How to verify a counterparty in order not to be involved in tax fraud (part 6)

Przemysław Powierza
Tax Partner at RSM Poland

In today's entry I will summarize the main assumptions arising from the “Methodology”, i.e. a document containing guidelines helpful for tax administration officials in assessing the exercise of due diligence by entrepreneurs. The Methodology, as a set of "good practices", is very important for retaining the right to deduct VAT. I will try to point out to you, in a nutshell, the most important measures that need to be taken not to be involved in a tax fraud. Remember, however, that there is no one-size-fits-all solution that is always effective. The best safeguard is to prepare and implement our own individual verification procedure, which will strike a balance between what is necessary and what is actually feasible and as practical as possible.

WHAT MEASURES SHOULD BE TAKEN IN ORDER NOT TO BE INVOLVED IN A TAX FRAUD?

Formal criteria

1. Verification of information from KRS/CEIDG and the list of the Ministry of Finance and the databases available on the Tax Portal (Portal Podatkowy).
2. Verification whether the counterparty has the required licenses and permits concerning the goods subject to the transaction (it should make them available without resisting to do so, e.g. by e-mail).
3. Verification whether the persons entering into the agreement/transaction hold valid powers of attorney to act on behalf of the counterparty (e.g. whether they have a power of attorney from a management board member or a proxy entered into the National Court Register).

As part of the formal verification of existing suppliers, it is important to remember about the regularity of such verification (See section 4 for more details.). Additionally, taking the steps mentioned above is one thing, and you should also remember to document them. Officials will not take our word for it when we tell them that we undertook a given verification measure before we started to cooperate with our counterparty, which is why it is so important to have, for example, screenshots, print-outs from the register or dated e-mail correspondence. In other words, we "open a file" for every counterparty. Such are the times...

Transaction criteria

When verifying the counterparty, it should be checked whether the terms and conditions of the transaction do not match those described in the Methodology. The occurrence of any of the following circumstances should be a signal for you that the real intentions of the counterparty - e.g. the willingness to extort tax - may be hidden. This, in turn, may lead to a denial of your right to deduct VAT if an inspection is carried out. However, let us treat the following situations as warning signals, and not as evidence that we have a criminal among our counterparties. Let's protect ourselves from paranoia - let's not forget that we run our business and earn money thanks to our contractors, and not thanks to the National Tax Administration. We pay taxes on the profits we make, but nobody has yet seen a profit only because they have paid taxes. Let us not get crazy, but be vigilant in the following situations:

1. The counterparty proposes to enter into a transaction without economic risk;
2. A supplier of goods requires you to make a payment in cash or offers to reduce the price in case of cash payment, when the transaction value exceeds PLN 15,000;
3. The counterparty demands payment for the goods into two separate bank accounts (not applicable to split payments), a third party account or a foreign account;
4. The price of the goods deviates significantly from the market price - without economic substantiation;
5. A counterparty offers you goods which belong to an industry other than that in which the supplier is active or goods which you have not previously purchased from him - without economic substantiation;
6. A counterparty requires you to pay within a time period shorter than the standard payment terms offered by other suppliers in your industry - without economic substantiation;
7. A counterparty proposes to conclude transactions on terms that do not guarantee the security of trading - according to the standards binding in a given industry;
8. A contractual partner delivers goods that are not in conformity with the quality requirements;
9. The transaction was not documented by an agreement, order or other confirmation (not necessarily in paper format) of the terms.

Additionally, if we start cooperation with a counterparty, we should also pay attention to such factors as:

1. Contact with the counterparty or its representative that is not appropriate for the circumstances of a given transaction;
2. Registered office or place of business at an address where there are no signs of business activity;
3. The counterparty does not have the organizational and technical resources appropriate for the type and scale of its business;
4. A supplier of goods which has the form of a company has a share capital which is disproportionately low in the circumstances of the transaction;
5. A counterparty does not have a website with information that would be relevant to its business, even though this is an accepted standard in its industry.

However, as part of verifying the counterparty with whom we continue cooperation, we should be particularly cautious in the event of changes - without economic substantiation - in the existing terms of cooperation (e.g. transport of goods).

The 'split payment' mechanism

To use or not to use? That is the question. If you have at least minimal doubts about the honesty of your counterparty or about the circumstances of your transaction with them, it is certainly a good idea to apply the split payment mechanism. This will significantly increase the likelihood that the tax authorities will not challenge your right to a reduction in input tax, but it will not give a 100% guarantee. According to the Ministry of Finance, the use of split payment is a key prerequisite for due diligence. As part of the audit, National Tax Administration (KAS) officials will probably first check whether you paid for the goods through the split payment mechanism. Theoretically, the use of this mechanism is voluntary, on the other hand, the Ministry of Finance has recently been reminding us of the importance of the split payment and has indicated that it is dishonest taxpayers who will avoid the use of the split payment mechanism. It is worth bearing this in mind.

The Ministry of Finance has also recently taken many steps to increase the security of transactions carried out by honest taxpayers and to protect them against unintentional entanglement in tax fraud. An example of these activities is the nationwide educational campaign "Secure transaction", which is to explain - "from general to specific" - how fraudsters act and how they take advantage of us - the honest entrepreneurs. The campaign is actively supported by tax advisors. The campaign reiterates the importance of due diligence and the use of the split payment mechanism. An information platform for entrepreneurs was also provided (available here). You will find a lot of important information concerning, among others, the mechanisms of extortion of VAT, split payments and the circumstances to which the entrepreneur should pay attention when concluding a transaction.

To sum up, it is a priority for the Ministry of Finance to tighten up the VAT system and increase the detection of tax fraud, thereby reducing fraud and the VAT gap. It is therefore worth applying the guidelines specified in the Methodology, however, this should be done in a way that is optimally suited to the business which is conducted. It is crucial in this respect to raise awareness among employees, particularly salesmen, as they are responsible for finding suppliers and entering into new contracts. The focus should be on purchasing and sales equally.

At the same time, we would like to remind you that compliance with the guidelines specified in the Methodology does not guarantee 100% legal protection of the taxpayer. We can do no more than wait for the promised 'code of good practice' addressed directly to taxpayers - and not to KAS officials - to guarantee protection. Meanwhile, we encourage you to include the guidelines of the Ministry of Finance in your internal procedures or to contact our experts who will be happy to assist you in the preparation of the internal rules of verification of the suppliers of goods.