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EC Urges Hungary To Amend VAT Reimbursement Rules

by Ulrika Lomas, Tax-News.com, Brussels

13 October 2009


The European Commission has issued a reasoned opinion, requesting that Hungary amend its value added tax (VAT) reimbursement rules. According to the Commission, the VAT reimbursement rules violate Article 183 of the VAT Directive, given that they do not ensure the application of the principle of neutrality guaranteed by the common system of VAT.

The Commission has called on Hungary to modify the relevant provisions of its VAT legislation which preclude Hungarian taxable persons from claiming reimbursement of input VAT where the underlying supply has not been financially settled by the taxable person. The request takes the form of a reasoned opinion, the second step of infringement procedure enshrined in Article 226 of the EC Treaty.

The Hungarian VAT Act grants taxable persons the option to choose between carrying forward their excess VAT (which results from deductible VAT exceeding payable VAT in a tax period) to the next tax period or immediately claiming the refund of it. However, the reimbursement of excess VAT cannot be claimed in respect of input VAT, charged on a purchase that has not yet been paid by the taxable person. As a result, taxable persons whose tax returns consistently show “excesses” are de facto obliged to carry forward the excess input VAT to the following tax period.

According to the Commission, this regime infringes Article 183 of Directive 2006/112/EC (the VAT Directive), as interpreted by the European Court of Justice (ECJ).

Under Article 183, where, for a given tax period, the amount of deductions exceeds the amount of VAT due, Member States may either make a refund or allow the carryover of the excess VAT forward to the following period, under the conditions which they shall determine.

The ECJ has held in its case-law that while the Article 153 provides Member States with some leeway in determining the conditions for VAT refund, account must be taken of the general principles of law. In particular, the principle of fiscal neutrality must be respected, so that the method of refund adopted by Member States does not entail any financial risk for the taxable person.

The Commission argues that the principle of fiscal neutrality is achieved by both a deduction mechanism, according to which on each transaction VAT is chargeable after deduction of the amount of VAT borne directly by the various cost components, as well as by a refund mechanism under which the excess VAT is immediately to be refunded to the taxable person.

Under the contested Hungarian provisions, the financial settlement condition applies only on input VAT. Indeed, VAT on the sales of the taxable person is due at the time of the return, regardless of the payment, while a possible refundable VAT balance would have to be carried over to the next period if all input VAT is not paid to the suppliers. This affects the neutrality of VAT.

The Hungarian system increases the VAT burden of taxable persons where, in periods of high investments, for example, the amount of input VAT exceeds deductible VAT. As refund is made conditional upon the payment of the supplies, the taxable persons may be obliged to carry forward refundable VAT to successive tax periods.

The Commission concludes therefore that the Hungarian system constitutes an infringement of Article 183 of the VAT Directive as it does not ensure the application of the principle of neutrality guaranteed by the common system of VAT.


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