Limitations to the non-deductibility of input VAT: Where does the diligence of a business person end when operating with other businesses?

03.2013

In the case Mahagében (C-80/11 and C-142/11) the Court of Justice of the European Union (CJEU) condemned Hungary for limiting a company’s VAT deductibility based on the suspicion that a supplier of this company might be committing VAT fraud. We must bear in mind that value-added tax works like a chain, where all links are connected; therefore, if one link has a problem, it will inevitably affect all the others.

The issue under examination was to what extent the tax administration can reject the deductibility of input VAT in those cases in which, despite holding correct invoices on both ends (issuer and recipient) and having duly paid for VAT, the tax administration suspects that the issuer of the invoices for which VAT is intended to be deducted, may be involved in fraudulent operations.

Certainly, in the fight against fraud, the tax administration must have the means to limit the deductibility of input VAT. However, in this case, it was proven that the tax administration had acted based on unconfirmed suspicions — that could have been verified — and shifted the burden of proof to the company requesting the VAT refund. The Court took the so-called “carousel fraud” into account, but insisted that the tax administration was not entitled to shift the burden of proof – that there was no fraud — to the company reclaiming VAT, considering that it acted with diligence. On the contrary, it is the sole responsibility of the tax administration to carry out the necessary verifications to detect any irregularities.

++Published at the tax newsletter of the German Chamber of Commerce related to VAT news.++