In October 2024, the Provincial Administrative Court in Wrocław issued a ruling (Case No. I SA/Wr 641/23), emphasizing that tax authorities’ premature or hasty conclusions regarding a taxpayer’s alleged participation in a VAT carousel fraud can harm the reputation of both the company and its representatives in business transactions. Such allegations may negatively impact the conclusion and execution of restructuring agreements with creditors, potentially leading to the annulment of tax authority decisions.
Case Background
Tax authorities initiated an audit into the company’s VAT settlements for June 2014. The audit concluded that the company had participated in a VAT carousel scheme designed to defraud the tax system by illicitly claiming VAT refunds. The authorities argued that the invoices received for the purchase of goods and those issued for their sale were not related to genuine economic activity but were instead part of a fraudulent scheme.
The audit involved verifying the supply chain of the goods. Investigators determined that the goods were traded within a complex chain of domestic intermediaries. The company purchased goods from these intermediaries and sold them under an intra-community supply of goods (WDT) transaction, applying a 0% VAT rate while declaring a refund of the VAT difference. Authorities found that in each supply chain, there was an entity identified as a "missing trader."
The company repeatedly appealed against the tax authority’s findings. However, the appellate tax authorities maintained that the company acted as a "broker," playing a crucial role in enabling VAT refund fraud within the Polish tax system. Furthermore, the company was accused of failing to exercise due diligence when verifying its suppliers. Although there was no direct evidence proving the company’s awareness of the fraudulent scheme, the authorities argued that the company should have foreseen the risk based on the circumstances.
The Director of the Tax Administration Chamber cited several factors as evidence of the company’s awareness of its involvement in fraudulent transactions, including:
- Ignoring widespread knowledge about VAT fraud mechanisms within its industry.
- Lack of interest in the origin of the goods it purchased.
- Accepting suspiciously low prices, which could only be explained by the non-payment of VAT at earlier stages.
- Minimal financial risk, as the company only paid suppliers after receiving payments from buyers.
- Intentional lack of thorough verification of its trading partners.
- Occupying a lucrative, central position in a network of fraudulent transactions.
Court Ruling
The Provincial Administrative Court in Wrocław annulled the contested decision, ruling that the arguments and findings presented by the appellate tax authority were insufficient to unequivocally prove the company’s conscious participation in the fraud. The court stressed that determinations regarding a taxpayer’s knowledge and intent must be definitive and unambiguous.
This means that tax authorities must provide clear and indisputable evidence proving that the taxpayer was fully aware that they were engaging in fraudulent transactions. The court emphasized that mere suspicion or assumption is not enough to classify a taxpayer as a knowing participant in VAT fraud. Instead, authorities must present concrete and irrefutable evidence demonstrating intentional involvement.
Failure to exercise due diligence does not equate to conscious involvement in fraud.
Important!
The court underscored that while tax authorities may establish that a taxpayer failed to exercise due diligence, this does not automatically mean the taxpayer knowingly engaged in fraud. A lack of due diligence implies that the taxpayer did not take the necessary steps to verify the credibility of their business partners or ensure the legitimacy of their transactions. This may include inadequate document verification, failure to check suppliers’ backgrounds, or ignoring red flags.
However, to classify a taxpayer as an intentional participant in fraud, tax authorities must prove that the taxpayer had full knowledge of the illegality of the transactions and deliberately engaged in them.
The Role of Due Diligence
The ruling in question demonstrates that a taxpayer’s defense may still be attempted even in cases where they have failed to implement due diligence procedures for verifying business partners. However, such a defense is significantly more challenging and primarily relies on identifying procedural errors and inconsistencies in the tax authorities' evidence, which does not guarantee success. Upon reading the ruling’s reasoning, one cannot help but feel that the court is providing guidance to tax authorities on how to conduct proceedings in a way that allows unfavorable decisions for the taxpayer to remain legally binding.
At the same time, when analyzing the criteria cited by tax authorities as evidence of awareness of participation in fraudulent transactions, it is evident that most of these criteria are already addressed in even relatively simple VAT due diligence procedures—including those based solely on the Ministry of Finance’s due diligence guidelines.
In the examined case, if the taxpayer did not voluntarily and knowingly participate in a VAT fraud scheme but was instead inadvertently entangled in it, then even implementing basic due diligence procedures based on standard methodologies would have significantly improved their legal position and likely helped them avoid the situation altogether. Implementing more advanced procedures, including consulting a tax advisor familiar with due diligence requirements and the realities of the taxpayer’s industry, would have practically guaranteed compliance, as most risk factors identified by the authorities would have been detected through these procedures.
Thus, this ruling should serve as a strong incentive for taxpayers to implement due diligence procedures, particularly in industries highly exposed to VAT fraud risks, such as construction, trade in building materials, metals, electronics, and similar sectors.
