Regional court says no to the concurrence of liability for VAT and denying the entitlement to deduction
The tax administration has numerous tools to fight VAT fraud and evasion, including denying the entitlement to VAT deduction or instating customers’ liability for VAT not paid by their suppliers. And tax administrators do not hesitate to use these tools concurrently, thus, in the final effect, collecting tax twice on the same transaction. Czech courts are now dealing with the admissibility of such practice.
Wherever customers could have known that they received a supply affected by VAT fraud, the VAT Act does not explicitly prohibit applying customer’s liability for tax not paid by the supplier and at the same time denying the entitlement to deduct VAT. The Appellate Financial Directorate believes that the customer’s liability for unpaid VAT and denying the entitlement to VAT deduction are not mutually exclusive; in its opinion, these are two separate duties arising from different reasons and based on different provisions of the law. Thus, the tax administrator may request the taxpayer to pay the VAT instead of their supplier. Subsequently, the administrator may also issue a securing order for tax not yet assessed, corresponding to the denied entitlement to VAT deduction, on the grounds that the taxpayer could have known that they were involved in VAT fraud.
The Regional Court in Ostrava now looked into this issue more closely. It sided with the taxpayer, clearly rejecting the possibility of paying tax twice on the same transaction. In its justification, the court pointed out the neutral character of VAT, which is meant to tax concrete goods with a tax to be eventually paid by the final consumer. The purpose of the tools and instruments to prevent tax evasion is to ensure that one and the same tax is properly collected for the state budget. The court held that it was inacceptable for one entity to pay VAT twice on an identical business transaction. Unsurprisingly, the Appellate Financial Directorate filed a cassation complaint against the decision, which means that the case will be dealt with by the Supreme Administrative Court. We will yet have to wait for its decision in the matter.