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MORE STRINGENT VAT REFUND RULES ADVERSELY AFFECT FINANCIAL POSITION OF COMPANIES

February 2012 - Tax & Private Client. Legal Developments by Wolf Theiss.

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As a result of a ruling of the European Court last July, the previous limitation of the VAT law, providing that companies could not claim back part of the positive difference between the payable and deductible VAT which related to their unpaid acquisitions, was annulled.

By amending the rules of taxation, legislature has now generalized the rule which is equally adverse to everyone to the effect that one has to wait seventy-five days until the tax authority refunds the reclaimed VAT. Only those can receive their money within a shorter period who have paid off to their suppliers in due course each invoice containing deductable VAT. This stringency measure considerably affects the financial and liquidity position of companies.

Prior to the amendments coming into force as of 1 January, in accordance with the general rule, the tax authority was obliged to refund the entire amount of the reclaimed VAT within thirty days (and within forty-five days in the case of an amount exceeding HUF five hundred thousand). The new seventy-five day rule is equally adverse to everyone as it makes the almost three-month refund period the general rule.

"In the practice of the EU member states, it is not uncommon that following a ruling by the European Court, ascertaining unlawfulness or discrimination, what was previously the rule of exception becomes the general rule and thereby provisions adversely affecting a large group of taxpayers are adopted. This happened, for example, in the case of Germany where, following the ruling of the European Court passed in the Lankhorst-Hohorst case, the rules of undercapitalization were modified to the effect that provisions previously afflicting only foreigners were extended to residents as well. It is not surprising, therefore, that Hungarian legislature also resorted to this means," says Dr. Balázs Békés, Tax Partner of Faludi Wolf Theiss Attorneys-at-Law.

The amendment to the procedural rules of VAT refunding was also justified by the fact that, as a result of the ruling of the European Court, the State had to repay to companies an amount exceeding 250 billion Forints as unlawfully retained VAT, which was a considerable extra burden on the Hungarian budget. The State is now trying to make up for this loss from other sources and modification of the provisions relating to the rules of taxation provides an opportunity for the tax authority to retain the VAT amounts for a specified period. It is also worth noting that the seventy-five day time limit only relates to the case where the tax authority does not order an in-depth audit, since if it does, then the time limit for refunding may be prolonged for a much longer period.

On the basis of the new rules, the tax authority generally has seventy-five days to refund the reclaimed VAT calculated from the submission of the tax return or the due date. There are only a few exceptions under this rule, such as when the taxpayer, by the time of the submission of the tax return, fully pays each of its invoices containing VAT passed on to it and allocated for deduction or the sum owed under the invoice has completely ceased to exist. In this case, where the amount of the refundable tax does not exceed 1 million Forints, the company may receive its money within 30 days, whereas in the event of reclaiming an amount exceeding 1 million Forints, it must wait 45 days until payment is made. Entrepreneurs must state in their tax return that they have paid off each of their affected invoices if they wish to receive the reclaimed amount within the shorter period. If actual payment has not been made in the case of one single invoice, the seventy-five day time limit applies. Moreover, if the relevant statement of the taxpayer is not true, the company may expect a penalty of up to 5% of the reclaimed amount but coming to no less than 500,000 Forints.

"The stringency measures relating to the procedural conditions of VAT reclaims may significantly affect the financial and liquidity position of companies since a much longer period applies until refund is made than before. On the other hand, the new regulation may encourage companies in a position to make a reclaim to settle their outstanding debts as soon as possible if they wish to shorten the general statutory time limit. This latter is also aimed at preventing any possible misuse," explains Dr. Balázs Békés.

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