The best and, really, the only way to prevent this from happening is to ensure that input VAT has been correctly determined by checking purchase invoices against compliance with all relevant tax rules. Relying on vendors to conduct this determination can be risky, of course, in part because vendors commit invoicing errors. There have been numerous cases where companies accepted incorrect invoices, deducted input VAT and then were subsequently required to make significant additional payments following a tax audit.
The importance of accurate VAT determinations was driven home in a judgment issued by the Court of Justice of the European Union (CJEU) regarding a dispute between construction company PORR Építési Kft (PORR) and the Hungarian Tax Authority. PORR received several invoices in which VAT was charged and then subsequently deducted this input VAT. However, the tax authority determined these transactions were subject to the reverse charge mechanism and, as a result, no VAT should have been charged in the invoices. Consequently, PORR’s right to deduct the input VAT was denied since the right to deduct is limited to taxes that are duly charged. The tax authority claimed that PORR could have requested its suppliers to correct their invoices. The CJEU agreed with the Hungarian tax administration and concluded that PORR could not deduct the VAT charged to it in error by its suppliers.
This case highlights the importance of validating purchase transactions from a VAT perspective. A new Vertex Webinar examines tools and techniques that can help companies more effectively verify and validate their vendors’ VAT charges in real-time for accurate reporting. The session, “Real-Time VAT Validation on Invoices in SAP Ariba,” takes place Sept. 12, and more information about the event is available here.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.