On 21 June 2012, the ECJ ruled on two Hungarian VAT cases concerning denial of VAT credit based on actions/omissions of the supplier and lack of documents other than the invoice for evidencing a supply.

From Bulgarian perspective, the ECJ ruling concerns the arguable practice of the local tax authorities and courts to deny VAT credit in case of “lack of actual supply” of goods and services.

The ECJ ruled that the revenue authorities may not refuse VAT credit deduction regarding received services, unless they could objectively prove that the taxpayer knew, or ought to have known, that the transaction was tainted with fraud.

The practice of the Supreme Administrative Court of Bulgaria has not been to enquire whether the taxpayer is acting in good faith but to look at whether the supplier has the wherewithal to provide the relevant service. According to the ECJ, this is irrelevant and what matters is whether the revenue authorities can prove involvement in VAT fraud.  

The ECJ also ruled that the right to deduct input VAT cannot be denied simply because the taxpayer cannot prove: 

  • that the supplier is a taxable person; or
  • that the supplier had the relevant goods and was in a position to supply them (including means of transportation); or
  • that the supplier has satisfied his VAT obligations as regards declaration and payment; or
  • from documents other than the invoice that the statutory requirements for a VAT deduction have been fulfilled,

while at the same time, the revenue authorities cannot prove that the taxpayer knew, or ought to have known, that the transaction was fraudulent on the part of the supplier.

Based on the above, we expect that the local revenue authorities and the courts will have to reconsider their “lack of actual supply” mantra and especially, the statement that the invoice itself can never be sufficient to evidence a supply and that the burden of prove regarding the right to VAT credit should be with the recipient, no matter what.

We would recommend keeping this ECJ ruling on the top shelf in case of a VAT audit.

Further, we are expecting the ECJ rulings on several Bulgarian cases which will shed more light on the above practice of VAT credit denial. We will keep you updated.

Case-law: Law: Mahagében (C-80/11) and Dávid (C-142/11) (Joined cases)