03.10.2024

EU budget fraud & VAT evasion - general concepts

The jurisprudential framework that has (recently) taken shape in both national[1] and European[2] law on the issue of the statute of limitations on criminal liability reveals a number of divergences of interpretation and application, some more subtle, others more obvious.

One such divergence has arisen over the last year in the case of judgments handed down in cases concerning offenses of tax evasion in relation to VAT,[3] with national courts having the additional task of determining whether such offenses are frauds detrimental to EU interests in order to determine which provisions of the statute of limitations on criminal liability apply^[4].

In the context set out above, we note that the national courts, in the resolution of each individual case, remain bound to determine, a priori, whether the offenses of tax evasion constitute fraud affecting the financial interests of the European Union, that is to say, whether such acts fall within the scope of Article 325 para. (1) TFUE și a art. 2 alin. (1) of the PFI Convention, as interpreted by the judgment of July 24, 2023 of the CJEU.

The concept of fraud[5] is defined in Article 1 of the PFI Convention as any intentional act or omission relating to the use of false, incorrect or incomplete documents for the purpose of misappropriation of European funds, misappropriation of those funds, etc., in essence acts or omissions likely to unlawfully reduce the EU budget.

Within Directive (EU) 2017/1371 of the European Parliament and of the Council of July 05, 2017 on combating fraud to the Union's financial interests by criminal law we find defined both the notion of fraud (definition similar to the PFI Convention)[6] and the notion of EU financial interests, which is basically all the revenue, expenditure and assets contained in, collected or due to the EU budget, involving of course also the budgets of the EU institutions.

At the national level, the sanctioning of fraud detrimental to EU interests, understood in the above sense, operates under Law no. 78/2000 for the prevention, detection and sanctioning of corruption, Section^{41 of} this normative act, marginally entitled Offenses against the financial interests of the European Union, being taken over in its entirety the provisions of Article 1 of the PFI Convention. Thus, at national level, the necessary legal mechanisms have been put in place to sanction fraud against the EU budget.

Moving on to VAT fraud, it should be recalled that the EU budget is largely financed from own resources and supplemented by other revenue. The VAT-based own resource consists of a percentage of the estimated VAT collected by Member States, which is transferred to the Union. In this regard, according to Art. 3 of Directive (EU) 2017/1371, with regard to own resource VAT revenues, the Directive applies only in cases of serious offences against the common VAT system. For the purposes of this Directive, offences against the common VAT system are considered to be of a serious nature if the intentional actions or inactions are related to the territory of two or more Member States of the Union and involve a total damage of at least EUR 10,000,000.

At national level, the penalization of tax evasion offences operates on the basis of Law No 241/2005 on preventing and combating tax evasion. By Law no. 125/2003 on the completion of Law no. 241/2005, art.⁹¹ was introduced, which regulates tax evasion in the field of VAT committed in the framework of fraudulent schemes of a cross-border nature, with the effect of reducing the resources of the European Union budget by at least 10,000,000 Euro, in national currency equivalent[7] In essence, Law no. 153/2023 transposes the provisions of Directive (EU) 2017/1371, with the final result being a correlation between the Union provisions and the national ones.

At this point, divergences in judicial practice can be seen in VAT tax evasion cases to which the provisions of Law 153/2023 are not applicable, in relation to the rules on the application of criminal law over time. In other words, for VAT tax evasion offenses committed prior to the entry into force of this legislative act, their classification as fraud affecting the EU budget remains a relatively open subject.

By way of example, in order to highlight this divergence of interpretation, we point out that, in a case of VAT tax evasion, the High Court of Cassation and Justice, Criminal Section, held that the scope of the concept of fraud affecting the EU's financial interests may include VAT tax evasion offenses, regardless of the threshold, the supreme court holding that "Whereas the Union's own resources include, in particular, the revenue from the application of a uniform rate to the harmonized VAT assessment bases established in accordance with European Union rules, there is a direct link between the collection of VAT revenue in compliance with the applicable European Union law and the making available to the European Union budget of the corresponding VAT resources, since any shortcoming in the collection of the former may be at the origin of a reduction in the latter. '[8] Subsequently, the High Court held that the standard of protection laid down in the judgment of July 24, 2023 of the CJEU would apply in the present case.

In contrast, the approach of the Bucharest Court of Appeal in similar cases appears to be a more nuanced one, the premise being that not every offense that harms the State budget or, lato sensu, a public asset, indirectly harms the financial interests of the European Union, such an extensive interpretation disregarding the limits of the applicability of the principle of supremacy of European Union law[9].

Lastly, it should be noted that the case-law of the CJEU has established an obligation on the courts to ensure the full effect of European Union law, without, however, requiring them to disapply national provisions which are sufficiently effective and dissuasive in combating VAT fraud. [10] Therefore, as long as clear and rigorous mechanisms are in place at national level, complying with the standard imposed by the CJEU, for penalizing VAT evasion, the approach must remain a balanced one, which implies a clear and correct understanding of the principles laid down by the CJEU.

In conclusion, the courts have both the task of guaranteeing the efficient collection of European Union resources, giving full effect to anti-fraud obligations, and the task of respecting the principle of the legality of offenses and penalties, with an explicit balance between the reference systems - Union and national.

An article signed by Paula Maftei (pmaftei@stoica-asociatii.ro), Associate, STOICA & ASOCIATII.

[1] In particular in relation to the CCR and ICCJ Decisions -

[2] with reference to the Judgment of the Court of Justice of the European Union (Grand Chamber) of July 24, 2023 in Case C-107/23 PPU [Lin].

[3] For offenses committed prior to the entry into force of Law No. 125/2023.

[4] For the practical determination of whether European Union law is to be applied in the resolution of the case, in accordance with the interpretation benchmarks outlined in the Judgment of the Court of Justice of July 24, 2023.

[5] See, to that effect, Judgment of the Court, Grand Chamber, of September 8, 2015, Ivo Taricco s.a, C-105/14 and Judgment of the Court, Grand Chamber, of May 2, 2018, Scialdone, C-574/15.

[6] It should also be noted that the Financial Regulation (Regulation (EU, Euratom) 2018/1046 of the European Parliament and of the Council of July 18, 2018 on the financial rules applicable to the general budget of the Financial Union[6] does not provide an express definition of fraud, its content referring both to Article 1 of the PFI Convention and to Article 3 of Directive (EU) 2017/1371, concluding therefore that in principle fraud must be understood in the sense provided for in the PFI Convention.

[7] According to Art.⁹¹ of Law no. 241/2005, as supplemented: '(1) Any action or inaction committed in the context of fraudulent schemes of a cross-border nature having the effect of diminishing by at least 10,000. 000 euro, in national currency equivalent, of the resources of the budget of the European Union, by: a) using or submitting false, incorrect or incomplete VAT returns or documents; b) failing to disclose VAT information, where such information is required to be disclosed by law; c) submitting correct VAT returns in order to fraudulently disguise the non-payment or the establishment of undue entitlements to VAT refunds. (1) shall be punishable."

[8] See CCJ, Criminal Division, Criminal Decision No. 45/A of 09.02.2024, final.

[9] See Criminal Decision no. 816/2024 of 27/06/2024 of the Bucharest Court of Appeal, S. II-a pen. final. See Bucharest Court of Appeal, S. I. pen., Decision no. 588 of 15.05.2024, final.

[10] See to that effect Judgment of the Court, Grand Chamber, of September 8, 2015, Ivo Taricco s.a, C-105/14 p.49; Judgment Berlusconi and Others, C-387/02, C-391/02 and C-403/02, EU:C:2005:270, p.72, and Judgment Kücükdeveci, C-555/07, EU:C:2010:21, p.51.