- Presumption of fictitious invoices introduced?
- March 13, 2013 | Author: Pál Jalsovszky
- Law Firm: Jalsovszky Law Firm - Budapest Office
1 The authentic invoice - the approach of NAV
According to the Hungarian Value Added Tax Act, taxpayers are entitled to deduct input VAT provided that they possess an authentic invoice indicating the exact amount of VAT. The invoice is considered to be authentic if it meets the statutory formal requirements and, further, if its content genuinely reflects the invoiced transaction.
As far as the latter requirement is concerned, in the course of tax audits, the tax authority consistently investigates whether the invoiced transaction was, in fact, performed by the person issuing the invoice and in the manner as it is stated in the invoice. If this cannot be verified then, in accordance with the tax authority’s practice, the authenticity of the invoice becomes disputed and, as a result, the taxpayer loses its right to deduct the VAT. In such cases the tax authority usually does not examine whether the transaction, on which the tax deduction is be based, is real, but rather requests the taxpayer to prove that the transaction took place fully in line with the circumstances contained in the invoice.
As an example, if a moving company operates its business by hiring subcontractors to carry out the conveyancing, then the tax authority will not examine whether the transactions actually took place, instead it will investigate whether it can be verified that the conveyancing has been carried out by the subcontractors issuing the invoice, in the manner as described in the invoices. In such cases the tax authority usually commences audits at the subcontractors as well and examines whether they have the personnel and equipment necessary to perform the conveyancing (e.g. trucks, registered employees, office space). If it is determined that the subcontractor did not have the personnel and equipment necessary to perform the conveyancing then the tax authority will argue that, regardless whether the transportation has indeed been performed, it is not verified that it has been performed by the issuer of the invoice. This can enable the tax authority to refuse the right of the moving company to deduct the VAT charged by the subsidiary.
This practice raises an obvious question: to what extent is the taxpayer receiving the invoice responsible for the circumstances of the issuer of the invoice. The statutory laws do not prescribe that business partners need to investigate each other’s businesses and ascertain whether their contracting party possesses all the required resources that ensure the proper performance of the transaction. In general business practice the customer of a service acts reasonably if it checks some basic data of its contractor only, before entering into a contractual relationship. The tax authority, however, is of the opinion that this does not satisfy the requirement of reasonable care. According to its interpretation, market participants are expected to monitor their business partners, whether they operate their business activities at their registered seat or place of business, whether they employ registered employees and whether they possess appropriate documents verifying the lawful acquisition of the goods sold or services performed by them. In the practice of the tax authority any circumstance that may imply that the transaction had not been performed by the issuer of the invoice but by someone else will lead to the challenge of the authenticity of the invoice and result in the refusal of VAT deduction.
2 The practice of NAV - as the European Court of Justice sees it
The European Court of Justice (ECJ) passed decisions in various Hungary-related cases during last summer. In the decisions it has been articulated that the practice of the tax authority, namely that it consistently questions the taxpayers’ right to deduct VAT in case certain circumstances of the performance of the underlying service cannot be evidenced, is not in compliance with EC law. The ECJ briefly argued that it is not the task of the taxpayers to fully audit their contracting parties. According to the ECJ if the transaction has been performed and the taxpayer can verify the performance with a duly issued invoice then the deduction of the VAT cannot be challenged on the basis that the issuer of the invoice or any of its business partners are unable to verify the lawful origin of the transferred goods or rendered services.
The ECJ allowed only two exceptions from the above principle. On one hand, if the circumstances of a case lead to a suspicion regarding the lawful operation of the issuer of the invoice then an increased examination of the partner’s operation is required. Further, if the taxpayer knew or should have known that the objective of the transaction is tax evasion then the taxpayer is refused the right to deduct the input VAT.
3 Where do we go from here? - how the legislation sees it
Despite the above decisions of the European Court of Justice, as of 2013, the newly introduced provisions of the VAT Act will preserve the current audit practice of the tax authority. In accordance with these amendments, from 1 January 2013 the taxpayers need to ensure “the authenticity of the origin of the invoice”. Ensuring the authenticity of origin requires the taxpayers to collect such documentation or information that enables the tax authority to investigate the connection between the invoices and the transactions the invoices cover. In case the tax authority audit determines that the taxpayer’s documentation is not able to verify that the invoiced transaction was actually performed by the issuer of the invoice (i.e. the authenticity of origin is not verified) then the taxpayer loses its right to deduct the VAT contained in the invoice.
Another provision will enter into force on 1 July 2013. According to this new rule the taxpayers will have the opportunity to check whether their business partners fulfilled their obligation to submit their inland summary VAT reports. While, at the first instance, this new rule provides only apossibility for the taxpayers, in the wake of the decisions of the ECJ it can be foreseen that this new rule will rather create an obligation for the taxpayers. The taxpayers will, in the future, have no more possibility to argue that they did not know about the unlawful operation of their business partners, since a publicly accessible database will enable them to check their business partners’ compliance with the tax reporting obligations.
4 What to expect? - as we see it
For a short period of time it seemed that the practice of the tax authority which elaborated over the decades will be restricted by the decisions of the ECJ. The year-end tax law changes, however, provided a momentum for the tax authority once again. In accordance with the amended laws, it will be a statutory precondition of the right to deduct VAT that, in the course of an eventual tax authority audit, the taxpayers are able to verify the authenticity of the invoice and the actual performance of the service behind such invoice.
It is not regulated in the laws, however, in what way taxpayers will need to fulfil this obligation. In many cases taxpayers will have to verify such circumstances that they have no influence on or insight into. Consequently, the recipient of an invoice will have to show special care and diligence upon the receipt of the invoice and it also seems inevitable for taxpayers to introduce certain internal control measures to their daily operations in this regard.
As a consequence, we suggest that taxpayers carry out frequent examination of their business partners by using the information available on the tax authority’s website. Additionally, we further suggest that taxpayers shall collect and store such documents that can certify the actual performance of the invoiced transaction upon a tax revision. Based on the newly introduced rules, however, the risk of the findings of a tax authority cannot be ruled out, even if the taxpayer shows the highest level of prudence.