Denial of VAT Deduction Right, Inconsistent Practices of the Tax Authority

The denial of the right to deduct value-added tax (VAT) is becoming an increasingly prevalent issue among Hungarian businesses, particularly in cases where the National Tax and Customs Administration (NTCA) issues contradictory or inadequately substantiated findings. In practice, it is not uncommon for the NTCA to adopt conflicting positions regarding the same economic event (e.g., product procurement), posing significant risks to taxpayers. This article provides a detailed examination of the NTCA’s practices, the primary grounds for denying VAT deduction rights, and the available legal remedies. Additionally, it addresses the influence of the Court of Justice of the European Union (CJEU) and the Hungarian Supreme Court (Kúria), which fundamentally shape Hungarian tax authority procedures. Expert advice from the Molnár & Márk Law Association offers guidance on effectively defending against tax authority proceedings.

Why Does the NTCA Deny VAT Deduction Rights?

The NTCA frequently justifies the denial of VAT deduction rights by raising doubts about the underlying product procurement. The tax authority typically relies on three main grounds for such denials:

• No Product Procurement Occurred
  The NTCA determines that the products listed on the invoice were neither procured from the supplier indicated nor from any third party. The tax authority bears the burden of proof and must substantiate its position with concrete evidence, such as investigative reports or other documentation.

• Products Were Not Supplied by the Invoiced Supplier
  The NTCA acknowledges that the procurement occurred but asserts that the products were not supplied by the entity named on the invoice. Here, too, the burden of proof lies with the tax authority, which must present specific evidence (e.g., statements or investigative materials).

• The Supplier Lacked Capacity to Supply the Products
  The NTCA contends that the supplier lacked the legal authority or capacity to supply the products. In such cases, the tax authority cites objective facts suggesting that the taxpayer knew or should have known of irregularities (e.g., the supplier’s failure to file tax returns or lack of tangible assets).

Issues with the NTCA’s Practices

The NTCA’s practices often reveal inconsistencies with its own guidelines or applicable legal provisions. The following issues commonly arise:

• Contradictory Findings
  The NTCA issues conflicting positions regarding the same economic event (e.g., product procurement) across different proceedings.

• Inadequate Evidence
  The tax authority frequently fails to provide sufficient evidence to support its findings or relies on objective circumstances that do not constitute legitimate grounds.

• Shifting the Burden of Proof
  Despite its obligation to clarify the facts, the NTCA often attempts to shift the burden of proof onto the taxpayer.

These practices not only contravene Hungarian legal standards but also conflict with the jurisprudence of the CJEU and the Kúria.

Court of Justice of the European Union (CJEU) Jurisprudence

The CJEU has addressed VAT deduction rights in numerous cases, emphasizing that the VAT system aims to relieve taxpayers of tax burdens and that tax authorities must act fairly.

• Burden of Proof
  The CJEU has consistently held that tax authorities must substantiate the denial of VAT deduction rights with clear and specific evidence. Taxpayers cannot bear the burden of proof if the tax authority fails to establish its case.

• Limits of Objective Liability
  According to the CJEU, taxpayers may only be held accountable if they knew or should have known of irregularities. Tax authorities must rely on objective facts and avoid arbitrary determinations. For instance, in Case C-273/11, the CJEU ruled that tax authorities must prove the taxpayer’s actual or constructive knowledge of irregularities; absent such proof, VAT deduction rights cannot be denied.

Hungarian Supreme Court (Kúria) Jurisprudence

The Kúria has also addressed VAT deduction denials in multiple cases, generally aligning with CJEU principles and emphasizing the need for fair and consistent tax authority conduct.

• Burden of Proof
  The Kúria underscores that tax authorities must support their findings with concrete evidence, and taxpayers cannot be tasked with disproving unsubstantiated claims.

• Limits of Objective Liability
  The Kúria holds that taxpayers are liable only if they knew or should have known of irregularities, requiring tax authorities to cite objective facts rather than arbitrary assumptions. For example, in Decision BH2019.10, the Kúria ruled that absent proof of the taxpayer’s actual or constructive knowledge, VAT deduction rights cannot be denied.

Legal Remedies

Taxpayers facing a denial of VAT deduction rights have several legal remedies at their disposal:

• Comments to the Tax Authority
  The initial step is submitting comments on the tax authority’s audit report. This is a cost-free remedy, though it carries preclusive effects, making it advisable to utilize it to contest specific findings.

• Appeal to the Tax Authority
  The next step is appealing the tax authority’s decision, requesting a re-evaluation of the case.

• Administrative Court Proceedings
  If the appeal fails, taxpayers may seek judicial review before an administrative court, which can assess the legality of the tax authority’s decision.

• Request for Review by the Kúria
  Should the administrative court rule against the taxpayer, a request for review may be filed with the Kúria, which evaluates whether the tax authority’s findings are supported by clear and specific evidence.

Expert Advice from Molnár & Márk Law Association

Experts at the Molnár & Márk Law Association emphasize the importance of documenting all economic events related to product procurement. Contracts, invoices, and other records are essential during tax authority proceedings, though they may not suffice on their own. To the extent possible, retaining additional documentation—such as emails—is recommended. Taxpayers are also urged to exhaust all legal remedies rather than accepting adverse decisions unchallenged.

With assistance from the Molnár & Márk Law Association, taxpayers can mount an effective defense in tax authority proceedings, ensuring their rights are upheld.

Conclusion

The denial of VAT deduction rights poses a significant challenge for businesses, particularly when the NTCA issues contradictory or poorly substantiated findings. However, with proper legal support and meticulous documentation, taxpayers can successfully contest tax authority decisions. Do not hesitate to consult expert attorneys, such as those at the Molnár & Márk Law Association, to safeguard your interests and enforce your rights.