Tax Consultant at RSM Poland
The old adage goes: "all good things come to an end soon". And, therefore, the holiday season draws to a close - we can feel it every day when we spend more and more time in traffic jams. We also receive more and more correspondence - both by post and by email. As it turns out, the increased activity is currently characteristic not only for business entities but also for tax authorities and tax audit bodies...
In one of the letters by the Head of the Tax Audit Office, which I will not specify herein, issued in the progress of audit procedures conducted in a large entity engaged in trading among other things, we can read that due to the fact that this entity, by purchasing goods from a supplier and selling them to a foreign wholesaler, did not store these goods in its warehouse, did not unpack them and did not check them in person, then this entity is certainly a swindler, colloquially speaking. Consequently, the authority decided that this entity had no right to reduce the amount of tax due by the amount of input tax resulting from purchase invoices issued by the supplier. According to the authority, the taxpayer should return to the tax office the trifle amount of over PLN 100,000 due to the outstanding tax including interest. And it was irrelevant for the Head of the Tax Audit Office that the goods - in accordance with the chain transaction scheme - were delivered directly from the supplier to the wholesaler, all invoices, both purchase and sales invoices were properly issued, and the resulting VAT was properly settled and paid to the accounts of relevant tax authorities. What is the problem then? It turns out that, unfortunately, tax authorities and tax audit bodies, as the guardians of the state interest taking care of the state budget operate in total isolation from economic realities of the 21st century. For instance, it is difficult for them to understand that more than two entities can participate in commercial transactions or that the goods are transported directly from the supplier to the end user. The approach of the authorities is even more surprising when we take into account the fact that the Polish VAT Act of 2004 governs directly similar situations. Thus, it is difficult to resist the impression that in the opinion of the authorities, "chain transaction" is by definition something suspicious and unclear. There is an attempt to label such transactions as frauds, just as in case of tax optimization activities, even when they are justified and fully transparent.
And here we come to the subject of tax carousels, which has been widely commented on recently, and the combat of the Ministry of Finance with VAT frauds. Taxpayers are required by tax authorities and tax audit bodies to verify their contracting parties in terms of their credibility prior to and during commercial transactions. In absence of such verification, the taxpayer may be accused of lack of due diligence, thus giving grounds for tax authorities and tax audit bodies to question the right to deduct the input tax resulting from purchase invoices.
The aforementioned risk, although present in the minds of entrepreneurs, is frequently underestimated. The majority of entrepreneurs do not realise that they may fall victims to the fraudulent practice, especially given the fact that organisers of the offences related to VAT frauds operate in various industries and they constantly modify the method of their fraudulent activities.
Fortunately, entrepreneurs are not completely powerless in this case. The right to deduct VAT - apart from meeting the substantive conditions, resulting directly from the provisions of the VAT Act - depends, inter alia, on the "good faith" of the taxpayer and on exercising "due diligence" by the taxpayer when entering into transactions with contracting parties. The Court of Justice of the European Union pointed out repeatedly that if the taxpayer acted in good faith, and, thus, exercised due diligence, inter alia, through the implementation of relevant verification procedures, the taxpayer shall not suffer negative consequences, even if the contracting party of the taxpayer actually proves to be a dishonest entity, which, however, the taxpayer was unaware of.
It should be a good practice of each entrepreneur to develop effective instructions or internal tax procedures which, when combined with trained personnel and accounting team, should minimise the risk of concluding transactions with dishonest contracting parties. At the same time, such procedures constitute a practical tool for the management staff with respect to risk management and tax planning.
Thus, maybe it would be worth considering the implementation of appropriate procedures in one's own enterprise as the holiday season is coming to an end and the time of annual summaries of work efficiency is approaching. And not only for private sector employees but also for the employees of tax offices and tax audit offices...