Mahagében KFT & Péter Dávid: Re-Directing the EU VAT's Perfect Storm

Abstract

On June 21, 2012 the Court of Justice of the European Union (CJEU) rendered judgment on two Hungarian references, Mahageben kft v. Nemzeti Ado-es Vamhivatal Del-dunantuli Regionalis Ado Folgazgatosaga and Peter David v. Nemzeti Ado-es Vamhivatal Del-dunantuli Regionalis Ado Folgazgatosaga (Mahageben/David). The Mahageben/David decisions clarify the CJEU’s earlier holdings in the joined cases of Alex Kittel v. Belgium and Belgium v. Recolta Recycling SPRL (Kittel/Recolta). Kittel/Recolta is a critically important decision. It is central to the EU’s anti-fraud effort. It is one of three legal imperatives that earlier this year appeared to be coalescing into a Perfect (enforcement) Storm. After Mahageben/David the Perfect Storm needs to be re-assessed, because Mahageben/David limits Kittel/Recolta in some respects, while it broadly re-affirms it in others. This paper examines the relationship between Mahageben/David and Kittel/Recolta and then updates the analysis of the Perfect Storm. Kittel/Recolta stands for the proposition that a trader who enters into a transaction knowing or having the means to know that by doing so he is a participant in fraud, forfeits the right to deduct input tax incurred on purchases that were related to the fraud. Both the standards that are applied (the “known/should have known” formulation) and the scope of its application have been debated. Mahageben/David largely resolves these debates. First, in terms of the Kittel/Recolta standards the CJEU has told the legal community that it will translate the expression aurait du savoir (should have known in the official English translation of Kittel/Recolta) as ought to have known. The narrower definitions that have been argued for will not be used. Secondly, in terms of the scope of Kittel/Recolta, the CJEU has indicated that Kittel/Recolta is not limited to privity relationships, and it is applicable throughout the supply chain (but not at all in the customer chain). The consequence is that the Perfect Storm needs to be modified by removing Stage 2, and Hypo III. These no longer apply because they are dealing with fraud in the customer chain.