In today’s rapidly evolving tax environment, it is crucial to exercise heightened caution to avoid accusations of involvement in tax fraud and the potential issues related to challenges against VAT deduction rights.
Growing effectiveness
According to the Ministry of Finance, over 222,000 fraudulent invoices were detected in the first three quarters of 2024 alone. This marks the highest number of identified fictitious invoices in six years, highlighting how easily businesses can unwittingly become entangled in a VAT carousel fraud, exposing themselves to allegations of tax fraud.
Key recommendation
Implementing and adhering to a comprehensive counterparty verification procedure is essential to mitigate the risk of VAT fraud accusations or failing to meet due diligence standards. For businesses with such procedures already in place, regular updates are advised to reflect evolving national and European court rulings.
Supreme Administrative Court ruling
As emphasized by the Supreme Administrative Court in its ruling of October 29, 2024 (case ref. I FSK 352/21), tax authorities are not obliged to ensure that invoice issuers have corrected their invoices or to demand such corrections before rejecting a VAT deduction request.
The ruling clarified that even in the absence of suspicion of tax fraud, tax authorities may deny a business the right to deduct improperly paid VAT if the transaction should have been subject to the reverse charge mechanism. Meanwhile, the Court of Justice of the European Union (CJEU) in its April 11, 2019 ruling (Case C-691/17) determined that if reclaiming the VAT equivalent through civil proceedings is impossible (especially in cases of counterparty insolvency), the service recipient should be entitled to claim a refund directly from the tax authority. This principle aligns with the proportionality and neutrality of VAT.
Tax Procedures: A guide to minimizing risk
These rulings underscore the importance of robust due diligence procedures to effectively safeguard rights when dealing with problematic contractors. Businesses are encouraged to protect themselves against the negative consequences of erroneous invoicing by contractors and to establish a framework for reviewing and validating incoming invoices. Such measures minimize errors and enable early identification of problematic invoices.
Well-developed internal procedures not only enhance accounting processes but also reduce tax risks.
Learn more about tax procedures by clicking here.
What actions should you take?
To mitigate tax risks, every business should design and implement comprehensive tax procedures. These serve not only to ensure compliance with tax obligations but also to demonstrate due diligence to tax authorities. Before creating these procedures, a professional tax audit is recommended. Considering the steadily increasing number of VAT-related tax audits, such measures appear increasingly unavoidable.
