Dealing with the biggest pain of VAT inspections

Value added tax accounts by far for the highest additional tax amounts assessed by tax administrators. Understandably, VAT inspections are large corporations’ biggest concern – apart from transfer pricing. Hence, keeping a close watch on the tax administrators’ approach to VAT inspections and being ready for all possible tricks is highly recommendable.

A frequent reason for assessing additional VAT is a company’s purported involvement in a chain of transactions with one of the preceding supplies affected by VAT fraud. It is extremely difficult for taxpayers to prove that they did not and could not have known of the involvement in fraud. In this respect, tax authorities make the recipient’ s good faith conditional upon carrying out thorough checks of their suppliers, in fact bordering on detective work unthinkable in common business practice. Moreover, the legitimacy of such a tax administrators’ approach has been repeatedly sanctioned by the Supreme Administrative Court, most recently in Judgement 7 Afs 136/2016. The SAC judges themselves would even go as far in checking the suppliers as making physical inspections at the suppliers’ registered address or sending a message through a data box.

The situation may be slightly more favourable if the tax administrator claims that the taxpayer failed to prove the receipt of goods from the specific supplier declared on the tax document. Often, tax authorities make such proof of receipt dependent on a substantiation that the goods were physically handed over to and accepted by the taxpayer; frequently, they expect the statutory bodies of both parties to be involved in the handover and acceptance. Such requirements are virtually impossible to meet in practice, as goods are often received in documentary form or through shipping agents. Nevertheless, administrative courts have been taking into account the specificities of chain transactions and in their decision-making practice have started to challenge the legitimacy of such tax administrators’ requirements. In Judgement 2 Afs 55/2016, the SAC admits that goods can be delivered by a specific supplier without a physical handover. The SAC has also repeatedly concluded that taxpayers cannot be requested to prove facts that are outside the sphere of their influence, for instance the manner in which suppliers obtained their goods. Even in this judgement, however, the SAC mentioned the possibility of denying the entitlement to VAT deduction on the grounds of involvement in fraud.

The described approach of the tax authorities should already be considered at the onset of a business relationship. This early it is worthwhile to thoroughly document any checks of suppliers. Then, once the tax administrator comes knocking, a detailed strategy should be at hand from the beginning of the inspection to be able to stand up to the tax administrators’ unlawful requirements. We will be happy to assist you in this.