How to protect yourself from participating in the tax carousel? Article from the series: Security in VAT

It is common for entrepreneurs to claim that participation in the tax carousel is not a threat to me, because I run my business legally and I pay for the goods.

However, it may turn out that only at the time of cross-checking by the tax authorities or in the course of checking activities, the entrepreneurs find out that they cooperated with or at an earlier stage of the turnover of a given commodity/goods there was an entity which, years later, turned out to be an unreliable taxpayer or issued empty invoices, and the entrepreneur did not even know about this entity.

Carousel taxation (VAT carousel) is an organized structure aimed at obtaining financial benefits by means of undue understatement of VAT liabilities or undue refund of VAT. The VAT carousel involves multiple transactions in goods or a simulated movement of goods that are taxed for VAT purposes as intra-Community supply of goods (ICT) and intra-Community acquisition of goods (VAT) in order to obtain an undue refund of the VAT difference.

Participation in the VAT carousel, even if unaware, deprives the taxpayer of the possibility to deduct input VAT from VAT invoices documenting fictitious trading in "acquired" goods, if he did not exercise due diligence in verifying his contractor.

In such a situation the tax authorities examine whether the entrepreneur knew or with due diligence could have known that at an earlier stage of the turnover there was an unreliable entity in the supply chain.

An entrepreneur who cooperated with an unreliable entity may also be subject to an additional sanction under the VAT Act up to 100% of the questioned VAT. Penal fiscal proceedings may also be initiated against the entrepreneur.

That is why it is so important to properly verify one's contractors.

How the authorities act in carousel cases:

On 25 April 2018. The Ministry of Finance on its website published a document entitled: "Methodology in the field of assessment of due diligence by buyers of goods in domestic transactions". This is a set of guidelines for tax authorities, which outlines the most relevant circumstances that should be taken into account when assessing the behavior of taxpayers who did not commit VAT fraud themselves and did not know that the transaction as a result of which they purchased goods is for VAT fraud.

The Ministry of Finance pointed out therein that if a taxpayer fails to exercise caution when entering into a transaction and ignores circumstances that may indicate that the transaction is intended to violate the law, the tax authority may question the taxpayer's right to deduct VAT on such transaction. Particularly transactions concluded with a new contractor are burdened with greater risk, therefore the Ministry differentiated the prerequisites for the assessment of due diligence in the case of commencement of such cooperation and the prerequisites for the assessment already during the cooperation.

The necessity to retain the right to deduct VAT when due diligence has been performed on a contractor is also indicated by the jurisprudence of the European Court of Justice. For example, in Joined Cases C-439/04 Axel Kittel and C-440/04 Recolta Recycling SPRL, the Court indicated in paragraph 53 that "according to the case law of the Court, when an economic operator has taken all the steps which may reasonably be required of him in order to satisfy himself that the transactions in which he is involved do not involve any criminal offence, either in respect of VAT or in any other area, he may presume those transactions to be lawful without risking forfeiture of the right to deduct input VAT".

Obligations of the trader:

A taxpayer should be able to demonstrate to the tax authorities during an audit that he has properly verified his contractors. Thus, if the taxpayer unwittingly operates in the tax carousel, he will not be held liable because he will show that he exercised due diligence in verifying his contractors. The Ministry of Finance points out that the larger the activity of the taxpayer, the more significant are the requirements for verification of the contractor.

The authority may question even the transaction despite the fact that entrepreneurs settle by means of split payment and the contractor was e.g. verified on the white list of taxpayers and in the VIES search engine.

Prevention is better than cure - a recipe for tax security

To prevent the authority from effectively questioning the right to VAT deduction, it is important to prove that we have properly verified our contractor.

An important safeguard is to have and apply an appropriate procedure for verifying the contractor, especially a new one. The procedure should be prepared taking into account the Ministry's guidelines and should be adapted to the size and type of activity of the entrepreneur, so as not to overburden the entrepreneur's human resources on the verification of contractors, and at the same time to effectively prevent possible accusations from the authorities of improper verification of contractors.

Legal and tax support

We have extensive experience in preparing due diligence procedures for our Clients. We prepare procedures adapted to the type and size of business.

If an entrepreneur is already subject to actions related to even unconscious participation in a tax carousel, legal assistance requires knowledge of both tax law and criminal fiscal law.

We successfully represent clients at various stages of carousel proceedings. Both during tax inspections and tax proceedings, as well as by representing clients before administrative courts, including preparation of complaints and cassation appeals.

Provisions: Act of 11.03.2004 on Goods and Services Tax (Journal of Laws of 2020, item 106, as amended)