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|Mervärdesbeskattning vid obestånd / Value Added Tax in Insolvency Situations|
|Abstract||1. During the last few years, the question of Value Added Tax (VAT) in insolvency situations has received increased attention in the application of Swedish Law. This is undoubtedly related to the increase in the number of bankruptcies in Sweden since the beginning of the 1990s which has in itself given rise to a whole new source of legal problems. The gravity of these new problems increases when one considers the amount of money at stake. In a recent bankruptcy case, where the states tax claim was in the region of 100 million Swedish Crowns, the question arose not only as to whether or not the state had a high priority claim against the bankruptcy estate, but also if it had a claim at all.|
From a legal perspective, the question primarily relates to two branches of law: VAT Law and Insolvency Law. This creates few problems per se as the two areas of law are sufficiently diverse. However, in certain situations the division between Insolvency Law and VAT Law becomes somewhat diffuse and a degree of uncertainty arises as to how the different objectives, principles and legislature of the respective areas impinge upon each other. For example, in what respect is Insolvency Law’s principle of the neutrality and equality of creditors reflected in the application VAT Law? Added to this problem is the fact that the laws within both fields can occasionally be very technical in nature which makes their application all the more difficult.
2. My impression is that the relevant questions tend to be addressed either from the VAT aspect or from the insolvency aspect. This is, however, not surprising when one considers the conflicting fundamental objectives of the Swedish VAT Act (Mervärdesskattelagen) and the Bankruptcy Act (Konkurslagen). The VAT Act has as its basic purpose to provide for the state’s financial needs in order to fund public spending i.e. the monetary policy goals. In a bankruptcy, the state finds itself as one in a procession of creditors. The notion of bankruptcy law is that the entire group of creditors is fairly represented during the liquidation of the debtor’s business. In an on-going bankruptcy, the two legal areas are aspiring to establish themselves as dominant while striving in opposite directions and in practice this has manifested itself in the VAT Act being interpreted from different perspectives.
3. The main emphasis of the doctoral thesis is the investigation of two central issues. The first is the boundary between the debtor’s and the bankruptcy estate’s tax liability according to the VAT Act. The second is to establish what priority the state’s claim for VAT has in the bankruptcy. The solution to the first problem affects the solution to the second.
The situations in which these two issues are most relevant take two forms. The first is when there is a duty to pay VAT to the state arising from past income in which VAT has been included. The second is when the duty to pay arises from a previous deduction of VAT.
The difficulty in agreeing boundaries between the differing claims in a bankruptcy often originates from the fact that the circumstances surrounding the debt in question can have occurred both before and after the declaration of bankruptcy. This problem is compounded through the wording and application of the VAT Act where certain circumstances need to occur for the differing VAT debts to arise. These circumstances can occur at different points in time.
4. A suitable starting point for the investigation of these problems has been to look at them from the two different angles simultaneously and analyse the objectives, the principles and the actual wording of the relevant Acts, thereafter doing a comparison. Therefore, in the second and third chapter of the thesis, the two fields of law are considered in more detail before a comparison between the two areas is further discussed in chapter four.
Chapter four also contains the analysis of where to draw the boundaries between the subject’s and the estate’s liability for VAT according to Chapter 6, paragraph 3 of the VAT Act. A transaction that falls under this regulation leads to the state having a VAT claim against the bankruptcy estate. If the transaction falls outside the rule contained in this paragraph, then the debt belongs to the subject in bankruptcy and not the estate. The question of whether or not the debt can be made valid within the estate must thereby be addressed first. The actual paragraph stipulates that the estate automatically becomes liable if the subject was liable. However, the scope of the estate’s liability is unclear. There appear to be two principal approaches to this problem and their basis lies in the above mentioned conflicting objectives of the relevant areas of law.
It is, in my opinion, important to look at the regulation in its context i.e. in a bankruptcy case. To the extent that the VAT Act does not stipulate otherwise, the principles of Insolvency Law ought to be maintained during interpretation of the legislation. The aim of the legislation is surely that the estate is only liable for taxes incurred due to transactions made by the estate after the declaration of bankruptcy. This ought to lead to the situation that if the estate is able to abandon some of the bankrupt subject’s property, then it ought also to be able to do so without incurring VAT liability for the transaction involving the same abandoned property. In Swedish case law however, a more fiscal approach has been expressed and the estate has been deemed liable for VAT on all transactions that have occurred after the bankruptcy, regardless of whether the estate has been a party to the transaction or not.
5. Chapter five addresses the problem of the refund of previously deducted VAT. Such a situation can occur, for example, when business premises are rented out or when invoices are discounted after the fact. The relevant legislation is highly complex and the technique for the return of funds varies from situation to situation. The common denominator, however, is that the liability to refund induces a reciprocal claim for the state. The bankruptcy produces, therefore, the same principle problem of where to draw the boundaries between the debtor’s and the bankrupt estate’s liability for VAT as would occur as a result of ordinary taxable transactions. I believe, since the VAT Act is uncertain as to what is applicable in this situation, despite the topic’s importance, that the objectives of Insolvency Law ought to be maintained even when interpreting the legislation on VAT refunds.
6. Whilst chapters two to five examine the debtor’s and the bankrupt estate’s liability according to the VAT Act, together with the state’s position as creditor in the bankruptcy, chapter six deals with the other creditors involved in the bankruptcy. The loss of trade claims which ensue because of compositions or bankruptcies entail a right to reduce the taxation basis for VAT liability.
7. In conclusion, chapter seven gives general opinions on how the VAT Act ought to be reformed.
The insolvency based foundation for the division of responsibility between the debtor and the estate is that the debtor is deemed responsible for all liabilities that occur before the bankruptcy and the estate for those that occur after bankruptcy is declared. The declaration of bankruptcy does not, however, create a clear-cut division between the debtor’s and the estate’s liability. There are, for example, cases where it has been considered motivated to expand the debtor’s liability to include commitments made after the declaration of bankruptcy.
In my opinion, there are no grounds for accepting that liability for VAT in a bankruptcy should deviate from the norm. The subject in bankruptcy ought, as a rule, to be liable for both taxes and refunds for all transactions that occur within the enterprise before the declaration of bankruptcy and the estate ought to be liable for those that occur thereafter. In the first case, the state’s tax claim against the subject in bankruptcy ought to be a valid claim in the bankruptcy. In the second, a claim against the bankruptcy estate ought to remain solely as a claim against the bankruptcy estate. The content of the current legislation in the VAT Act reflects this principle albeit not consistently. Changes in the law are, therefore, desirable. In certain cases, the state appears to be unable to make a valid claim in the bankruptcy, despite the fact that this ought to be the case.
From the Insolvency Law perspective, it is important to guard against the state’s tax claims being given hidden protection within the realms of the VAT Act. This would conflict with Insolvency Law’s fundamental principle of neutrality in relation to the competing creditors. Furthermore, the state already has a number of special rules giving added protection to its claims in relation to other creditors. In certain situations, however, the VAT Act has shifted the risk factor that occurs when a subject is declared bankrupt from the state to the remaining creditors.
In addition to this, it appears that current legislation favours creditors who have collateral. The mortgagee can include the entire sum of the sale of collateral toward his claim, including the amount that represents VAT. The debtor may therefore be forced with having to pay VAT on an item even though he has not received any payment relating to the VAT from the sale of the item. If the sale of the collateral occurs after the declaration of bankruptcy, the bankruptcy estate can, through no fault of its own, become insolvent. Such an application of the regulations is, in my opinion, unsatisfactory. The possibility of amendment to allow the mortgagee to pay all or some of the VAT on the item ought to examined.
Finally it is desirable to co-ordinate the different rules and regulations relating to the refund of VAT contained within the VAT Act. There are currently areas that unnecessarily overlap each other. Through such a co-ordination, the content of the legislation could be made more self-evident and the number of occasionally very technical rules for refunding could be reduced.