Supreme Administrative Court: For VAT fraud purposes, outstanding tax must be assessed at the time of the decision

In its recent ruling, the Supreme Administrative Court ruled in favour of a taxpayer in a case of an alleged VAT fraud where no outstanding tax existed at the time of the decision. In the heard case, the tax administration challenged the taxpayer’s excessive VAT deduction, arguing that the taxpayer participated in a chain of transactions affected by fraudulent conduct. The taxpayrer defended itself against the conclusions of the tax administrator and appellate body by administrative action and a cassation complaint.

The Supreme Administrative Court upheld the taxpayer’s position as it was not found that the conditions for the refusal of deduction in case of a VAT fraud defined in the Court of Justice of the EU case law had been met. The first condition is that the supply from which the deduction is claimed is part of a chain of transactions that is affected by the VAT fraud. The second condition is the existence of objective circumstances based on which the taxpayer knew, could have and should have known about the VAT fraud. The third condition is that the taxpayer did not adopt sufficient measures that would have prevented its participation in the fraud.

In the given case, the dispute was based on the first condition, i.e. the existence of a VAT fraud in the given chain of transactions with an outstanding tax as its essential characteristics. To meet this condition, the outstanding tax has to be directly linked to the fraudulent conduct. A mere proof of an absent tax payment (e.g. due to financial issues) does not suffice to establish a VAT fraud. In the case of the first (and second) condition, the burden of proof is born exclusively by the tax administrator who has to adequately justify and prove the fraudulent tax absence.

The Supreme Administrative Court did not accept the tax administration’s arguments

The tax administration believed that the compliance with the conditions has to be proved at the time of the tax deduction being claimed, i.e. as of the day of the tax return submission. In the given case, the VAT that was due by the taxpayer’s supplier in relation to the transaction was undisputedly absent at this moment.

The Supreme Administrative Court unequivocally rejected the tax administration’s argumentation, stating that the assessment of the above-mentioned conditions, inter alia the fraudulent tax absence, must be based on the state of facts established as of the day of the tax assessment decision or decision on appeal (if filed). At this point, it has to be assessed if the tax is objectively absent (for fraudulent reasons) or if it was paid, whether voluntarily or not.

In the heard case, the absent tax was apparently fully paid by the supplier at the moment of the issuance of the decision on appeal. Therefore, the Supreme Administrative Court annulled both the decision of the Regional Court and the decision on appeal and ordered the tax administration to decide in accordance with its legal opinion.

The tax administration should assess the existence of fraudulently unpaid tax in a chain of transactions in relation to VAT frauds at the moment of the decision on the tax assessment or appeal. In case of a longer time interval between the transaction and the decision, it is appropriate to request the tax administration to verify if the absent tax was paid in the meantime. If you have any questions, please do not hesitate to contact us.

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