SAC on VAT deduction and supplier check
The Supreme Administrative Court (SAC) has once again dealt with the refusal of a VAT deduction on the grounds of a company's involvement in a transaction affected by tax fraud. One of the issues was whether the company's checks of its suppliers had been adequate and sufficient and whether the company had known or could have known that it had been involved in tax fraud.
A company trading in copper cathodes and zinc was refused a VAT deduction on their purchase, following a tax inspection where the tax administrator concluded that the company had engaged in fraudulent transactions. The tax administrator believed that the company should or could have known about the fraud but had not taken any measures to prevent its engagement in the fraud (for instance, the company had purchased the commodities at suspiciously low prices, had not adequately checked their quality, and the supplier had not published its financial statements).
The company disagreed with the tax administrator's conclusions, appealed the decision, and subsequently filed a lawsuit with the Municipal Court in Prague. Both the Appellate Financial Directorate and the Municipal Court upheld the tax administrator’s conclusions. The company therefore lodged a cassation complaint with the Supreme Administrative Court (SAC).
The SAC agreed with the conclusions of the previous instances and dismissed the complaint. According to the SAC, the company had not sufficiently vetted its suppliers, had traded with them without adequate contractual arrangements, and should have been more cautious when trading with new and potentially risky entities in the market. The company had also failed to prove that it had acted with sufficient prudence to minimise the risk of being involved in VAT fraud. The court sided with the tax administrator, concluding that the company had known or could have known about the suspicious circumstances of the transactions in question. In this case, the taxpayer did not provide evidence convincing the SAC that they had acted in good faith.
In its decision-making, the SAC relied on established case-law which provides that taxpayers must take measures appropriate to any suspicious circumstances of a transaction. The court found that although witness statements confirmed that certain steps had been taken by the taxpayer, those had not been sufficient in relation to the nature of the high-risk transactions. Measures consisting in checking only basic information on new suppliers (i.e. that they are VAT payers, registered in the Commercial Register and fulfil their tax obligations) or paying for goods only after their delivery cannot be considered sufficient.
The decision confirms that if a taxpayer takes certain precautionary measures, these must be appropriate to the specific risks and circumstances of the transaction. The case highlights the importance of adequate supplier verification and transparency in commercial transactions. The court's decision also reflects the growing need for more rigorous internal controls for firms doing business in high-risk markets.
It is crucial for all companies, not just those in similar sectors, to implement robust control and compliance systems to prevent similar litigations and financial losses associated with tax fraud.