Appropriate diligence of the taxpayer

Preparation of data in electronic form by generating JPK structures from a computer program or creating e-reports is only a small part of the activities that the entrepreneur must do in order to exchange data electronically with tax authorities. The fundamental challenge is to ensure that data in information systems is correct.

It is clear that if incorrect data are entered in the computer program, in a way that does not comply with the legal requirements, then the JPK structure creation mechanism will download these incorrect data and transmit it to the office.

That is why the legislator put such great emphasis on the so-called due diligence and assessment of whether the actions have been carried out in good faith.

1. Definitions of due diligence

The further part of this study highlighted tax consultations on the grounds of due diligence[1]. The opinions of the participants of this consultation often state that due diligence has not been defined anywhere.

In one of The participant wrote: "The concept of due diligence has not been defined in EU or Polish legislation and its content is always determined by the competent authorities conducting a specific case, depending on the circumstances of the particular case".

However, when reviewing literature and legislation, there are definitions of due diligence. According to the description given in the Legal Gazette, this is an action that shows that someone has done everything possible to do their job as best as possible.[2].

A very interesting definition of due diligence has also been cited in an article published in “Rzeczpospolita”: “In principle, by due diligence we mean the care generally required in relation to a given type.

Its pattern is objective and, in turn, its application in practice is first to choose a model that sets the optimal treatment under the conditions in question, adequately concrete and socially approved, and then to compare the behaviour of the debtor with such a pattern of conduct’ 3 .

The definition of due diligence can also be found under Article 355 Act on 23 April 1964 Civil Code 4 (Next: k.c.). Under this provision, the debtor is obliged to care generally required in the relationship of a given type (due diligence).

The due diligence of the debtor in his business activities shall be determined taking into account the professional nature of that activity.

In the context Article 355 k.c. courts issued 68 decisions. In the Supreme Court judgment of 21 September 2007 5 Article 355 k.c. has been detailed by Article 827 k.c., which clarifies the principle of due diligence in the context of the liability of the insurer. Article 827(1) k.c. indicates that only gross negligence of the insured person relieves the insurer of payment of compensation. An interesting description of gross negligence is given in the judgment cited above.

Judgment

The District Court stated that gross negligence should be considered not only indiscriminately limited to deliberate action, so-called recklessness combined with the prediction of the effect, but also exceeding the basic, elementary principles of care, proceedings below the minimum, elementary level of message or skill.

Therefore, gross negligence can be attributed to this under Article 827(1) c., in the event of non-predicting damage as a result of an act or omission of the policyholder, where the basic, elementary precautionary principles have been exceeded.

Assessment of whether such rules have been exceeded must always be made in the circumstances of a particular accident[6].

In interpreting this record, it is difficult to determine universally whether we are dealing with gross negligence, because the context is always important. The grounds for the above judgment state: ‘The due diligence of the debtor in respect of his business activity, which is determined taking account of the professional nature of that activity, does not mean exceptional care, but adapted to the working person, the object of the action and the circumstances in which it takes place’ 7 .

Other ruling that also refers to due diligence and Article 355 k.c., is a judgment of the Poznań Court of Appeal of 8 March 2006 8 .

Judgment

Higher care therefore required in economic relations, taking into account the professional nature of the activity (Article 355(2) (k.c.) finds its translation into procedural rules. Having regard to the professional nature of his business activity, the due diligence of the entrepreneur justifies the increased expectations of skills, knowledge, scrupulousness and reliability, prevention and predictability. It shall also include knowledge of applicable law and its consequences[9].

Another interpretation of due diligence, which sheds light on how it should be understood, is the ruling from 9 March 2016 10 . Here, the case concerned damage to the plaintiff's health as a result of a fall on a slippery sidewalk.

The Court ruled that a person who had a duty to protect the pavement from the risk of slipping on it could not be attributed to any intentional fault, but pointed out that his act should be assessed rather in terms of due diligence as a professional entrusted with winter maintenance of the pavement.

The Court of First Instance has indicated that the due diligence measure determines Article 355 k.c. and may be used for liability for illegal acts.

In addition, he added that this due diligence of the defendant should be assessed within reasonable limits, namely that the person responsible for maintaining the pavement could not be required to constantly snow and sand the pavement at all times of the day and night, nor to cuff the ice from all the pavements that it handled.

Among the opinions submitted during the consultation on due diligence was the opinion of the Taxes Association in Poland.

This opinion, very rich and exhaustive includes the definition of due diligence 11 : „The concept of due diligence, which is the subject of a tax consultation, is a general clause, a non-acute concept and should therefore not have a legal definition.

The determination of whether the taxpayer has exercised due care now requires in every case the model of a carefully functioning taxpayer to be developed. This model should take into account the standards resulting from commercial habits and specificities of the economic sector concerned.

The requirements of a carefully functioning taxpayer should be laid down taking into account the principle of proportionality, i.e. they must be reasonable and must not create an excessive burden for the taxpayer beyond the limits of common sense."

Many other judgments, opinions or definitions can be cited here, which refer to due diligence, but it is worth noting that the nature of the activities performed is important to determine due diligence. The questions worth remembering from these interpretations are:

• 1) due diligence and gross negligence,
• 2) due diligence as an action showing that someone has done everything to do their job as best as possible,
• 3) due diligence in translating into procedural rules,
• 4) due diligence and knowledge of applicable law and its consequences,
• 5) assessing due diligence within reasonable limits.

Therefore, due diligence should be considered both in the context of obligations and rights – the entrepreneur should be aware not only of his obligations, but also of his rights as a result of the due diligence he should exercise in running his company.

Every entrepreneur is obliged to account for the tax authorities. In the light of the provisions, the legislator expects due diligence in tax settlement[12]. However, it should be noted that the taxable person cannot be burdened with excessive responsibilities resulting from ill-conceived due diligence.

In addition, due diligence is also worth seeing in the context of actions in good faith, although the entrepreneur should be aware that this good faith will not justify everything.

In addition, it is much better to protect yourself from the unwanted effects of his actions than to explain himself later and to expect understanding from the fiscal system, for it can be very different.

Please note that due diligence also protects the entrepreneur. When checking whether the trader with whom the business relationship is established is an honest entity, the entrepreneur not only reduces the risk of entering into conflict with tax authorities, but also protects his business interests. Due diligence is in the interests of the taxpayer and the trader.

2. Tax consultation on due diligence – introduction

It is important to know that the taxpayer has a statutory obligation to control its invoices in terms of their reliability. State Article 106m Act on 11 March 2004 on tax on goods and services 13 (Next: the VAT Act).

In accordance with that provision, the taxable person shall determine how to ensure the authenticity of the origin, integrity and legibility of the invoice. The authenticity of the origin of the invoice shall mean the certainty of the identity of the supplier of the goods or service provider or the issuer of the invoice.

The integrity of the content of the invoice is understood to mean that the invoice does not change the data that the invoice should contain.

The authenticity of origin, the integrity of the content and the legibility of the invoice may be ensured by any business checks that establish a reliable audit trail between the invoice and the supply of goods or services.

In addition to the use of business controls, specified under Article 106m(4) the VAT Act, the authenticity of the origin and the integrity of the content of the electronic invoice shall be preserved, in particular where:

1) qualified electronic signature or

1. Electronic Data Exchange (EDI) in accordance with the European Data Exchange Model Agreement 14 , where the agreement concluded on this exchange provides for the application of procedures ensuring the authenticity of the origin of the invoice and the integrity of its data.

In the light of this statutory obligation, the taxpayer should launch internal business checks by which it will be possible to verify the processes, entities associated with those processes and related documents. It is not only the Polish government that is facing tax fraud, mainly VAT, that procedures are being launched, often legal, which require the taxpayer to give due care to safeguard the correctness of economic operations and the data recorded in the tax books. The due diligence of taxpayers has just become one from discussion topics in the Sejm. On this point, the two Parliamentary interpellings:

• 1) No 11813, by Jakub Kulesza 6 April 2017, Answered by Paweł Gruza, Undersecretary of State at MF,
• 2) No 14059, submitted by Tomasz Swallow 5 July 2017, Answered by Paweł Cybulski, Undersecretary of State at MF.

Mr Kulesza pointed out in his interpelling that the concept of due diligence was not defined in any law, making it difficult for honest entrepreneurs to function. They do not really know what criteria and activities to check their counterparties. In conclusion, he asked the Minister of Finance the following questions:

• 1) Does the Ministry plan to amend the Goods and Services Tax Act in which it will introduce a definition of due diligence?
• 2) Does the Ministry plan to issue clear and precise guidelines for entrepreneurs, specifying what action they must take to maintain due diligence?
• 3) How do entrepreneurs now have to learn what they need to do to maintain due diligence?
• 4) is due diligence an economic interview enough?
• 5) what is the percentage of the statement of conduct and lack of due diligence in the checks carried out by the tax authorities in which the occurrence of that condition was subject to review?

In response to the questions raised above, the representative of the MF, Paweł Gruza, stated that in the event of any doubt arising at the time of establishing a relationship with the contractor, special care should be taken. He further mentioned the circumstances which may indicate that the transaction is a tax fraud:

• 1) the entity, particularly with a large number of activities, reports its registered office at an address where there are no business signs and has no technical facilities necessary to carry out such activities,
• 2) suppliers and customers in the supply chain often change without any economic justification (new companies are emerging, companies are being restarted after change of shareholders),
• 3) the supplier does not seek to conclude a commercial contract providing for longer cooperation,
• 4) organisers, for no apparent reason, indicate from whom the goods can/must be purchased or to whom they can/must be sold,
• 5) there are relatively short payment deadlines, given the size of the transaction,
• 6) there is a reverse payment chain – the last entity in the chain funds all purchases through advance payments,
• 7) transaction margins are relatively low for most companies in the chain and often represent fixed amounts, and price negotiations generally do not take place,
• 8) there is rapid trade, goods are resold immediately to other entities without storage.

This reply also informs us that the Ministry is working on preparing a list of due diligence grounds, but it is a major challenge – due to the great diversity of economic relations – to create such a list in the form of a standard.

In the second Interpretation No 14059 point to the risks associated with unfair entities, while noting that the obligation to verify certain commercial offers has been transferred to a fair taxpayer. This interview, like the previous one, ends with questions. 15 :

• 1) What is the additional verification made by entrepreneurs?
• 2) How can you avoid the risk of taking up cooperation with an unfair counterparty?
• 3) Does the verification of its counterparty in the business record, VAT register, REGON database automatically exempt the entrepreneur from any adverse consequences resulting from the counterparty's dishonesty?

In his reply, Paweł Cybulski mentioned the activities that the entrepreneur can perform during the verification of the counterparty 16 :

1. „confirmation of the status of the entity by checking it on the website https://ppuslugi.mf.gov en/, in the Service provided by the MF “Checking the status of the entity in VAT” on the tax portal where the taxpayer can carry out the ongoing verification of the counterparty. The service makes it possible to verify that the entity is an active, exempt VAT taxable person or not registered as a VAT taxable person, which is extremely important in the process of documenting an economic transaction;
2. confirmation of EU VAT number (VIES) on the website http://ec.europa.eu/taxation_customs/vies/?locale=PL – This allows to obtain confirmation of the activity of the entity’s VAT number according to Article 31 Council Regulations No. Regulation (EU) 904/2010 to 7 October 2010;
3. to submit to the competent head of the tax office a request for confirmation as to whether the taxable person is registered as an active or exempt VAT taxable person, or the possibility of telephone contact with the tax office to confirm the status of the counterparty;
4. verification of the entity in the KRS or CEIDG;
5. verification of the entity in REGON database;
6. for “sensitive” goods transactions (including those mentioned) In Annex 13 to the VAT Act Act) – check that the seller is on the date of delivery of the goods in the list of entities that have lodged a guarantee guarantee of the appropriate amount (http:// kaucjagwarancyjna.mofnet.gov.pl/)”.

The above list in the document was extended to include a list of additional activities that the taxpayer can do in order not to be involved in illegal activities 17 :

• 1) check that the counterparty has its website or that its postal address is not fictional;
• 2) checking that the counterparty has the legal concessions and permits required,
• 3) be careful when someone proposes a so-called good interest with EU counterparties, particularly in the field of intra-Community supply of goods, and in particular if this interest concerns the purchase/sale of goods outside the scope of their business;
• 4) be careful when the proposal to enter into a transaction concerns trade in goods at increased risk, e.g. scrap metal, electronics, phones, telephone cards, coffee, tea, also gold;
• 5) formalising relations with counterparties – it is desirable that any cooperation agreement with the supplier be concluded in writing;
• 6) request the counterparty to submit a copy of the non-tax certificate;
• 7) be covered by a written commitment from a counterparty that the goods to be sold are not from a crime and that they have not been traded under a tax carousel, and that the counterparty does not participate and does not engage in tax fraud;
• 8) require that the specifications of the goods supplied be attached to the invoice with an indication of the individual factory (serial) number of each device supplied and that the product complies with the specification.’

At the end of the document, information about the aforementioned launch by MF 30 June 2017 tax consultations on the list of due diligence grounds.

3.3. Tax consultation on due diligence

In response to the call for tax consultations, it sent its opinions and proposals to the list of due diligence grounds 69 entities. All were placed on the page https://www.gov.pl/web/finanse/konsultacje-podatkowe Table 1 provide the most frequently mentioned procedures for due diligence.

In conclusion, the material contained in this consultation may be a valuable source of knowledge for the creation of own good practices to ensure due diligence in the control of counterparties and transactions.

In the context of requests related to current databases of taxpayers, it is worth noting that from 1 September 2019 provisions for amending the VAT Act 12 April 2019 18 , according to which existing databases: active VAT taxable persons, deleted VAT taxable persons, taxable persons refused registration, taxable persons who were reinstated and merged into a single electronic database.

Its administrator is the Head of the National Tax Administration. The list shall be updated on working days, once a day. The above-mentioned database also provides the bank accounts of entities. Payments related to transactions are to be made only on accounts that are visible in the register.

Introduction to the database of bank numbers of entrepreneurs is linked to income tax, as payment for the invoice above 15,000 PLN to an account other than that specified in the public register, it will result in the inability to charge such payment in the cost of obtaining revenue.

The legislator provides for procedures for including such payment in costs, but after prior notice to the head of the tax office (the invoice of the issuer) that payment for the invoice was made to a different account than indicated in the database.

These regulations are to enter into force from 1 January 2020 We should hope that the new regulations and solutions of the Ministry of Finance will increase the security of entrepreneurs in their business.

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