Limitations on the right to deduct VAT on travel, hotel and restaurant expenses. Judgment of the TEAC of January 26, 2017


Article 96 of the VAT Law establishes cases in which VAT cannot be deducted on the acquisition of goods and services stated on it, including in its first paragraph, paragraph 6, travelling or travel services, accommodation and restaurants.

However, the VAT Law leaves an open door to the deduction of these expenses when the amount of the tax was considered as tax deductible expense for the purposes of Personal Income Tax or Corporate Income Tax. That is, it establishes a link between both taxes so that if the expenditure on the activity is deductible for the purposes of direct taxation, the deduction is allowed for the purposes of indirect taxation.

However, TEAR of Catalonia issued a resolution which added a new requirement for Tax Administration to regularize the deductibility for VAT purposes of these expenses, which practically came to establish the obligation of the Tax Administration to regularize the expenses for CIT or Personal Income Tax purposes, so that the deduction for VAT purposes is not admitted. That is to say, if the Tax Administration wanted to regularize the deduction of VAT corresponding to travel, hotel and restaurant expenses, in order to limit it, it should also justify the regularization of these expenses for the purposes of Corporate or Personal income tax, otherwise, even if the expenses did not meet the requirements to admit their tax deductibility by direct taxes, if they had not been regularized for direct tax purposes, their deductibility in indirect taxation should be allowed.

Given this criterion, the Tax Administration filed an extraordinary appeal for the unification of criteria before the Central Court, defending that the interpretation of the TEAR goes beyond the literal diction of the precept, since the article at no time provides that even if the VAT quotas are not deductible, these would be deemed as such as long as the direct taxation of the subject has not been effectively regularized. It is necessary to take into account that the TEAR criterion could lead to certain situations leading to the lack of regularization of all taxes, for example, due to the different set of barred by Law.

In this sense, the TEAC categorically gives reason to the Tax Administration, since in the opinion of this Court the tax rules must be interpreted according to the proper meaning of their words, according to their literalness, without prejudice to that initial criterion must be completed with others. However, the law does not require, as the TEAR states, that the Administration has regularized the taxpayer in its direct taxation of the corresponding expenses, but only that they will be deductible if the amount of the expenses had the consideration of expenditure tax deductible in direct taxes. In summary, the TEAR criterion should be rejected because it goes beyond what the standard literally provides. The article only refers to meeting the objective deductibility requirements for direct taxation.

A copy of the TEAC ruling dated January 26, 2017 is attached.

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