Distortions in vat due to insolvency regulations: corrective measures introduced/provided by Law 7/2012

Abstract

The disconnection between the payment of due VAT and the refund of deductible VAT is evidenced by different taxable persons or by different tax periods of the same taxable person; this situation implies the risk of having to refund non-collected VAT, and is the basis of most of VAT fraud behaviors.

Two reasons lead the judicial insolvency of the taxable person to increase these behaviors:

a) Judicial Insolvency legally restricts, at least in part, the possibility of payment of the VAT charged by the insolvent person over the acquirer, even when the acquirer is going deduct it.
b) Automatic credit compensation is forbidden in current Insolvency Regulation and this results in a definitive disconnection between positive and negative VAT shares within a taxable person, erasing the compensating essence of VAT and making it possible to refund VAT credits that are definitively disconnected of their correlative due tax actually unpaid.

Law 7/2012 is trying to solve both problems through a case reverse charge mechanism, at a very late date, and through a complex system to rectify previous declarations. These measures don´t solve the actual problem: the prohibition to compensate credits established by the Insolvency Regulations.