SAC on proving conscious involvement in tax fraud in chain of supplies

The SAC reiterated that a tax administrator may only deny a VAT deduction if they prove fraud or abuse of right. VAT fraud occurs when one of the participants in a chain fails to pay the tax collected while another one deducts it to obtain an advantage contrary to the purpose of the EU Directive on the common system of VAT. The consequence must be a ‘missing’ tax, which is manifested by the fact that one of the links in the chain failed to meet their tax liability at some point in the past.

According to the SAC, to conclude on the existence of tax fraud, the tax administrator must ascertain such objective circumstances that taken together may constitute a sufficient basis for presuming that the tax missing in a particular case is the result of a targeted effort to obtain an unjustified tax advantage. It is not the tax authorities’ duty to prove in what specific way and by which specific supplier in the chain the fraud was committed, but the facts constituting the tax fraud must be established with certainty. Circumstances that taken together indicate the existence of tax fraud may have their origin in the past (e.g. a business history or past personal ties), at the time of the transaction (non-standard business terms and conditions), and in the period after closing the transaction (e.g., subsequent unavailability of the persons concerned, subsequent irregular cash flows between them).

If the tax administrator proves that tax fraud has occurred, they must further investigate the subjective aspect of the taxpayer's involvement in the fraud. According to established case law, a company's right to deduct cannot be affected by another prior or subsequent transaction in the chain of supplies being affected by facts of which the taxpayer does not and cannot know. It is therefore for the tax authority to sufficiently prove the objective circumstances indicating that the taxpayer knew, or must have known, that the transaction was a part of a fraud committed by their supplier or another entity operating in the supply chain. When assessing the subjective aspect, it must be assessed whether the entity during their economic activity has taken adequate measures that can reasonably be required of them to ensure that their supply is not part of fraud. Where it has been established that the supply was made for a person who knew, or should have known, that they were involved in a transaction that was a part of VAT fraud (and did not take sufficient measures that could reasonably be required of them to ensure that the transaction did not give rise to fraud), it is legitimate to deny such person’s right to deduct VAT.

In the case under consideration (7 Afs 331/2021-35), according to the SAC, there were non-standard circumstances and indications which taken together formed a logical and comprehensive set of mutually complementary and interconnected facts, from which it was possible to deduce that the company at least should and could have known that it was involved in fraud. According to the court, non-standard facts in this case were, e.g., suppliers in liquidation, acceptance of supplies by company employees using suppliers’ stamps, personnel interconnection, non-standard transactions in bank accounts, and the absence of written contracts.

The SAC thus ruled that the company’s right to deduct VAT had been denied legitimately.