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Hungary: VAT reverse-charge mechanism, input VAT deduction (CJEU judgments)

Hungary: VAT reverse-charge mechanism, VAT

The Court of Justice of the European Union (CJEU) issued judgments in two value added tax (VAT) cases concerning application of the reverse-charge mechanism in Hungary.

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Background

In these VAT cases (Farkas, no. C-564/15, and PORR Építési Kft, no. C-691/17), the taxpayers received invoices that were issued in accordance with the general VAT rules (i.e., the supplier charged VAT on the invoices).The taxpayer receiving the invoices deducted the amount of VAT charged. The tax authority audited the invoices, and took a position that the underlying transactions came under the scope of reverse-charge VAT, and thus denied the deduction of input VAT.

The cases were eventually referred to the CJEU which considered the following questions:

  • The practice of the Hungarian tax authority is to deny input VAT at the level of the purchaser of goods (or recipient of a service) in situations when the seller of the goods (or supplier of the service) charges VAT in its invoices (and declares and remits the amount of VAT), even though the reverse-charge mechanism applies to the transaction. Is this treatment compatible or not compatible with EU law?
  • Is the tax authority required to investigate whether the issuer of the invoice is able to revise the invoice and return the VAT to the purchaser (recipient) before denying the right of deduction of input VAT at the purchaser (recipient)? 

CJEU judgments

According to the CJEU:

  • It is not in contravention of EU law if the tax authority makes an assessment regarding the application of the reverse-charge mechanism against the taxpayer—even if the state treasury suffered no shortage in relation to the transaction.
  • The taxpayer receiving the invoices does not have the right to deduct VAT because the sum paid to the supplier cannot be deemed to be a tax paid by the supplier to the state treasury.
  • However, the principles of fiscal neutrality and effectiveness require that the taxpayer—having incorrectly deducted the VAT—be able to exercise its right to reimbursement of the unduly charged VAT directly from the state treasury if reimbursement from the supplier becomes impossible or excessively difficult in certain circumstances (for instance, insolvency or liquidation of the supplier).
  • The tax authority is not required to investigate the ability of the supplier to revise the VAT treatment of a transaction. Accordingly, the possibility for reimbursement from the state treasury must be considered by the purchasers (recipients) subject to such assessment by the tax authority, and such reimbursement may be requested in a separate procedure.

In accordance with the CJEU judgements, in situations when the tax authority makes assessments when correction of the invoices was not possible because of insolvency or liquidation of the supplier, it would be prudent to consider and investigate if there is a possibility for reimbursing the VAT directly from the state treasury.
 

Read a May 2019 report prepared by the KPMG member firm in Hungary

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