B Law & Tax
15 November 2023

Tax advisor: The Supreme Court and the principle of proportionality as a cornerstone in VAT tax penalties

The Supreme Court has reaffirmed the importance of the principle of proportionality, indicating that it not only guides interpreters of the law in modulating penalties but that legislators must also take it into account when establishing tax penalties. This doctrine may lead to the annulment of penalties by ordinary courts if a lack of proportionality in the application of the law is detected.

In its ruling on July 25, 2023, the Supreme Court upheld the decision of the National Court, which annulled a penalty related to VAT. The penalty was imposed for not declaring a reverse charge operation in VAT, and the Supreme Court based its judgment on a previous ruling by the Court of Justice of the European Union in the Farkas case.

The Court held that the VAT Law violated the principle of proportionality by allowing sanctions for the failure to declare VAT, ignoring that this omission was merely fictitious and without any indication of fraud. The judgment emphasizes that the case is essentially the same as the one resolved by the CJEU in the Farkas case, which established that VAT penalties should not exceed what is necessary to ensure collection and prevent fraud.

The possibility of applying this criterion to similar cases is noted, where the law does not consider mitigating factors such as the absence of economic harm and the lack of indication of fraud. Additionally, the need for the Supreme Court’s criterion to prevent disproportionate penalties is highlighted, correcting possible legislative deficiencies that sometimes do not adequately balance the interests at stake and follow the Administration’s initiative in drafting regulations



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