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The taxpayer has the right to supportive tax authority administration

The European Court of Justice recently made a decision in another interesting case with Hungarian implications. The ruling relates to a special topic of the VAT Act, that of the VAT reclaim procedures of foreigners. In the justification of the ruling, the court also refers to areas of procedural law that are of interest to Hungarian companies as well.

VAT refund application referred to court

A foreign taxable person submitted a VAT refund application in due time to the Hungarian tax authority in relation to its activity in 2016. In the application, it asked for the refund of the Hungarian input VAT relating to its activity but the VAT amounts shown in the application and the VAT content of the attached invoices did not match. In all cases where the amount reclaimed in the application was lower than the input VAT in the invoice, the Hungarian tax authority always refunded the lower amount requested in the application to the foreign company. 

There was no opportunity to correct the differences without filing a new application and a new application could not be filed due to the term of limitation applicable for the procedure. For this reason, the foreign company referred to court to claim the refunding of the difference between the tax paid according to the invoices filed and the tax stated in the refund application. 

During the procedure, the Curia escalated the matter to the European Court of Justice to clarify whether the tax authority may, in the case of an obvious difference to the detriment of the taxpayer of the refund application and the invoice, proceed without asking the taxpayer for additional data as it has access to all material information to make a decision on the reclaim. The European Court of Justice recently made another decision in a case of VAT reclaim with Hungarian implications also. 

The tax authority is bound by the principle of good administration also

The European Court of Justice takes the view that the general principle of the right to good administration must be applied in tax audit procedures. The principle of good administration requires that the authority carries out an inspection covering all relevant circumstances as part of its audit obligation. This way, it can make sure that information that is the most reliable and of the widest possible scope is available during the making of its final decision. If the taxpayer makes errors in its application that are not identified during the procedure, liability will lie with the taxpayer according to the main rule. 

An exemption from this rule is if these errors can be identified easily as, in this case, the tax authority must be able to detect the errors according to the principle of good administration. After identification of the errors, the tax authority must notify the taxpayer calling it to change its refund application so that it can be fulfilled. 

In the absence of such notice, the tax authority concerned would disproportionately violate the principle of tax neutrality as it would deny the taxpayer the VAT to the refunding of which it would be entitled. In its ruling, the European Court of Justice also stated that the legitimate procedure would have been if, having identified the error, the tax authority would have called the foreign company to correct its erroneous application. This correction should have been treated as if it was filed at the time of submission of the original application. 

This approach is not a novelty in Hungarian tax law either as a basic principle of tax administration procedure provides that the tax authority has the obligation of calling the taxpayer's attention to enforcing its rights. And although the tax authority emphasises in its communication its role as a supporting tax authority instead of a sanctioning one, that is not always our everyday experience. Reclaiming of VAT incurred abroad is an area, in particular, where instead of support, we often find the old tax authority insisting inflexibly to administrative rules. 

Recently it was not possible for Hungarian taxable persons to reclaim foreign VAT because Hungarian Tax and Customs Administration (NAV) was struggling with a system failure and the relevant forms could not be filed electronically. The tax authority did not accept the forms submitted by mail, which means that it practically excluded any reclaim option for the companies concerned. 

The above ruling may also be a breakthrough in their case as the European Court of Justice clearly insists on the principle of tax neutrality in the area of VAT. This principle is infringed severely when a company is not given the opportunity to reclaim the VAT imposed on it abroad because it did not try to file its tax return "at the right time". 

It is good news for the companies applying to reclaim VAT incurred abroad that according to the European Court of Justice the right to good administration and the principle of tax neutrality have priority in the judgment of applications. Procedures in line with these principles were upheld by this ruling of the European Court of Justice (although they are also represented in Hungarian legal regulations). 


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