/01/2018.
Unsatisfied with this Decision No. 27–32/01307/2 of 27.11.2020, the plaintiff filed a new lawsuit to the Administrative Court for a wrong facts determined by the authority, violation of the rules of procedure and misapplication of material law. The Administrative Court, acting after the lawsuit, held an oral public hearing on 28 January 2022 involving the plaintiff without a representative and the representative of the PRO, after which the Administrative Court delivered Judgment U-5 No. 1420/2020 of 31 January 2022, rejecting the plaintiff's lawsuit as unfounded.
In the explanation of Judgment U-5 No. 1420/2020 adopted from 28 January 2022, the Administrative Court stated that the lawsuit was unfounded because the files in the case show that the PRO - Regional Directorate of Skopje acting on a previously filed Annual Tax Application for the Determination of Personal Income Tax for 2017, as well as Annual Reports of Gross Revenue Payers, Tax and contributions paid and total net income paid, found that the plaintiff for 2017 generated a total gross revenue of 1,235,044.00 denari, on the basis of receivables under contracts for the occasional or temporary performance of services in several subjects — payers of revenue. The Administrative Court also stated that, on the basis of this fact, in accordance with Article 9 paragraph 1 and Article 51 paragraph 1 of the Law on VAT, the defendant body adopted the contested Decision No. 27-32/01307/2 of 27.11.2020, which enrold in the tax liability register for the purposes of the VAT of the plaintiff with the first tax period 01.01-31.03.2018 and date of registration 01.01.2018. Hence, the Administrative Court said it found that the Decision of the PRO is legal.
Furthermore, the Administrative Court stated in the grounds that in the specific case, it found that the PRO correctly applied the provisions of the Law on VAT. The Administrative Court also stated that it determined this as a result of the factual situation established by the material evidence attached, stating that it considered the claimant to be a taxpayer for value added tax purposes. The Administrative Court also stated that the total revenues on various grounds by the plaintiff were 1,235,044.00 denari, thus exceeding the legally established threshold in accordance with Article 51 paragraph 1 of the Law on VAT and therefore the PRO registered the plaintiff in the VAT Register legaly.
In relation to the plaintiff's allegations in the lawsuit, The Administrative Court stated that it appreciated the plaintiff's allegations indicating that he was not a taxpayer in accordance with the provisions of the VAT Law, since he is a natural person and generates income, while the subject of taxation of the Law on VAT is turnover of the business activity. The Administrative Court stated in the grounds that it rejected them as unfounded, for the reason that in the specific case, due to VAT purposes, the amount of additional income generated is important, not the source from which they originate, and as the plaintiff during 2017 generated total revenues in an amount that exceeded the legally envisaged registration threshold — 1,000,000,00 denari, from performing an independent activity from the provision of professional and intellectual services. The Administrative Court stated that those services are an activity which constitutes an independent performance in accordance with Article 9 paragraphs 1 and 2 of the Law on VAT, which is why he/she was registered as a taxpayer for VAT in accordance with Article 51 paragraphs 1, 6 and 10 of the same law. The Administrative Court also stated in its explanation of the judgment that it rated them as unfounded allegations indicating the fact that the date of first registration precedes the adoption of the contested decision, for the reason that if the conditions for registration are achieved, the competent tax authority shall register the value added tax from the beginning of the current calendar year in accordance with Article 51 paragraph 6 of the Law on VAT.
The Administrative Court also stated that no violation of Article 13 concerning Article 24, in connection with Article 88 paragraph 6 of the Law on General Administrative Procedure (hereinafter: LGAP) are found, for reasons that the sole procedural basis of the taxes is the Law on Tax Procedure and in accordance with the acts for the systematization of the PRO, tax administrative acts are signed only by the managers of the regional directorates of the PRO.
Against this judgment the plaintiff appealed to the Higher Administrative Court, which on 14.04.2023, delivered judgment UJ-3.no.453/2022, rejecting the appeal as unfounded and confirming the Judgment of the Administrative Court U-5 No. 1420/2020 from 28 January 2022.
In the Judgment, the Higher Administrative Court stated that when deciding, it appreciated the appealal allegations that the Administrative Court had committed a fundamental violation of the provisions of the proceedings, incompletely and incorrectly determined the factual situation, material law is wrongly applied. The Higher Administrative Court in the explanation of its judgment states that the allegations in the appeal are unfounded and that there are not influenced by other decision-making. According to the Higher Administrative Court, the Administrative Court gave sufficient reasons for the decisive facts of which it was governed in the judgement, and with which the appeal court agrees entirety.
ANALYSIS OF THE APPLICATION OF THE PROCEDURAL RULES
In his lawsuit, and further in the appeal before the Administrative Court, the plaintiff invokes violations of Article 13, in connection with Articles 24 and 88 paragraph 6 of the LGAP, which is the basic system procedural law in the state.
Article 13 of the LGAP regulates the principle of delegation. According to this principle within the public authority, the power to make decisions in administrative matters shall, as a rule, be delegated to administrative servants within the authority, appropriate to the complexity of the relevant administrative work. This is of utmost importance for administrative procedures that should be conducted and decided by employees who work professionally on certain matters, not by directors and other managers, whose jurisdiction is to manage the institution, not to carry out professional work.
Article 24 of the LGAP regulates the jurisdiction to conduct and complete the administrative procedure, which should be delegated to an authorised servant through the Internal Organisation Act.
Finally, Article 88 paragraph (6) of the LGAP as one of the mandatory elements of any administrative act, such as Decision No. 28-32/02037 of 01.08.2018 adopted by the PRO for registration in the VAT Bond Register. According to this provision, the administrative act is signed by an authorized servant. Exceptionally, in the case of typical administrative acts, the signature may be signed with faximil or printed.
What is indeed controversial in the explanation of the Administrative Court's judgment, and which is confirmed by the Higher Administrative Court's judgment, is the allegation that the calls for procedural injury in the lawsuit are unfounded for reasons that the sole basis of tax procedure is the Law on Tax Procedure and in accordance with the acts for systematizing the defendant body, tax administrative acts are signed only by the managers of the regional directorates of the PRO. However, the Administrative Court and then the Higher Administrative Court did not take into account Article 3 paragraph (2) of the LGAP, which states that this law applies to all administrative actions of public authorities and service providers. With special laws, separate matters can be regulated differently from this law, unless they are contrary to the basic principles and purpose of this law and do not reduce the protection of the rights and legal interests of the parties guaranteed by this law. Given the fact that the delegation of decision-making power is the principle of the LGAP, then in no case the sole basis of tax procedure can be the Law on Tax Procedure, i.e. in the part of the principles, the LGAP has greater legal force than any provision of the Law on Tax Procedure.
ANALYSIS OF APPLICATION MATERIAL LAW
In accordance with Article 2 of the Law on VAT the subject of VAT is:
The turnover of goods and services (hereinafter: turnover), which is carried out with compensation in the country by the taxpayer within its business activities and
Imports of goods.
Article 6 of the Law on VAT regulates the turnover of services, intellectual services can’t be putted in the scope of this article.
Article 9 of the Law on VAT regulates that a taxpayer is a person who performs business activity permanently or occasionally independently, regardless of the objectives and results of this activity.
In doing so, the Law on VAT implies any activity of producers, traders and persons performing services, which aims to generate revenues, including activities in the fields of mining, agriculture and forestry, as well as the deviation of material and intangible goods for their use.
As an independent activity are considered:
Natural persons, who are individually or jointly employed by a company and on that basis receive a salary and are obliged to invoke the employer's instructions and
Subsidiaries, branches or other individual organizational parts of a company.
The Law on Personal Income Tax on the other side in Article 3 stipulates that the following types of income generated in the country and abroad are implied under personal income:
income from work;
income from independent activity;
income from copyright and related rights;
income from the sale of own agricultural products;
income from industrial property rights;
rental income and sub-lease;
capital income;
capital gains;
gains from games of chance;
insurance income and
-other income.
As can be seen, our legislation makes a clear distinction between income and turnover, and it is never stated that income enters turnover and vice versa.
Hence the plaintiff 's allegations that it generates income and that it is subject to a completely different law have a legal basis.
Additionally, in accordance with Article 51 paragraph (1) of the Law on VAT, which was valid at the time of the adoption of the contested decision, all taxpayers, whose total turnover in the past calendar year exceeded 1,000,000 denars or whose total turnover is predicted at the beginning of the business activity to exceed the amount or exceed the amount bound for registration for VAT during the year.
The Law on VAT regulates the deduction of the previous paid tax (Chapter VIII) and the refund of tax (Articles 46 to 48), but none of these provisions are applicable to natural persons, which is why the applicability of the law to those persons is called into question.
Given all the above legal provisions, it is indeed doubtful whether the citizen who made income in accordance with the Personal Income Tax Law may be subject to registration in the VAT Bond Register. So the application of material law in the Decision No 28-32/02037 of 01.08.2018 of the PRO, the Judgment U-5 No.1420/2020 of 28 January 2022 of the Administrative Court and Judgment UJ-3.no.453/2022 of 14.04.2023 of the Higher Administrative Court is also opened for debate.
This document serves as an analysis of Judgment U-5 No. 1420/2020 (hereinafter: The Judgment) adopted by the Administrative Court (hereinafter: the Court) on 28 January 2022. It is a judgment by which the Court dismissed X's lawsuit filed against Decision No. 28-32/02037 of 01.08.2018 brought by administrative body within the Ministry of Finance of the Republic of Macedonia, The Public Revenue Administration (hereinafter: the PRO) to register him/her in the Register of Value Added Tax Bonds. Given that the registration of natural persons in the Register of Taxpayers of Value Added Tax of the PRO and thus the determination of the status of taxpayers for paying value added tax (hereinafter: VAT) is particularly specific due to the unequal status that natural persons have with legal entities in relation to this tax, because the law does not recognise vat refunds, as permitted for legal entities, which is why it can be concluded that this law is regulating primarily legal entities, and applies to natural persons, only in the part that imposes obligations on them, but not that part that gives rights. Hence the legal practice to be established in this particular case is of particular importance to the equality of citizens before the law and legal certainty in the state, and thus to the constitutional principle of rule of law.
STATE OF PLAY
The plaintiff is a natural person from Skopje to whom decision No. 28-32/02037 from 01.08.2018 was submitted to him on 01.10.2018 by the PRO with which the plaintiff was registered in the VAT Register. The Decision states that the period for filing a tax return is quarterly and that the first tax period is 01.01.2018-31.03.2018. Against the Decision, the plaintiff filed a lawsuit Infront of the Administrative Court, which on 05.09.2019 passed the Judgment of U-5.br. 1876/2018 and annulled the Decision of the PRO. The PRO, through the State Attorney for the Area of the City of Skopje to the Higher Administrative Court, appealed against the U-5.no. 1876/2018 of 05.09.2019, after which the Higher Administrative Court on 07.10.2020 adopted judgment UJ-3br.319/2020, rejecting the appeal as unfounded.
On 27 January 2020, the PRO adopted a new Decision No. 27–32/01307/2, re-enrolling the plaintiff in the VAT Register again with obligation to pay VAT from 01/01/2018.
Unsatisfied with this Decision No. 27–32/01307/2 of 27.11.2020, the plaintiff filed a new lawsuit to the Administrative Court for a wrong facts determined by the authority, violation of the rules of procedure and misapplication of material law. The Administrative Court, acting after the lawsuit, held an oral public hearing on 28 January 2022 involving the plaintiff without a representative and the representative of the PRO, after which the Administrative Court delivered Judgment U-5 No. 1420/2020 of 31 January 2022, rejecting the plaintiff's lawsuit as unfounded.
In the explanation of Judgment U-5 No. 1420/2020 adopted from 28 January 2022, the Administrative Court stated that the lawsuit was unfounded because the files in the case show that the PRO - Regional Directorate of Skopje acting on a previously filed Annual Tax Application for the Determination of Personal Income Tax for 2017, as well as Annual Reports of Gross Revenue Payers, Tax and contributions paid and total net income paid, found that the plaintiff for 2017 generated a total gross revenue of 1,235,044.00 denari, on the basis of receivables under contracts for the occasional or temporary performance of services in several subjects — payers of revenue. The Administrative Court also stated that, on the basis of this fact, in accordance with Article 9 paragraph 1 and Article 51 paragraph 1 of the Law on VAT, the defendant body adopted the contested Decision No. 27-32/01307/2 of 27.11.2020, which enrold in the tax liability register for the purposes of the VAT of the plaintiff with the first tax period 01.01-31.03.2018 and date of registration 01.01.2018. Hence, the Administrative Court said it found that the Decision of the PRO is legal.
Furthermore, the Administrative Court stated in the grounds that in the specific case, it found that the PRO correctly applied the provisions of the Law on VAT. The Administrative Court also stated that it determined this as a result of the factual situation established by the material evidence attached, stating that it considered the claimant to be a taxpayer for value added tax purposes. The Administrative Court also stated that the total revenues on various grounds by the plaintiff were 1,235,044.00 denari, thus exceeding the legally established threshold in accordance with Article 51 paragraph 1 of the Law on VAT and therefore the PRO registered the plaintiff in the VAT Register legaly.
In relation to the plaintiff's allegations in the lawsuit, The Administrative Court stated that it appreciated the plaintiff's allegations indicating that he was not a taxpayer in accordance with the provisions of the VAT Law, since he is a natural person and generates income, while the subject of taxation of the Law on VAT is turnover of the business activity. The Administrative Court stated in the grounds that it rejected them as unfounded, for the reason that in the specific case, due to VAT purposes, the amount of additional income generated is important, not the source from which they originate, and as the plaintiff during 2017 generated total revenues in an amount that exceeded the legally envisaged registration threshold — 1,000,000,00 denari, from performing an independent activity from the provision of professional and intellectual services. The Administrative Court stated that those services are an activity which constitutes an independent performance in accordance with Article 9 paragraphs 1 and 2 of the Law on VAT, which is why he/she was registered as a taxpayer for VAT in accordance with Article 51 paragraphs 1, 6 and 10 of the same law. The Administrative Court also stated in its explanation of the judgment that it rated them as unfounded allegations indicating the fact that the date of first registration precedes the adoption of the contested decision, for the reason that if the conditions for registration are achieved, the competent tax authority shall register the value added tax from the beginning of the current calendar year in accordance with Article 51 paragraph 6 of the Law on VAT.
The Administrative Court also stated that no violation of Article 13 concerning Article 24, in connection with Article 88 paragraph 6 of the Law on General Administrative Procedure (hereinafter: LGAP) are found, for reasons that the sole procedural basis of the taxes is the Law on Tax Procedure and in accordance with the acts for the systematization of the PRO, tax administrative acts are signed only by the managers of the regional directorates of the PRO.
Against this judgment the plaintiff appealed to the Higher Administrative Court, which on 14.04.2023, delivered judgment UJ-3.no.453/2022, rejecting the appeal as unfounded and confirming the Judgment of the Administrative Court U-5 No. 1420/2020 from 28 January 2022.
In the Judgment, the Higher Administrative Court stated that when deciding, it appreciated the appealal allegations that the Administrative Court had committed a fundamental violation of the provisions of the proceedings, incompletely and incorrectly determined the factual situation, material law is wrongly applied. The Higher Administrative Court in the explanation of its judgment states that the allegations in the appeal are unfounded and that there are not influenced by other decision-making. According to the Higher Administrative Court, the Administrative Court gave sufficient reasons for the decisive facts of which it was governed in the judgement, and with which the appeal court agrees entirety.
ANALYSIS OF THE APPLICATION OF THE PROCEDURAL RULES
In his lawsuit, and further in the appeal before the Administrative Court, the plaintiff invokes violations of Article 13, in connection with Articles 24 and 88 paragraph 6 of the LGAP, which is the basic system procedural law in the state.
Article 13 of the LGAP regulates the principle of delegation. According to this principle within the public authority, the power to make decisions in administrative matters shall, as a rule, be delegated to administrative servants within the authority, appropriate to the complexity of the relevant administrative work. This is of utmost importance for administrative procedures that should be conducted and decided by employees who work professionally on certain matters, not by directors and other managers, whose jurisdiction is to manage the institution, not to carry out professional work.
Article 24 of the LGAP regulates the jurisdiction to conduct and complete the administrative procedure, which should be delegated to an authorised servant through the Internal Organisation Act.
Finally, Article 88 paragraph (6) of the LGAP as one of the mandatory elements of any administrative act, such as Decision No. 28-32/02037 of 01.08.2018 adopted by the PRO for registration in the VAT Bond Register. According to this provision, the administrative act is signed by an authorized servant. Exceptionally, in the case of typical administrative acts, the signature may be signed with faximil or printed.
What is indeed controversial in the explanation of the Administrative Court's judgment, and which is confirmed by the Higher Administrative Court's judgment, is the allegation that the calls for procedural injury in the lawsuit are unfounded for reasons that the sole basis of tax procedure is the Law on Tax Procedure and in accordance with the acts for systematizing the defendant body, tax administrative acts are signed only by the managers of the regional directorates of the PRO. However, the Administrative Court and then the Higher Administrative Court did not take into account Article 3 paragraph (2) of the LGAP, which states that this law applies to all administrative actions of public authorities and service providers. With special laws, separate matters can be regulated differently from this law, unless they are contrary to the basic principles and purpose of this law and do not reduce the protection of the rights and legal interests of the parties guaranteed by this law. Given the fact that the delegation of decision-making power is the principle of the LGAP, then in no case the sole basis of tax procedure can be the Law on Tax Procedure, i.e. in the part of the principles, the LGAP has greater legal force than any provision of the Law on Tax Procedure.
ANALYSIS OF APPLICATION MATERIAL LAW
In accordance with Article 2 of the Law on VAT the subject of VAT is:
The turnover of goods and services (hereinafter: turnover), which is carried out with compensation in the country by the taxpayer within its business activities and
Imports of goods.
Article 6 of the Law on VAT regulates the turnover of services, intellectual services can’t be putted in the scope of this article.
Article 9 of the Law on VAT regulates that a taxpayer is a person who performs business activity permanently or occasionally independently, regardless of the objectives and results of this activity.
In doing so, the Law on VAT implies any activity of producers, traders and persons performing services, which aims to generate revenues, including activities in the fields of mining, agriculture and forestry, as well as the deviation of material and intangible goods for their use.
As an independent activity are considered:
Natural persons, who are individually or jointly employed by a company and on that basis receive a salary and are obliged to invoke the employer's instructions and
Subsidiaries, branches or other individual organizational parts of a company.
The Law on Personal Income Tax on the other side in Article 3 stipulates that the following types of income generated in the country and abroad are implied under personal income:
income from work;
income from independent activity;
income from copyright and related rights;
income from the sale of own agricultural products;
income from industrial property rights;
rental income and sub-lease;
capital income;
capital gains;
gains from games of chance;
insurance income and
-other income.
As can be seen, our legislation makes a clear distinction between income and turnover, and it is never stated that income enters turnover and vice versa.
Hence the plaintiff 's allegations that it generates income and that it is subject to a completely different law have a legal basis.
Additionally, in accordance with Article 51 paragraph (1) of the Law on VAT, which was valid at the time of the adoption of the contested decision, all taxpayers, whose total turnover in the past calendar year exceeded 1,000,000 denars or whose total turnover is predicted at the beginning of the business activity to exceed the amount or exceed the amount bound for registration for VAT during the year.
The Law on VAT regulates the deduction of the previous paid tax (Chapter VIII) and the refund of tax (Articles 46 to 48), but none of these provisions are applicable to natural persons, which is why the applicability of the law to those persons is called into question.
Given all the above legal provisions, it is indeed doubtful whether the citizen who made income in accordance with the Personal Income Tax Law may be subject to registration in the VAT Bond Register. So the application of material law in the Decision No 28-32/02037 of 01.08.2018 of the PRO, the Judgment U-5 No.1420/2020 of 28 January 2022 of the Administrative Court and Judgment UJ-3.no.453/2022 of 14.04.2023 of the Higher Administrative Court is also opened for debate.