The deduction of VAT on constructions without a building permit causes many problems for companies during the fiscal audits carried out by ANAF, the tendency of the tax inspection teams being not to allow the deduction of the value added tax related to these constructions.
The Cont Consulting team, led by Ioan BÂSCĂ, founding partner, managed to completely annul a taxation decision issued by ANAF regarding VAT on constructions without authorization refusing to reimburse a client from the portfolio. The amounts that were subject to ANAF taxation decision represent the VAT deducted after the construction of a building intended as a production hall, without holding a construction permit.
Our client (the company) has the main object of activity the manufacture of screws, bolts and other threaded articles, producing exclusively for customers from outside Romania. This means that its sales are exempt from VAT, resulting in amounts of VAT to be recovered, the reimbursement of which was requested and obtained in advance (without control) by us.
During 03.11.2020-10.11.2020, the ANAF inspectors carried out an unexpected control at the company, followed by a fiscal inspection regarding VAT (control after the early reimbursement). The purpose was to verify a potential violation of art. 294 para. (4) lit. a) of Law no. 227/2015 on the Fiscal Code: “Any taxable person has the right to deduct the tax related to purchases, if they are intended for use for the following operations: a) taxable operations;”.
Checking the deductible VAT, the inspectors found that between 2017-2019 the company built, without a building permit, a production hall with a value of 3,719,500 lei.
Because it built the hall without a building permit, the company was sanctioned by the Local Police with a fine of 5,000 lei, according to art. 26 para. 1 lit. a) of Law no. 50/1991. At the same time, the Local Police ordered the company to stop the works and legally authorise the construction process. Until the date of the inspection, the company did not comply with the demands of the local authorities.
We communicated to the inspection body our point of view, that the provisions of art. 294 paragraph 1 letter a) of the Fiscal Code were not violated. We have invoked the Government Decision no. 1/2016, title VII, point 67, which stipulates that: “the right of taxable persons to deduct the tax paid or due for the goods / services purchased intended for use for taxable purposes is a fundamental principle of the VAT system and it, in principle, cannot be limited. In order to benefit from the right to deduct, the following conditions must first be met, namely:
- the deduction is exercised by a taxable person;
- upstream, the goods or services are provided by another taxable person;
- the goods or services invoked to justify this right to be used downstream by the taxable person for the purpose of the operations provided in art. 297 paragraph (4) of the Fiscal Code” (taxable operations).
The Fiscal Inspection Report (RIF) and the Taxation Decision stated that: “Considering that the Urbanism Certificate specifies the construction ban until the preparation of the P.U.D. (zonal development plan) and that the document states that the construction planning certificate cannot be used for the stated purpose, the tax inspection bodies find that the substantive condition regarding the exercise of the right to deduct VAT is not met, respectively it is not unequivocal that the investments will be used for the purpose of the company’s taxable operations. In this case, it is not the intention of a taxable person to independently start an economic activity within the meaning of art. 269 of the Fiscal Code and which begins to incur costs and / or to make preparatory investments necessary for the initiation of this economic activity, following that it will subsequently go through the stages provided by Law no. 50/1991 for obtaining the building permit. As there is a construction ban, the expenses were incurred by the company outside the legal framework.
For the construction works of the building, in the amount of 3,710,385 lei, the fiscal inspection bodies proceeded to the negative adjustment of the value added tax in the amount of 704,976 lei, according to art. 305 of Law no. 207/2015 on the Fiscal Procedure Code, with subsequent amendments and completions ”.
The hall was put into operation by the company, technological equipment was installed inside, and specific production activities were carried out without interruption.
Because it could not sustain the refusal of the VAT deduction, the inspection team changed the legal classification in the RIF, from the refusal to grant the deductibility according to art. 297 paragraph 4, letter a) of the Fiscal Code, to adjusting the deductible VAT, according to art. 305, para. 4, lit. a), point 2., a situation that stipulates that the capital good is used for carrying out operations that do not give the right to deduct the tax!
Through the appeal filed together with the Cont Consulting team, the company acknowledged the violation of Law no. 50/1990 regarding the building discipline, a fact that constitutes a contravention and for which we were fined 5,000 lei. However, we considered the negative adjustment of the deducted VAT to be unjustified, as long as taxable economic activities are carried out within the objective, the invoices for goods and services related to the construction of the production hall were received from suppliers registered for VAT purposes, thus, the company having deduction rights oo the VAT related to the respective process. The adjustment of the VAT deduction to constructions without authorization does not represent one of the reasons invoked by art. 305 para. 4, lit. a), point 2 of the Fiscal Code, which stipulates that this adjustment is necessary only to the extent that the good ceases to exist or is used for operations that do not give the right to deduct tax.
In addition, we argued that in accordance with art. 14 point 3 of the Fiscal Procedure Code, “The fiscal body establishes the fiscal treatment of an operation taking into account only the provisions of the fiscal legislation, the fiscal treatment not being influenced by the fact that the respective operation meets or not the requirements of other legal provisions”.
Thru the Decision regarding the settlement of the appeal, ANAF admitted the appeal filed by our team and completely canceled the contested fiscal administrative act.
In the motivation of the decision, the Service for the settlement of appeals within ANAF states that:
‘The petitioner states in the appeal that, both at and before the inspection and on the date of the appeal, she uses the hall (for which the inspection refused the right to deduct VAT) for production activities, which result in finished products being sold (…).
The Tax Inspection Report shows that the company mainly performs exempt operations with the right of deduction, and the tax inspection bodies verified the fulfillment of the conditions for granting the exemption with the right of deduction without finding deficiencies. At the date of acquisition of the goods and services necessary for the investment in the hall, there can be no obligation to adjust VAT, as long as the event motivating the adjustment has not taken place, this obligation occurring when a good is actually allocated to non-deductible operations.
Therefore, it is found that the tax inspection bodies applied to the company a tax treatment contrary to their own findings, being no causal link between the alleged factual situation found and the legal rules applicable to the case (…). ”.