Tax obligation in VAT – how to distinguish a tax obligation from a tax liability

The concept of a tax obligation is defined in Article 4 of the Tax Ordinance, which states that it is a non-specific obligation to make a compulsory monetary payment arising from tax laws, triggered by the occurrence of an event specified in those laws. This definition refers to the provisions of tax laws (including the VAT Act). It primarily highlights the compulsory and objective nature of the obligation, as it arises at the moment an event specified in tax law occurs—regardless of the will of the parties or the content of civil law agreements. A tax obligation also arises independently of tax authorities. It also does not matter whether the persons subject to the obligation are aware that a tax obligation has arisen from their actions.

A key distinguishing feature between a tax obligation and a tax liability—as defined in Article 5 of the Tax Ordinance (i.e. the taxpayer’s obligation to pay a tax to the State Treasury, province, county, or municipality, in the amount, by the deadline, and at the location specified by tax regulations)—is its non-specific nature. The fact that an entity is subject to the duty to provide a monetary payment does not mean that this entity will actually be required to make that payment (e.g., the tax obligation may not turn into a tax liability due to a statute of limitations).

It is also worth noting that a key element of VAT is the right to deduct input tax on purchases. Therefore, it may happen that the amount of output tax (from taxable transactions) is lower than the amount of input tax. In such a case, despite carrying out taxable activities (which give rise to a tax obligation), no tax liability arises—rather, the taxpayer may be entitled to a VAT refund.

Under the VAT Act, the moment a tax obligation arises affects, among other things:

• the date the transaction should be reported in VAT returns and the tax paid;
• the date input tax may be deducted;
• the deadline for issuing a VAT invoice;
• the start of the limitation period;
• the exchange rate to be applied when the taxable amount is expressed in a foreign currency.

More on VAT tax obligations will be covered in the next parts of this series.