VAT - Right to deduct input tax: The practice of the Constitutional Court

In 2014, the Constitutional Court issued two decisions in which it took a position with regards to the right of taxpayers to deduct input VAT in the case of the supply of goods from the "disputable" suppliers, respectively regarding the treatment of the Tax Administration and the Administrative Court in determining the additional tax liability on the basis of challenging the right to deduct input VAT.

In these decisions the Court has canceled the rulings of the Administrative Court and the resolutions of the Tax Administration and concluded that the right of the taxpayer to a fair trial and to a judicial review of administrative acts was violated (due to the formalistic approach of the Administrative Court), as administrative bodies and the Administrative Court failed to present reasonable explanation for their allegations and for determined additional tax liabilities.

In particular, it was pointed out that the administrative authorities and the Administrative Court did not state the reasons why they consider that the taxpayer has not proved that he did not receive supply of goods from the disputable suppliers. Also, it was pointed out that it is not clear which additional - prescribed or custom - accounting document represent, according to the administrative authorities and the Administrative Court, credible evidence that the taxpayer received supply from the disputable suppliers and that the taxpayer is "subject to excessive and unsupported by the regulations burden", which cannot eliminate the suspicion in arbitrary and subjective application of the law.

Furthermore, the Constitutional Court stated that "the position of administrative bodies and the High Administrative Court that the taxpayer has not met the requirement for recognition of the right to deduct input tax must be based on facts established in the administrative proceedings and sufficiently disclosed and explained in the decision establishing the tax liability. Due to the mere fact that during the tax inspection it was not possible to determine with certainty, whether the supply of goods by the suppliers was actually carried out, because these suppliers were not available to the tax inspection or / and did not possess the necessary documentation, does not by itself mean that supply was not performed."

The Constitutional Court referred to the decision of the European Court of Human Rights and the principle of equality of arms, which is one of the elements of the broader concept of a fair trial and implies that each party must have a reasonable opportunity to present its case, and that "parties in the proceeding must in principle have the opportunity not only to present any evidence which is needed to succeed with their requests, but also the opportunity to know about all the evidence and statements presented or submitted in order to influence the court's decision and the opportunity to comment on them."

Tax Administration should follow the decisions (position) of the Constitutional Court in tax proceedings as well as the Administrative Court in administrative disputes concerning claims of the taxpayers, so their more concrete approach in explaining and proving additional liabilities to taxpayers is expected in the practice.