National tax authorities may not set out formal requirements to substantiate the VAT-exemption on services connected with importation. Levying withholding tax on the service fee of a foreign service provider does not contravene the principle of free movement of services.
In case C 461/21., a Romanian carrier company transported goods from the port of Rotterdam to Cluj Napoca, Romania with the goods declaration in Romania for customs purposes. They treated the transportation fees as VAT-exempts claiming that those make up a customs value element and are included in the import VAT base.
The Romanian tax authority rejected the VAT exemption on the ground that the carrier company did not provide the documental evidence set out by the Romanian law but only presented the CMRs and referred to the fact that the tax authority has already registered its entry summary declaration showing also that the place of delivery is indeed Cluj Napoca. The Romanian tax authority established further that the Romanian carrier company should have deducted and remitted 4% withholding tax on the service fee, constituting “commission” under the Romanian law, of a Danish company which assisted in the foreign VAT reclaim on the fuel costs incurred abroad.
A number of questions were referred to the European Court of Justice in this case. The court first of all held that the mere registration of an entry summary declaration is not sufficient to demonstrate that the transportation costs are included in the impot VAT base, however the national authorities violate the common law if they set out formal requirements on the substantiation of the VAT-exemption.
The court also interpreted the rules on withholding taxes acknowledging that levying withholding tax on service fees paid to a foreign service provider indeed restricts the principle of free movement of services (it incentivizes engaging domestic service providers) particularly if the business expenses do not reduce the tax base however such a restriction is allowed if serves a legitimate objective that is compatible with the FEU Treaty and is justified by overriding reasons in the public interest. This is a matter of judgement in the competence of the national courts.