The case debates whether national tax authorities may impose taxable persons to determine the pro-rata for deduction of input VAT based on the actual use of mixed use goods and services, instead of the general turnover based pro-rata.
Thus, in the specific case of a bank providing also leasing services (hence carrying out both VAT exempt without credit and VAT-able operations), it is questioned if only the interest component of the lease instalment should be taken into account for the pro-rata computation rather than the entire lease instalment.
The CJEU ruled that, where a member state’s legislation foresees this possibility, the tax authorities may impose an actual use based pro-rata, provided that it ensures a greater accuracy in determining the deductible input VAT relating to operations which enable input VAT recovery.
According to the CJEU, the interest represents the consideration for the lessor’s costs of financing and managing the leasing agreements, which are the main activities for which mixed acquisitions of goods and services are used (overheads such as buildings, electricity, cross-cutting services). Under these circumstances, the actual use method would determine the extent of input VAT deduction in a more accurate manner than the turnover based pro-rata (as required by the principles of neutrality and proportionality).
The decision of the CJEU is relevant to mixed taxable persons that deduct input VAT based on pro-rata, as it indicates that the turnover based pro-rata may not ensure a sufficiently precise VAT deduction. In this context, it should be assessed how the current provisions of the Romanian VAT law may be applied so as to ensure an accurate assessment of the deductible input VAT.
Moreover, financial institutions (in particular suppliers of lease services) should analyse the pro-rata used for input VAT deduction on a case by case basis in light of this ruling, having regard to the consideration received / the actual use of purchases for activities which enable input VAT recovery.