Limitations on the right to deduct input VAT should be exceptional and proportionate

04.2014

Taxpayers frequently encounter significant restrictions on their right to deduct input VAT. The purpose of these restrictions is ostensibly to simplify the administration of the tax and to prevent potential fraud. Unfortunately, tax authorities often apply such limitations in an unjustified or disproportionate manner, undermining one of the core principles of VAT — that of neutrality. This principle dictates that input VAT should never become a cost to the business.

Fortunately, the courts have sought to curb this tendency. In a judgment dated 23 December 2013, drawing on the CJEU’s ruling in Case C-177/99, the Spanish National Court held that the tax authorities cannot automatically deny deduction of VAT on expenses related to accommodation, restaurants and entertainment. Instead, businesses must be allowed to justify the necessity of such expenses. The Court made clear that applying anti-fraud measures indiscriminately would distort the proper functioning of the VAT system by disproportionately affecting legitimate business transactions. Each case, therefore, must be assessed on its individual merits.

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