Member Article

The deduction of the VAT related to services cannot be refused due to reasons concerning the necessity thereof or to the absence/insufficiency of the explanatory documents!

The tax authorities frequently deny the taxpayers’ right to deduct the VAT related to services, due to reasons related to the doubts concerning the necessity thereof or the “insufficiency” of the explanatory documents.

Pursuant to a recent final decision, the Iasi Court of Appeals admitted the claim filed by the taxpayer represented by NNDKP, and ordered the tax authority to pay an adequate compensation, including with respect to the payment of the interest owed to the taxpayer as a consequence of the refusal to deduct VAT.

The tax authorities denied the taxpayer’s right to deduct the VAT related to consultancy services, given that, according to the tax control bodies, this has not allegedly justified the necessity of the services acquired by presenting certain documents that include an extremely high number of details and meet specific form related requirements.

In concreto, the taxpayer had acquired various intra-group management, IT, human resources, logistics and technical consultancy services. The services were mainly provided online, in English, and several examples of translations of the relevant explanatory documents were made available in order to be reviewed by the tax control team.

The court ruled with respect to the findings of the tax authorities that those were not substantiated on legal provisions applicable in the field of VAT, the deductibility of which is strictly conditional upon the existence of an invoice (form related requirement) and the use of the services acquired for the purpose of the taxable operations (substance related requirement).

Thus, the court ruled in agreement with the taxpayers’ defenses prepared by NNDKP and substantiated on legal provisions and aspects from the national and community jurisprudence, i.e. that from the perspective of the right to deduct VAT, the findings of the tax authorities concerning: the the relation of affiliation with the provider of the services, the price thereof, the existence or inexistance of certain explanatory documents (e.g. activity reports), the necessity of the services from the perspective of the direct and immediate connection between them and the activity of the taxpayer are completely irrelevant and in contradiction with the legal provisions.

Another important aspect is that the court disagreed with the fact that the tax authorities considered that the result of the previous tax control carried out for the same taxpayer was irrelevant, given that the services in question were not different from those that formed the subject matter of the previous tax control. In this case, the Court validated NNDKP’s arguments according to which, in virtue of the unitary practice principle and of the legal security principle, the tax authorities must ensure that similar factual situations benefit from equal treatment, especially when several controls are carried out for the same taxpayer.

Thus, apart from the fact that the court ruled in favor of the taxpayer, the decision of the second appeal court obtained  by the NNDKP team sanctions an abusive approach frequently encountered during tax controls. Hopefully, this will constitute a useful precedent, including for NAFA, since it confirms decisions rendered by the national and European Community courts, intended to prevent similar practices. In fact, these practices are harmful for the Romanian State itself, since the State must compensate for the damage by reimbursement of the relevant amounts and payment of significant amounts as legal interest.

The Romanian version of this newsletter is available here.