How to verify a counterparty in order not to be entangled in tax fraud (part 5)

Przemysław POWIERZA
Tax Partner at RSM Poland

I have written a lot so far about how to verify a contractor in order not to be entangled in tax fraud (Link to previous section). However, there is something else that can protect you from the sanctions of the tax authority and measurable business losses (loss of money and reputation). The Ministry of Finance clearly indicated in the Methodology that the assessment of due diligence will also be carried out by the National Tax Administration (KAS) officials taking the application by the taxpayer of the split payment mechanism, which will become effective as of 1 July 2018 into account.

The main objective of the split payment mechanism is to reduce tax fraud and thus the VAT gap. The split payment mechanism will consist in payment of VAT resulting from the invoice to the seller's VAT account, while payment of the net amount will be made to the seller's account used for settlements. The use of the split payment will be voluntary - at least initially. If it turns out that during the first 6 months that the split payment mechanism is working effectively, the Ministry of Finance is considering the introduction of an obligation to make payments using this system. However, the agreement of the European Commission is still needed, because the restrictions imposed by our national regulations must not, under any circumstances, disrupt the functioning of the Single Market, the advantages of which for the economies of all the Member States of the Union cannot be overestimated. According to the assumptions, the obligatory split payment would initially apply only to those sectors in which the obligatory reverse charge mechanism currently applies, i.e. construction, sale of electronics or scrap metal trade. You can find more information about the split payment mechanism in our tax alerts (7/2018), 4/2018 and 20/2017).

What does split payment have to do with due diligence?

The use of the split payment mechanism seems to be the golden mean of exercising due diligence. If you pay for the goods using the split payment method, you will be deemed to have exercised due diligence, provided that:

• You have positively verified the formal elements;
• there are no other circumstances which would clearly show a failure to exercise due diligence.

In practice, this means that the use of split payment will guarantee you legal protection and protect you not only against the refusal to deduct VAT, but also against the payment of tax which is not yours. Provided that you have correctly verified the counterparty, taking into account the conditions included in the Methodology, and none of the circumstances of the transaction aroused your suspicion. The application of the split-payment mechanism alone is unfortunately not enough. This is only an additional method which, if applied (voluntarily) in addition to all other methods and measures, will ensure that you have exercised due diligence. On the other hand, however, failure to apply the split-payment mechanism may be badly perceived by the tax authorities. According to the Ministry of Finance, dishonest taxpayers will try to avoid using the split payment at any price. They will persuade their counterparties to make payments in the traditional way, using various incentives, e.g. discounts for not using the split payment mechanism or contractual provisions that exclude the possibility of settling accounts in this way. According to the Ministry of Finance, if a seller refuses to settle a transaction using the split payment mechanism, he may be a tax fraudster. Caution is recommended in these situations. However, one should not generalise, because not using split payments can simply be caused by explainable business considerations.

The Ministry of Finance strongly encourages the use of the split payment and points out that the execution of payments using this mechanism also brings other benefits:

• releases the purchaser of goods from joint and several liability;
• secures the purchaser of goods against the risk of incurring an additional tax liability;

- up to the amount corresponding to the amount of tax resulting from the invoice received.

However, the exclusion of liability will not apply where the taxable person knew that the invoice paid through the split payment mechanism:

• was issued by a non-existing entity;
• identifies any activities that have not been carried out;
• gives an incorrect figure;
• confirms legal actions contrary to Acts of Parliament or aimed at circumventing such Acts, legal actions contrary to the principles of social co-existence, as well as actions in respect of which  a declaration of will has been submitted to the other party with its consent for the sake of appearance only.

How will the split payment work in practice? This question is asked by many entrepreneurs and experts, and time will tell whether the mechanism of split payments will actually be business-friendly and whether it will bring the intended results. The Ministry of Finance announced that it would issue extensive explanations on the application of the split payment scheme, but these have not yet been published. As soon as they have seen the light of day, our experts will certainly discuss the subject. In the next entry of this series, I will summarise all the reasons for exercising due diligence discussed so far, which is why I would like to encourage you to keep track of our website.