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If you know or could have or should have known that your supplier has been involved in fraud, then you are not entitled to a VAT deduction under the established case law. It seems that the General Financial Directorate (GFD) has now provided taxpayers with instructions on how to proceed with scrutinising their suppliers’.
The question of the extent to which the purchaser has to verify his supplier has not been sufficiently answered. The case law only gave indications of what can be considered a reasonable measure (e.g. 2 Afs 15/2014 EON). In practice, taxpayers have generally lacked public documents and have asked for more detailed scrutiny. If the customer no longer had any other proof of the supplier’s correctness at the date of performance of the transaction and the supplier committed fraud, the tax administrator did not recognise the VAT deduction with reference to the “should have or could have known” principle. The professional public has argued that this procedure is a substitute for the duties of the taxpayer.
The financial administration’s statement of the 15th of May 2017 has given the purchaser a powerful tool. In an article titled “Financial Management Verifies its Suppliers as a Standard Firm”, the GFD has admitted that data from public registers is sufficient.
However, please be careful, according to the follow up article from the financial administration dated the 22nd of May 2017, this tool cannot be universally applied to all cases. Take more care in cases of suppliers and businesses, where the price is significantly lower than that of competitors, without any economic justification.
Inconveniences leading to problems with the right to deduct VAT or in respect of non-deductible VAT can also occur during the course of the cooperation. The supplier may become an unreliable payer, for example, and the buyer may be liable for non-deductible VAT. To avoid liability, you can pay the supplier for the tax base only and pay the tax directly to the relevant tax office. From a legal point of view, however, such a situation could be considered as non-payment of the entire agreed amount. I, therefore, recommend that all the alternatives be modified in the contracts already, so that in this case, the VAT paid to the tax office will be considered a payment of the obligation also.