Can subsidiaries deduct VAT on supplies received by parent?
The Supreme Administrative Court (SAC) recently dealt with a complaint by a subsidiary regarding the right to deduct input VAT on an invoice received. The transaction involved advisory services provided by a parent company's financial advisor. They were paid for by the subsidiary, which also claimed the deduction. The tax authorities challenged the right to deduct and after examining additional evidence rejected the claim.
The company was engaged in the production and sale of frozen products such as ice cream, popsicles, and dumplings.
In its VAT return, the company claimed input VAT deduction based on a tax document/invoice received on whose basis they also paid for the advisory services. The invoice did not specifically state the scope or subject matter of the received services, only a reference to a concluded advisory contract.
The tax administrator had doubts as to whether the company had actually received the supplies and whether they were used for its economic activity and therefore initiated a tax inspection. The company did not provide the tax administrator with the contract or any other relevant evidence showing that their claim to deduct VAT was justified. The company only submitted an email communication between them and the provider of the advisory services, showing that the latter was also the financial advisor to the parent company who had advised the parent company on the sale of the subsidiary.
The above evidence raised even more doubts on the part of the tax administrator who then issued an order to pay additional VAT plus a penalty. The company argued that they had proved that their claim to deduct VAT was justified by submitting the tax document. The company also argued that by carrying out the recommended sale of its assets to another VAT payer they proved that they had used the advisory service received for their economic activity.
The financial advisor provided a contract concluded between them and the parent company, along with an agreement to the contract concluded with the subsidiary. It was clear from the contract that the tax documents issued to the subsidiary concerned its transfer to a selected buyer. The company further stated that the taxable supply also included an in-depth analysis/due diligence of its assets, based on which they decided to sell their ice cream manufacturing technology. However, the contract to which the tax document referred did not show any connection between that sale and the advisory services.
The company thus failed to prove before the court that they had received the taxable supply and used it in their economic activity. Therefore, the Supreme Administrative Court upheld the tax administrator's conclusion denying the right to deduct VAT.