Consequences of EU Court ruling on VAT case in Hungary
The Court of Justice of the European Union (“CJEU”) recently delivered a judgement concerning Hungary (case no. C-189/18 “Glencore”) – a ruling that could change the Tax Authority’s approach during tax audit- and related appeal procedures.
Hungary's Tax Authority rejected a deduction of a significant amount of VAT based on the findings and evidence of previous tax inspections and ongoing criminal proceedings against the taxpayer’s suppliers. The taxpayer challenged the decision, citing, among others, that no access was granted to the documentation that the findings were based on; neither to that of the criminal proceedings against its suppliers, nor to that of the tax inspections. The taxpayer argued that the Tax Authority violated their right to defence and due process, as the Tax Authority had only made available a part of the documentation to the taxpayer, selected according to its own considerations. The CJEU scrutinised the practice of the Tax Authority based on Article 1 Section (3a) of Hungary's Tax Procedure Act, as well as the rights related to previously conducted tax procedures, based on a request for a preliminary ruling by the Budapest Administrative and Labour Court.
The CJEU declared that a practice where a tax authority is bound by the findings of previous tax procedures in order to ensure legal certainty and equal rights of taxpayers is generally considered to be compatible with EU law. However, taxpayers must be granted the right to challenge the findings and evidence upon which a tax authority based its adverse decision against them in the course of their own procedure. Accordingly, the application of Article 1 Section (3a) of Hungary's Tax Procedure Act does not relieve the Tax Authority of its obligation to inform the taxpayer of the evidence upon which it has made a decision during a procedure initiated against the taxpayer, and access to such files may only be restricted to ensure the public interest (e.g. personal data, law enforcement, etc.).
With regard to the extent of right to review, the CJEU determined that administrative courts must be allowed to review the use and lawfulness of evidence gathered in the course of administrative (tax audit) procedures against other taxpayers (in this case, the suppliers of Glencore), as well as relevant findings.
In light of this judgement, ongoing and concluded cases where the Tax Authority has relied on the findings of previous tax inspections (or even criminal proceedings) may be worth reviewing.