An international parent company engages lawyers and advisers when authorities in the United Kingdom, France and the United States are investigating bribery within the group. The legal costs amount to almost €300 million, with over €60 million in VAT. The company deducts that VAT on a pro rata basis. The tax inspector refuses to allow part of the deduction and issues additional tax assessments for the years 2016 to 2019 inclusive. The court quashed the additional assessments, on the grounds that the costs serve to safeguard the company’s economic activities.
Settlement worth billions
The authorities suspect the group of bribery via intermediaries in connection with securing contracts. In January 2020, the company reached settlements to avoid criminal prosecution and paid the equivalent of approximately €3.6 billion. The legal costs relate to assistance with the investigations, avoiding prosecution and improving the compliance and ethics programme. The company charges these costs to the group’s commercial division. There is no dispute that the VAT on the compliance costs is deductible.
Prohibited acts?
The inspector considers the VAT on the investigation and legal fees to be non-deductible. In his view, these costs are directly linked to bribery and corruption, which are prohibited in the European Union. He relies primarily on the ECJ judgements in Einberger and Happy Family. In the alternative, he excludes the VAT on employee benefits via the BUA. The company argues that the passing on of costs constitutes a taxable supply to the commercial division, meaning that all VAT is deductible. Furthermore, it regards the costs as general expenses.
Two positions are rejected
The court places the burden of proof regarding the prohibited acts on the inspector, and the inspector fails to meet this burden. The settlements and the amount paid are insufficient. Even with that evidence, the deduction is not automatically ruled out, as the European court rulings concern situations that are not directly comparable. The company’s position also fails to hold water. Passing on costs is not, in itself, a taxable service. The agreements with the commercial division were drawn up retrospectively, and the company itself declares the costs as general expenses.
Prosecution affects the company
According to the company, the support provided to employees is intended to enable them to speak freely, in the interests of the internal investigation and the settlements. The court finds this explanation credible and regards the employees’ personal benefit as secondary, meaning that the BUA does not apply. Criminal proceedings could affect the group’s export credits, licences and new orders, and even its very survival. The costs therefore serve the company’s general economic activities.