The principle of “he knew and could know” and the principle of in good faith, with regards to VAT
In §109, the VAT law regulates the fulfilment of the vendor for the tax the supplier did not pay it, if the recipient of taxable liability with the place of fulfilment in the Czech Republic knew or could and should know that:
- the supplier does not intentionally pay the tax on the tax document,
- the supplier has intentionally got or will get into the situation where they cannot pay the tax,
- it comes to tax evasion or the elicitation of a tax advantage.
Checking the business partners and knowledge of the partner that you do business with plays a key role in the case of tax liability. The key role lies in defending the allowance by the discovery of the fraudulent behaviour in the area of the business relationships.
The Supreme Administration Court developed this principle of good faith in the judgment 22 Af 22/2012. The decisive criteria of proving the good faith in the case of fraud in the area of VAT is the quality of the accepted measures to check the business partners and respect these rules for the purpose of the elimination of the involvement in the fraudulent transactions. If the purchaser does not sufficiently check the principle in good faith, the purchaser can be considered as the person participating in the fraud of VAT without regard to the profit the person would have from the sale of the goods or not. The court has said by the next judgment 4 Afs 178/2015 that it is the decision of each entrepreneur how much he checks his business partners and he has to bear the risk of negative consequences in case he checks them a little or did not at all.
In 2016, the internal directive of the General financial directorate has been published, which lays duties to the tax administrators to check the purchaser in case the supplier did not pay the tax. In this directive, there are examples of questions the purchaser should be asked to prove their control systems. The questions apply to the beginning of the cooperation, steps for checking their control, the person of the supplier and the employees acting instead of the suppliers, questions about signing contracts, orders or delivering the goods.
I recommend that you project an internal directive about the process of checking the business partners and set-up the control systems, because the consequences could be very serious in the case when you cannot prove your VAT knowledge about your business partners.
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