VAT . Good faith in the jurisprudence of the TEU as a basis for avoiding liability for abuse against concepts of fraud and fraud in non-tax laws

Good faith can be crucial in VAT matters. A person who did not know and could not know about the abuse of a counterparty cannot be responsible for the abuse. Can good faith be defined?

Introduction

The concepts of good faith and due diligence are crucial in the tax on goods and services, as they can protect the taxpayer from negative consequences, especially in the context of the so-called tax carousel and other types of VAT abuse.

However, the basic issue in this issue must be taken into account – both concepts (good faith and due diligence) are very vague. For this reason, the taxpayer may rely on good faith and due diligence in his proceedings, but in practice he may face considerable difficulties, both in dealing with tax authorities and administrative courts.

In practice, the recognition that a person acted in good faith or maintained due diligence focuses on considering individual circumstances such as whether the taxpayer has verified the counterparty sufficiently accurately.

Despite this, it would be difficult to establish a set of principles which will ensure that the taxpayer has a positive assessment of the matter, i.e. good faith or due diligence.

Abuse of law, good faith and due diligence

Such concepts as abuse of law, good faith and due diligence are not explicitly defined in tax laws. For this reason, it is appropriate to refer to extra-tax laws in order to present the background of this issue more accurately.

The theory of abuse has been regulated under Article 5 Civil Code 1 (continue k.c.). Under this provision, powers cannot be used in a manner contrary to the socio-economic purpose of that right or the principles of social coexistence. If a person exercises his or her right in this way, such action or omission shall not be considered to exercise the law and shall not be protected.

According to this provision, the law may be exercised or abused. The application of this principle to VAT could, for example, justify the conclusion that the principle of VAT neutrality cannot be infringed in order to achieve financial advantages, since such action would be contrary to the socio-economic purpose of that right.

At the same time, it should be noted that the theory of abuse regulated under Article 5 k.c. cannot be a justification for negating the validity of existing legislation[2].

The structure in question applies when we are dealing with an attempt to abuse a given rating, but at the same time there is no basis for excluding the power of a given provision.

At the same time, it should be stressed that this regulation can be applied very carefully under VAT. It is necessary to take into account the specific characteristics of a particular case.

Fraud in the Tax Penal Code

The definition of the meaning of concepts such as abuse or fraud is not an explicit matter and it is therefore appropriate to refer to another extra-tax law, the Tax Penal Code 3 (continue k.k.s.). Article 56 k.k.s. defines fiscal criminal offence (and fiscal misdemeanour – privileged type). The concept of tax fraud is linked to self-calculation[4]. Article 56 k.k.s. penalises the exposure of public debt to depletion.

At the same time, it should be stressed that the offence of tax fraud can only be committed intentionally, and this in turn means that, for example, the unintentional understatement of the amount of the tax liability does not fulfil the criteria of that provision. This is due to the Supreme Court ruling:

„The actions attributed to that defendant in paragraphs II and III of the judgment of the Court of First Instance did not exhaust the marks fiscal criminal offence in the form of assistance and co-procedure to commit a prohibited act from Article 56(1) (k.k.s.) According to that provision, a taxable person who submits a declaration or a declaration to the tax authority, to another authorised authority or to a payer, falsely discloses or conceals the truth or fails to comply with the obligation to notify the amendment of the data covered by it, thereby exposing the tax to depletion, is liable to a fine to 720 the daily rates or penalties for imprisonment or both together.

Therefore, the effect of tax evasion is necessary in order to achieve the characteristics of such a prohibited act. This effect may result from behaviour which involves misleading the tax authority as to the circumstances relevant to the tax obligation, leading to the possibility of setting it at a lower level than the tax actually due.

Of course, things cannot matter in the perspective of effect with Article 56(1) k.k.s. such behaviours of the taxpayer, which consist in the transmission to the Authority of false information which would not affect the size and content of the tax obligation’ 5 .

The judgment cited shows a specific understanding of the concept of fraud with regard to the provision Article 56 k.k.s. This example shows at the same time that determining the meaning of concepts such as abuse, fraud, good faith and due diligence in VAT is not an easy process and requires account to be taken of the specific nature of a particular case.

An analogy with German jurisprudence

Similar provision in German law (section 370 section 1 point 1 Abgabenordnung 1977 – The equivalent there Tax Ordinance) provides for liability for providing false tax information. The referring court considered that this provision was of a blank character (similar to Article 56 k.k.s.), and concreteisation occurs in tax laws.

The application of that provision has been the subject of a ruling from the Court of Justice of the European Union (hereinafter referred to as the TEU)[6]. The judgment was problematic enough that the German taxpayer committed an abuse which in practice violated the interests of another EU country, i.e. Portugal.

The taxpayer brought an appeal in which he argued that the illegal conduct did not undermine the tax interests of the Federal Republic of Germany and that there was no reason to hold him liable in that country.

The Federal Supreme Court ruled that “Article 28c Part A point (a) sixth The Directive should be interpreted as meaning that the tax advantages provided for in principle for a given transaction should be refused to all participants in such transactions for the purpose of tax fraud, if the taxpayer concerned is aware of and participates in an abuse or fraud practice.

According to this court, one parties, from the prohibition of abusive practices laid down in Community law and applicable in the field of VAT, and, second Parties, from the principles and scope of this provision and objectives sixth directives.

That court notes that it has never had doubts about the interpretation sixth Directives in view of the sufficiently clear case law of the Court of Justice of the European Union" 7 .

Interests of not only a country but of the European Union as a whole

The Court of Justice of the European Union has ruled that, when assessing the question of potential fraud, national authorities should consider the interests of not only their country but of the Community as a whole: ‘In particular cases where there are serious reasons to believe that intra-Community acquisitions corresponding to the supply at issue could avoid payment of VAT in the Member State of destination, despite mutual assistance and administrative cooperation between the tax authorities of the Member States concerned, the Member State of origin should, in principle, refuse to exempt the supplier of the goods and require him to pay the tax and the posteriori in order to prevent the transaction from avoiding any taxation’ 8 .

The rulings of both rulings (German court and TEU) were unfavourable to the taxpayer who committed fraud. The German court emphasised the definition of fraud or abuse as knowledge of participation in fraud. At the outset, the TEU pointed out that the fight against fraud and fraud is an objective supported by sixth Directive.

The Court also stressed that in similar cases the principle of proportionality should be taken into account.

Good faith as a basis for action

The most important criterion on the basis of which the concept of tax fraud can be distinguished in the case law of the TEU is good faith. This case-law shows that the economic operators' taking reasonable action to ensure that they are not involved in tax fraud excludes the possibility of having negative tax consequences.

According to the decision of the CJEU[9]: „In fact, economic operators who take any possible action which can reasonably be required to ensure that their transactions do not form part of the chain, including transactions affected by VAT fraud, should be able to rely on their legality without the risk of being jointly and severally liable for the payment of that tax by another taxable person.’

A similar proposal includes a different decision of the EUS[10]: „It is therefore not contrary to Union law to require an economic operator to act in good faith and to take any action reasonably required to ensure that the activity carried out by him does not lead to a participation in tax fraud (the Teleos and Others case, point 65; and in the case of Mahagében and Dávid, point 54)”.

Similarly, another judgment by the EU Court of Justice 11 : „(…) in accordance with settled caselaw, contrary to the rules of operation of the right of deduction laid down in Directive 2006/112 is sanctioning the refusal to exercise that right of a taxable person who did not know and could not know that the supplier had committed a criminal offence in the course of the transaction or that another transaction, carried out before or after the transaction carried out by that taxable person, was carried out in breach of VAT rules.’ These TEU judgments point to a permanent and established line of case law whereby entrepreneurs cannot be charged with the dishonesty of counterparties that they could not know about. Tax law consists of a number of clear standards and certain circumstances which cannot be predicted because they are not dependent on the entrepreneur.

No provision requires the taxpayer to check its counterparties, but it is in the interests of the economic operators to take measures that would eliminate the risk of cooperation with unreliable entities. It would be difficult to treat everyone as a potential fraud, but verifying the other party’s claims is absolutely necessary to avoid financial losses resulting from the loss of the right to deduct, exempt or refund VAT .

Unconscious participation in tax fraud

In the light of the case law of the TEU, an unwitting trader, such as a tax carousel, must not be deprived of the right to deduct. The EU Court stresses two concepts: he did not know and could not know about the reliability of the counterparty. Special attention needs second from these concepts.

Certainly, it cannot be interpreted as "there is no theoretical possibility of finding out that a counterparty is unreliable" as this would require taxpayers to be completely unrealistic. The only acceptable interpretation was “he did not know and could not know with due care”.

The concept of abuse may seem substantially similar to the concept of fraud, but in this case the design is different. In general, abuse occurs when a taxpayer uses lawful measures, but in a way contrary to the objective of tax legislation.

Valuable indications in this respect are provided by the Halifax ruling 12 : „In order to establish the existence of abuse, a first, that the transactions concerned, although they fulfil the formal conditions provided for in the relevant legislation sixth Directive and national legislation transposing that Directive have led to a tax advantage which would be contrary to the objective of those provisions. After second, It should also appear from all objective circumstances that the primary objective of these transactions is to obtain a tax advantage.’

The above passage indicates that abuse occurs when a taxable person takes the action in question in order primarily to obtain a tax advantage which cannot be considered justified despite a lawful act.

The same ruling concluded that ‘sixth The Directive should be interpreted as precluding the right of a taxable person to deduct value added tax if the transactions resulting from that right constitute an abuse.’ This thesis emphasises that the right to deduct VAT may be contested if there was an abuse.

Another passage of the ruling emphasizes the relationship between sixth Directive and VAT regulations : "The principle of non-abuse applies also to VAT . In fact, the fight against fraud, tax avoidance and possible abuse is an objective recognised and supported by sixth Directive’.

In a similar tone, the TEU expressed itself in another ruling 13 : „The finding of an abusive practice in the field of value added tax assumes that first, that the actions at issue, despite meeting the formal requirements laid down in the relevant provisions of the Directive and implementing national legislation, result in a tax advantage which would be contrary to the objective of those provisions and after second, that it is clear from all the objective elements that the main objective of the actions at issue is only to achieve the tax advantage in question.’

In another case, the TEU ruled that contractual provisions could also be regarded as an abuse aimed at achieving an unjustified tax advantage[14].

Abuse of the right to deduct VAT

A particular case of VAT fraud is the abuse of the right to deduct.

According to the case-law of the Court of Justice, a tax authority may in such a case request the reimbursement of an unjustified advantage with retroactive effect 15 : „If the tax authority finds that the right to deduct has been exercised fraudulently, it is entitled to request, retroactively, reimbursement of the amounts deducted (see in particular the judgments of 14 February 1985 on C-268/83 Rompelman, ECR p.

655, point 24, to 29 February 1996 on C-110/94 INZO , ECR p.

I-857, point 24, and Gabalfris and Others, point 46) and it is for the national court to declare that it is not possible to exercise the right of deduction if, in the light of objective circumstances, it is established that that right has been abused or that it has been exercised unfairly (see Fini H, cited above, point 34)”.

In a similar tone, the TEU expressed itself in another judgment 16 : „It follows from the caselaw of the Court that the status of taxable person is acquired and that the right to deduct can only be exercised if the person requesting a VAT deduction demonstrates that the conditions for benefiting from the deduction are met and that his intention to start an economic activity resulting in taxed activities confirms objective circumstances.

If the tax authority had found that deduction rights were abused or exercised unfairly, it could have requested retroactive reimbursement of the amounts deducted (see in particular the judgments: in the case C-268/83, Rompelman, point 24; on C-110/94, INZO , point 24; on C-32/03, Fini H, ECR p. I-1599, point 33)”.

In the next the judgment of the CJEU ruled, very generally, that EU law cannot be used to commit fraud or abuse 17 : „It should then be recalled that the fight against tax crime, tax evasion and possible abuse is an objective recognised and supported by Directive 2006/112 (see in particular the judgment in Halifax and Others, point 71; Judgment: from 7 December 2010 on C-285/09 R., ECR p.

I-12605, point 36; on 27 October 2011 on C504/10 Tanoarch, ECR p. I-10853, point 50). In this regard, the Court has already ruled that legal entities cannot rely on European Union law to commit a crime or abuse their powers (see in particular the judgment of 3 March 2005 on C-32/03 Fini H, ECR p.

I-1599, point 32; the judgment in Halifax and Others, point 68; in Kittel and Recolta Recycling, point 54)”.

Summary

The common denominator of the case law of the TEU with regard to the interpretation of ‘abuse’ is the understanding of that concept in terms of the specific form of ‘circumvention’ resulting in unjustified tax advantages.

VAT is a key source of income in each EU country. However, the construction of this public-law debt makes it possible to expose the state's treasury to the detriment of unfair traders. Different EU countries are trying to reduce this phenomenon in different ways.

EU case law plays a role in this respect in harmonising the application of the law by tax authorities. It should be remembered that abuse on this issue can occur not only on the part of the entrepreneur, but also on the side of the state authority, which wants to fight this phenomenon without moderation.

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1 Act of 23 April 1964 Civil code, i.e. Journal of Laws of 2018, item 1025.

2 Lt. J. Ciszewski (ed.), Civil Code. Comment, Article 5, II , Warsaw 2014.

3 Act of 10 September 1999 IRS Code, i.e. Journal of Laws of 2017, item 2226.

4 Lt. P. Cardas, G. Labuda, T. Razowski, Tax Penal Code. Comment, Article 56, III , Warsaw 2017.

5 Judgment of the Supreme Court of 5 March 2015, reference no. III KK 407/14, LEX No. 1678967.

6 Judgment of the Court of Justice of 7 December 2010, C-285/09, Criminal proceedings against R., application of the Bundesgerichtshof.

9 Judgment of the Court of Justice of 11 May 2006, C-384/04, Commissioners of Customs & Excise, Attorney General v Federation of Technological Industries and in.

10 Judgment of the Court of Justice of 6 September 2012, C-273/11, Mecsek Gabon Kft. v Nemzeti Adó- és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága.

11 Judgment of the Court of Justice of 31 January 2013, C-642/11, Stroj trans EOO D v Direktor na direkcija "Prayed and growing for pollinity" — Varna pri Centralno cropping for Nacizonata agent for prichodite.

12 Judgment of the Court of Justice of 21 February 2006, C-255/02, Halifax plc, Leeds Permanent Development Services Ltd and County Wide Property Investments Ltd v Commissioners of Customs & Excise.

13 Judgment of the Court of Justice of 27 October 2011, C-504/10, Tanoarch s.r.o. v Daňové riaditeľstvo Slovenskej republic.

14 Judgment of the Court of Justice of 20 June 2013, C-653/11, Her Majesty’s Commissioners of Revenue and Customs v. Paul Newey.

15 Judgment of the Court of Justice of 6 July 2006 in joined cases: C-439/04, Axel Kittel v Belgium and C-440/04, Belgium v Recolta Recycling SPRL.

16 Judgment of the Court of Justice of 1 March 2012, C-280/10, Discovery Mine of Poland Trawertyn P. Granatowicz, M. Wąsiewicz public company against the Director of the Tax Chamber in Poznań.

17 Judgment of the Court of Justice of 21 June 2012 in joined cases: C-80/11, Mahagében Kft v Nemzeti Adó-és Vámhivatal Dél-dunántúli Regionális Adó Főigazgatósága and C-142/11, Péter Dávid v Nemzeti Adó- és Vámhivatal Észak-alföldi Regionális Adó Főigazgatósága.