Is additional tax assessment due to VAT fraud reason enough not to waive penalties?

If the tax administrator concludes that a VAT payer has even indirectly been involved in VAT fraud (typically, by having accepted a delivery affected by fraud), the entitlement to VAT deduction will be withheld from the payer. The payment of additional VAT and related default interest and penalties represents an unexpected expense for the payer, with a significant financial effect on their business. According to the latest case law of the Supreme Administrative Court (SAC), proven involvement in VAT fraud may even endanger any waivers of penalties relating to additionally assessed tax.

The Tax Procedure Code allows for the waiver of up to 75% of a set penalty, depending on the extent of taxpayer’s cooperation during a tax inspection or another procedure carried out to assess additional tax. If the maximum waiver is applied, a 5% instead of 20% penalty is imposed. When assessing the situation, the tax administrator also takes into account whether the taxpayer violated tax or accounting regulations before, and the frequency of such breaches of obligations in tax administration. In a recent SAC judgment (1 Afs 236/2019), a taxpayer was involved in a serious VAT fraud and the tax administrator proved in the tax proceedings that the taxpayer should or could have known of its involvement in such fraud. Even though the taxpayer fulfilled the basic formal pre-conditions for a waiver of penalties as well as the requirement to have no record of violations of tax and accounting regulations, the tax authority denied the waiver to the taxpayer after assessing the nature, intensity and other circumstances of the violation of tax regulations.

Referring to its previous case law, the SAC concluded that when deciding on a waiver of penalties, it is necessary to consider also the violations of tax regulations leading to the assessment of additional tax to which the penalties being waived relate. The SAC confirmed that this particular case involved a particularly serious violation of tax regulations, not only in terms of the involvement in carousel fraud, but also in terms of the extent of tax being avoided (as the additionally assessed tax amount exceeded CZK 15 million).  The court concluded that involvement in fraud that the taxpayer should and could have been aware of is a relevant reason to deny a waiver of penalties. It may even be the only reason to deny the waiver if the tax administrator substantiates it in a proper and logical manner.

In practice, when assessing taxpayers‘ applications for waivers of penalties, the tax authority should evaluate each case on an individual basis, always considering specific factual backgrounds. However, with respect to the SAC’s conclusions in the above case, there is the risk that the tax authority will not waive, even partly, penalties to those who have even unconsciously been involved in VAT fraud. 

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