Proving the entitlement to VAT deduction and the risk of "carousel frauds"

Ruling of the Supreme Administrative Court of 22 October 2015, file no. 7 Afs 237/2015 - 33

The tax proceedings are governed by the principle that the taxpayer is obliged to report the tax in a tax return (the "burden of tax return") and, at the same time, to prove the statements made on such tax return (the "burden of proof"). The above decision deals with the fundamental question whether the claimant has proved his right to deduct the value added tax ("VAT") claimed in the tax return. Under the VAT Act, a VAT payer has the right to deduct VAT if he uses the received supplies for his business activities.The entitlement to VAT deduction has to be primarily substantiated by a tax document (tax invoice), but the factual situation must be reflected as well. This means that the submission of formally correct tax invoices and other documents may not be sufficient to bear the burden of proof, even if these documents contain all elements required by law. Where there is a doubt as to the factual situation (e.g. a doubt about the adequacy of an increase in the amounts invoiced, or a doubt about a carousel trade etc.), the taxpayer must prove that the conditions for the entitlement to VAT deduction have been met.

A carousel trade occurs in a situation where more than two entities in a sales chain are involved to obtain a tax benefit and the traded goods or services are unreasonably overpriced in successive steps or the subject of trade is priced at its market value but one of the traders in the sales chain fails to remit the VAT to the tax authorities and the last trader in the sales chain legitimately claims the right to deduct such VAT.

This shows that entrepreneurs should pay an increased attention to internal control mechanisms so that no doubt arises as to whether they were aware of a fraud or could have been aware of it in view of all the circumstances if a fraudulent conduct is discovered.