The Supreme Administrative Court has imposed certain limits on demands from the tax administration when it asserts that a supply has been affected by value added tax (VAT) fraud.
Historically, the tax administration sought to conduct investigations of suppliers—at any point in the chain.
In the case at issue, a single general contractor supplied high-tech machinery and equipment. A number of subcontractors also participated in the project. The tax administration asserted that one of the subcontractors had not paid VAT, and viewed this nonpayment as VAT fraud. The tax administration took the position that because the final customer could have known about the VAT fraud, the ability to deduct input VAT was denied at a rate of three times the missing tax.
The Supreme Administrative Court issued a decision for the taxpayer.
According to the high court, the burden was on the tax administration to prove that the VAT payer knew, or could have known or should have known, that the supply received had been affected by VAT fraud and that entitlement to the VAT deduction was not protected by “good faith.” In satisfying this burden of proof, the high court explained that the tax administration must equally assess the evidence in favour of and against the taxpayer, and cannot ignore one and highlight the other. Common business practice must also be taken into consideration, while “after the fact” information cannot be used against the taxpayer.
Read a March 2018 report prepared by the KPMG member firm in the Czech Republic
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