Tax neutrality applications

The Sandoz case currently pending before the Court of Justice of the European Union has once again brought the principle of VAT neutrality and taxpayers’ opportunities for legal remedies into the spotlight. While the case may be particularly significant for pharmaceutical companies, its broader implications are equally important: a potential conflict between Hungarian law and EU law may give rise to specific tax refund claims.

The principle of tax neutrality

One of the fundamental principles of the VAT system is tax neutrality. This means that a company should not become the final bearer of either deductible input VAT connected to its purchases or output VAT that it was ultimately unable to collect from its customer.

In practice, however, it is not uncommon that a company is unable, due to administrative, procedural or timing-related obstacles, to recover VAT to which it is entitled or reduce tax that was previously paid.

The good news is that Hungarian tax procedural rules provide several options for resolving such situations. The question is simply which remedy can be applied in the particular case.

When can refundable VAT arise?

On the side of the right to deduct VAT

The right to deduct VAT belongs to the taxpayer if the substantive legal conditions are met, meaning that there is a direct and immediate link between the expense and the taxpayer’s taxable economic activity, or the cost forms part of the taxable person’s general overhead expenses. However, certain formal requirements must also be met in order to exercise the right.

Problems may arise, for example, if:

• the invoice is received only at a later date;
• an administrative error is identified subsequently;
• the relevant period has already been closed by a tax audit;
• the documents supporting the right to deduct VAT become available only at a later stage.

On the side of output VAT

It is not only deductible VAT that can become “trapped”; output VAT lawfully paid in the past may also be refundable.

This may typically occur in the following cases:

• irrecoverable debts;
• cases where the taxpayer makes rebate-type payments or mandatory statutory payments for commercial policy reasons or as required by law (e.g. payments to the National Health Insurance Fund Administration (NEAK) under pharmaceutical volume agreements, pharmaceutical taxes, or fixed monthly payments related to the employment of pharmaceutical representatives applicable to pharmaceutical companies);
• retrospective discounts;
• failed or terminated contracts;
• amounts accounted for retrospectively as a result of correcting incorrect invoicing or tax treatment.

In summary, this may arise in any situation where a company has ultimately paid more VAT than it actually collected.

Four options for recovering VAT

1. Self-revision: the simplest solution

If the relevant period has not yet become time-barred and has not been closed by a tax audit, self-revision is generally the fastest and safest solution within the self-assessment system.

Self-revision may be applied, or is mandatory, for example in the following cases:

• late-received invoices;
• correction of administrative errors;
• irrecoverable debts;
• claiming specific correction items.

The advantage of self-revision is that the taxpayer can correct its own tax return without involving the tax authority.

Timing is the key issue. The statute of limitations may represent the most important restriction.

2. Repeated tax audit: if the period has already been closed

If the Hungarian tax authority (NAV) has already audited the relevant period, self-revision is generally no longer available.

In such cases, a repeated tax audit may be initiated if:

• a new fact or circumstance emerges;
• the new fact or circumstance could materially affect the previous findings;
• the taxpayer acted in good faith and the new fact or circumstance was not previously available.

With this type of remedy, the matter moves beyond the self-assessment framework. As a result, a favourable outcome depends not only on the taxpayer but also on the assessment of the tax authority and potentially at a later stage, the courts. Therefore, taxpayers should assess possible correction opportunities as early as possible.

3. Tax neutrality application: the “last chance”

There are situations where neither self-revision nor a repeated tax audit offers a solution.

In such cases, a tax neutrality application may become particularly valuable.

The purpose of the procedure is to ensure that the taxpayer does not bear a final tax burden where:

• the VAT can no longer be recovered through any other procedure;
• the failure to obtain a refund cannot be attributed to the taxpayer;
• there is a violation of the principle of tax neutrality.

For these applications as well, the correct interpretation and calculation of the limitation period are of crucial importance.

4. Applications under Sections 195 and 196 of the Act on Rules of Taxation where Hungarian legislation infringes EU law

In certain cases, if Hungarian legislation is contrary to EU law, a taxpayer may apply for the refund of taxes unlawfully collected (e.g. VAT or retail tax). Such applications may be submitted on the basis of a specific judgment of the Court of Justice of the European Union (Section 196), or even in the absence of such a judgment (Section 195).

Among the cases currently pending before the Court of Justice of the European Union, the Sandoz case may open up new opportunities for pharmaceutical companies to reclaim part of the VAT previously paid. Companies that, similarly to Sandoz, made mandatory payments to the National Health Insurance Fund Administration (NEAK) in connection with the employment of pharmaceutical representatives should monitor developments closely and consider the possibility of submitting a tax refund application under Section 196 of the Act on Rules of Taxation.

If the case law of the Court of Justice of the European Union ultimately finds the Hungarian rules incompatible with EU law, a tax refund claim may arise, subject to the relevant conditions, for several previous years. Given the potentially significant financial impact, companies should assess the affected transactions and available legal remedies in a timely manner.

Who may benefit from a tax neutrality application?

A tax neutrality application may be particularly useful in the following situations:

• regarding periods already closed by a tax audit;
• in cases approaching the limitation period or partially time-barred cases;
• in case of irrecoverable debts or problematic receivables;
• subsequent corrections of incorrect tax practices;
• situations where VAT can no longer be recovered through ordinary procedures;
• foreign companies that have been unsuccessful in traditional VAT refund procedures in Hungary.

In addition, companies should closely monitor the consistency of Hungarian law with EU law, as any conflict between the two may establish a specific tax refund entitlement that could result in a significant cash-flow advantage. Companies should therefore not automatically give up on these amounts. With the appropriate procedural tax expertise, it may still be possible to recover VAT or other tax overpayments, even in closed or otherwise challenging cases.

VAT COMPLIANCE

Successfully enforcing VAT refund rights and tax neutrality opportunities often involves not only tax technical issues but also procedural legal considerations. The outcome of a case may be significantly influenced by selecting the appropriate remedy, correctly interpreting limitation rules, or identifying relevant EU law aspects. It is therefore advisable to seek expert assistance as soon as potential opportunities arise. The VAT specialists at WTS Klient Hungary, who also possess extensive tax law expertise, may assist in assessing the relevant transactions, evaluating risks and effectively pursuing available refund opportunities.

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