In the context of a national and European framework that tends to overshadow the perspectives of the renewable energy, at least on the short term, the investors in green energy could face other challenges, with a direct impact on the forecasted cash-flow.
After the investors have made business plans based on the relevant legislation, the rules were changed and this affected the confidence of foreign investors and thus the volume of foreign investments in Romania. The volume of the foreign investments in Romania has also a direct impact on the taxes collected at the state budget.
VAT Reimbursement
Apart of the unpredictable changes of the relevant legislation (i.e., decrease of the number of granted green certificates), there are more and more cases when the Romanian tax authorities challenge the VAT reimbursement for companies in the energy sectors during the investment stage. As the amount of money invested in such projects as wind energy plants are material, the refusal of the VAT reimbursement by the Romanian Tax Authorities could have a tremendous impact with respect to the cash flow of the company and moreover, on its going concern.
The Romanian VAT law allows the VAT deduction with respect to the acquisitions, provided that they are performed for the purpose of obtaining taxable revenues. Moreover, the same domestic provisions allow a taxable person to deduct the input VAT from the moment of its intention to perform economic activities.
The Romanian VAT law allows the VAT deduction with respect to the acquisitions, provided that they are performed for the purpose of obtaining taxable revenues
It is clear that the production of green energy represents an economic activity from VAT point of view. However, during a tax audit it would be required to prove that the acquisitions during the investment phase of a project are performed in relation to the future economic operations that will generate taxable income. It could be more difficult to prove this when the taxable person has not started yet to perform economic activities. This situation would lead to the fact that there would be high amounts of input VAT and no output VAT at the level of the respective company.
If during the investment phase, there are services received from various suppliers, such as geological survey services, environmental assessment, wind analysis, other consultancy services, management services, technical studies, the companies could be required to prove the effective rendering of the services in their direct benefit and for the purposes of their business, with appropriate justifying documents such as: reports, work statements timesheets and others. The Romanian Tax Authorities often request specific justifying documents clearly describing the nature, the purpose and the effective rendering of the services supplied.
On the other hand, the companies should prove that the acquisitions were performed for the purpose of obtaining taxable revenues. The entitlement for the land, the permits and the necessary approvals already obtained for the construction work of a wind farm are a prerequisite for the subsequent operation of the wind park and could prove the company’s intention to obtain revenue.
Moreover, as Romania is a member of the European Union, the decisions of the European Court of Justice (ECJ) should be also taken into consideration when interpreting the provisions of the domestic VAT legislation. Also, the tax inspectors should be aware of those decisions and should interpret and apply the Romanian law accordingly. During the tax audits and when drafting appeals to the negative decisions issued by the Romanian Tax Authorities, it is highly recommendable for the companies to use decisions of the ECJ in cases having a similar nature. Moreover, not only the final decision of the ECJ but also the judgment of the ECJ may also be considered when analyzing the VAT implications of certain transactions.
Decisions of the European Court of Justice
For example, the conclusion of the Court in the ECJ case C-400/98 Breitsohl was that “the right to deduct the VAT paid on transactions carried out with a view to the realization of a planned economic activity still exists even where the tax authority is aware, from the time of the first tax assessment, that the economic activity envisaged, which was to give rise to taxable transactions, will not be taken up”.
Moreover, as per the judgment in the ECJ case C-268/83 à Rompelman, according to the neutrality principle of VAT, the expenses with the investments performed for the purpose of commencing a business should be considered as economic activities. It would be contrary to the neutrality principle if the economic activity would be considered as commenced only from the moment when taxable income would be generated.
Thus, the above decisions support the opinion according to that the mere intention to perform taxable supplies should enable the taxpayers to receive the refund of the VAT, provided that the mandatory conditions are met (e.g., correct invoices).
In conclusion, for the companies that performed investments in renewable energy projects such as wind farms, but did not yet obtain taxable revenues as the projects were not yet finalized, the VAT reimbursement could be a challenge. However, as the supplies of electricity and green certificates to traders is subject to reverse-charge mechanism (thus, not generating any output VAT), the incurred VAT should be requested for refund, otherwise, it will be lost.
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The full version of this article can be read in printed edition of energynomics.ro Magazine, issued this June.
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