SAC: Involvement in tax fraud must always be proved by tax administrator

The Supreme Administrative Court (SAC) dealt with a case in which the tax administrator denied a taxpayer’s entitlement to deduction of VAT on received taxable supplies, claiming that the taxpayer knew or should have known that they had been involved in a fraudulent chain of transactions.

In this particular case (5 Afs 252/2017), the tax administrator denied the taxpayer’s entitlement to VAT deduction based on the presumption that the taxpayer did not act with sufficient prudence and due managerial care and did not adopt all measures required to eliminate any involvement in VAT fraud.

The taxpayer concerned actually made an effort to review their suppliers in an appropriate manner: they checked the suppliers in the VAT payer register, acquired photo documentation of the goods supplied, with all invoices requested affirmations regarding the origin of goods and the method of transport, producers’ certificates, declarations for products with a preferential origin status, declarations that the supplies involved semi-finished goods and not waste, as well as declarations that the supplies did not involve goods of a criminal origin and that the goods had not been pledged in any way. Despite this, the tax administrator and the regional court arrived at the conclusion that the above measures adopted by the taxpayer in question were insufficient and had the taxpayer applied other measures, they would have revealed the taxpayer’s involvement in tax fraud.

The SAC stated that in this particular case the taxpayer proved the fulfilment of material conditions for claiming VAT deduction by providing tax documents and documenting that no fictitious supplies were involved and that the goods had been delivered for the arm’s length price paid including VAT and subsequently resold to other customers. It was therefore the tax administrator’s responsibility to prove that the taxpayer did not act in good faith and had been deliberately involved, or should or could have known that they had been involved, in a chain of transactions designed for the only purpose to acquire tax advantages.

To conclude, a taxpayer’s responsibility is to prove that a taxable supply has been effected and statutory conditions for the entitlement to VAT deduction have been met, whereas the tax administrator’s responsibility is to prove the taxpayer’s potential involvement in tax fraud.  The court also again confirmed that measures to ensure the proper collection of taxes and the prevention of tax evasion may not be used in a manner that systematically challenges the entitlement to VAT deduction. 

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