Due diligence — can the adverse consequences of unwitting involvement in carousel fraud be avoided?
Taxpayers who, despite their honesty and care in selecting counterparties, unknowingly become part of a VAT fraud chain often suffer adverse consequences.
According to the case law of the Court of Justice of the European Union and Polish administrative courts, adverse tax consequences cannot legitimately be imposed on taxpayers who acted in good faith, supplied appropriate evidence of the transactions and took every reasonable measure within their power to avoid involvement in tax fraud. Reasonableness should therefore be the benchmark for due diligence. Its assessment, however, falls to the tax authority, which verifies a transaction by examining its course in detail, reviewing supporting records, interviewing company employees, not only in accounting but also in sales and freight forwarding departments, and, where necessary, cross-checking counterparties.
As verification duties are not expressly set out in the VAT Act, tax authorities exercise discretion when assessing due diligence and good faith.
What should be checked first when assessing a new counterparty?
When checking a new counterparty at the start of a business relationship, prudence requires the following initial steps:
- check its registration documents: for domestic counterparties, the Central Register and Information on Economic Activity (CEIDG) or National Court Register (KRS), depending on legal form, and whether a REGON statistical number has been assigned; for EU counterparties, obtain evidence of business activity in an EU Member State and a copy of the decision or certificate confirming VAT registration in the Member State of establishment, and check VAT status through VIES;
- generate and retain confirmation of VAT registration for a domestic counterparty;
- request a copy of the domestic counterparty's VAT-R registration confirmation;
- periodically verify its current business registration in CEIDG or KRS and active VAT status using the Ministry of Finance's active VAT taxpayer search tool.
These basic duties follow directly from the VAT Act, at least for some transactions, and are undoubtedly standard checking procedures.
Tax authorities go further, however, requiring businesses to:
- check whether the counterparty actually conducts business;
- verify the scale of its activities;
- check its share capital;
- scrutinise the persons authorised to represent it;
- check whether it has a real office or uses a virtual one.
As regards the transaction itself, the authorities additionally require businesses to:
- ensure proper documentation every time, including transport documents, orders, email correspondence and even notes of telephone calls;
- collect appropriate evidence of performance where intangible services are supplied;
- verify the origin of the goods;
- check whether the goods supplied are transshipped at a logistics centre;
- check whether further purchasers are involved and, if so, identify the ultimate purchaser;
- verify whether the goods are insured;
- verify the contract duration and payment deadlines;
- enter into contracts with counterparties only in writing.
This is particularly important in light of the highly unfavourable Supreme Administrative Court judgment of 23 November 2016, I FSK 566/15. The Court held that good faith and due diligence need be examined only where a sale of goods actually occurred. If invoices recorded non-existent transactions, it was irrelevant whether the taxpayer knowingly joined the carousel fraud or was drawn in unwittingly.
Also bear in mind that, under current practice, the tax authorities remove from the register not only VAT fraudsters but also taxpayers acting lawfully who could have suspected that a business partner was accounting for tax improperly.
The following additional precautions should therefore be considered:
- avoid paying for goods in cash;
- exercise caution where the price of goods or services differs from market value.
Latest Ministry of Finance guidance
According to the Ministry of Finance's latest announcements, taxpayers undertaking business transactions must exercise due diligence in checking counterparties. The Ministry explains that this requires more than checking active VAT registration.
In the Ministry's view, steps to demonstrate due diligence may include checking:
- whether the company is registered at an address showing no signs of business activity despite its large scale, or
- whether the technical facilities needed for that activity exist;
- whether suppliers and customers in the supply chain change frequently without economic justification;
- whether the supplier shows no interest in establishing lasting commercial relationships;
- whether payment deadlines are unusually short given the transaction's size;
- whether most companies in the chain have margins that are excessively low, fixed and have not been negotiated;
- whether trading is excessively rapid, with goods immediately resold without storage;
- whether the counterparty holds certificates confirming no tax or ZUS social insurance arrears, which should be requested;
- whether payment comes from the counterparty's business account;
- whether the transaction matches the counterparty's business activities;
- whether the person handling the transaction for the counterparty is authorised;
- whether the counterparty can provide official electronic acknowledgements (UPO) confirming submission of JPK_VAT files to the competent tax office.
Taxpayers wishing to demonstrate good faith should use the Ministry of Finance's electronic registers in particular. The Tax Portal shows whether an entity is registered as an active VAT taxpayer. Entering the counterparty's tax identification number (NIP) reveals whether it is VAT-registered and whether its status is active or exempt. The result can be printed and retained as evidence for an inspection.
Alternatively, VAT registration can be checked by obtaining a certificate from the tax office or telephoning it to confirm status. For intra-Community transactions, as noted above, taxpayers can verify VAT-EU registration in the European Commission's VIES database.
The Ministry emphasises: 'It is important that the counterparty be an active VAT taxpayer on the date the invoice is issued, under Article 106b(1) of the VAT Act. An invoice issued by an entity that was a VAT taxpayer on that date may be included in VAT settlements. The counterparty's status after the invoice date is irrelevant.'
What next for due diligence?
In conclusion, tax legislation and implementing regulations do not specify how a business should verify a counterparty to establish conclusively that due diligence was exercised. Each business must introduce its own procedures evidencing verification and demonstrating that the transaction reflected a real economic event. As discussed above, taxpayers should therefore collect all evidence of transactions, including correspondence, orders, consignment notes and any other documents potentially relevant in tax proceedings.
The changes effective from 1 January 2017 to the rules on tax penalties and penalties for fiscal offences, including for unwitting participation in carousel fraud, must also be considered.
Finally, publication of guidance letters by the Ministry is only the first stage of work on guidance enabling businesses to avoid the consequences of involvement in carousel fraud. Selected organisations have now been invited to cooperate with the Ministry. A team will prepare procedures enabling businesses to exercise due diligence and decide their form: a general tax ruling, tax explanations, statutory provisions or merely a code of good practice. The Ministry favours the last option.
Position as at 22 September 2017
