VAT Newsletter 3/2012

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The European Court of Justice („ECJ”) has ruled on the joined cases Mahagében (C- 80/11) and Peter Dávid (C/142-11).

The dispute in this case concerns the refusal of the right to deduct the VAT in the event of improper conduct by the issuer of the invoice relating to the goods or services in respect of which the exercise of that right is sought and respectively the obligation of the taxable person to verify the lawful conduct of the issuer of that invoice and to provide proof thereof.

Case C- 80/11

During 2007 Mahagében bought from RK unprocessed acacia logs and deducted the related VAT based on the invoices raised by RK. The quantities of acacia logs purchased from RK were recorded by Mahagében as stocks and were resold by it to various companies.

During an inspection to RK, the tax authority concluded that RK did not have any reserves of acacia logs and that the quantity of acacia logs purchased during 2007 was insufficient to fulfil the orders invoiced to Mahagében.

Therefore, during 2010, the tax authority rejected Mahagében the right to deduct the VAT related to the invoices raised by RK.

Case C- 142/11

Mr Dávid had undertaken, under a works contract, to carry out various construction works. Given that Mr Dávid did not have any employees of his own, he had used a subcontractor, Mr Máté, to carry out the work. Mr. Dávid was unable to name the individual workers employed by that subcontractor.

Tax inspections showed that Mr Máté also did not have any employees or equipment necessary to carry out the work in respect of which the invoices had been issued and that he had merely replicated the invoices of another subcontractor. The latter, Mr Máté’s father-inlaw, did not have any registered employees during the respective period and had not filed a tax return for the tax year at issue.

Tax authority found that the invoices issued by the latter subcontractor could not adequately establish that the economic transaction detailed did take place in fact and that Mr Máté had not actually carried out any subcontracted activities.

Also, in 2006 Mr Dávid had undertaken to carry out for a company certain work which he completed using another subcontractor. However, at the time of the tax inspection, the latter subcontractor was already going through liquidation.

Under those circumstances, the tax authority refused Mr Dávid the right to deduct the VAT resulting from the two transactions at issue.

The ECJ considered that the tax authority cannot refuse a taxable person the right to deduct the VAT related to the services supplied to him, on the ground that the issuer of the invoice relating to those services, or one of his suppliers, acted improperly, without that authority establishing, on the basis of objective evidence, that the taxable person concerned knew, or should have known, that the transaction relied on as a basis for the right to deduct was connected with fraud committed by the issuer of the invoice or by another trader acting earlier in the chain of supply.

Also, ECJ considered that the tax authority cannot refuse the right to deduct on the ground that the taxable person did not verify whether the issuer of the invoice relating to the goods in respect of which the exercise of the right to deduct is sought had the status of a taxable person, that he was in possession of the said goods and was in a position to supply such, and that he had observed his obligations as regards the declaration and payment of value added tax, or on the ground that, apart from that invoice, the taxable person is not in possession of other documents demonstrating that those conditions were fulfilled, although the substantive and formal conditions laid down by Directive 2006/112 for exercising the right to deduct were met and the taxable person is not aware of any reason justifying the suspicion that irregularities or fraud have been committed within that invoice issuer’s sphere of activity.

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