Case law
15 March 2018

SAC sets limits to fighting VAT fraud

Where a supply has been affected by VAT fraud, the tax administration demands almost investigative checks of suppliers to maintain the entitlement for VAT deduction; and this may happen at any point in the chain. The Supreme Administrative Court (SAC) has now set the first limits to these demands.

Viktor Dušek
Jana Fuksová

In the case in question, a single general contractor supplied high-tech machinery and equipment, while a number of subcontractors also participated in the project. It was ascertained by the tax administrator that one of the subcontractors had not paid VAT. The tax administrator viewed this as tax fraud that the final customer at least could have known of and therefore denied him the entitlement to the deduction of input VAT of three times the missing tax ascertained at one of the subcontractors. The SAC stood up for the taxpayer.

According to the SAC, it is up to the tax administrator to prove that the VAT payer knew or could or should have known that the supply received had been affected by VAT fraud and that their  entitlement to VAT deduction was thus not protected by good faith. In proving this, the tax administrator must equally assess the evidence in favour of and against the taxpayer, and cannot ignore one and highlight the other. Common business practice must also be taken into consideration, while facts only occurring ex post cannot be used against the taxpayer.

According to the SAC, the liability for receiving a supply affected by VAT fraud must have its limits. Any unpaid tax does not necessarily mean VAT fraud on the grounds of which it is possible to limit the taxpayer’s entitlement to deduction. It is necessary to distinguish the failure to meet tax duties from a knowing enrichment by not paying VAT. Most importantly, the SAC refused the taxpayers’ unlimited liability for checking the trustworthiness of business partners throughout the chain of suppliers and deemed a strict (no-fault) liability for any VAT not paid within the chain inadmissible.

To conclude, the SAC appealed for a change in the current approach. In its opinion, fighting tax fraud cannot mean that the tax administrator focuses on the “most lucrative” entity in the chain and collects the tax from them. Let us hope that this new approach will also hold in other cases awaiting adjudication, and that it will also influence the inspecting and decision-making practices of tax administrators.

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