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Analysis

A due diligence action list will be developed for VAT purposes

The Ministry of Finance is developing a definition of good faith

taxCube news 7/2017

The Ministry of Finance specifies what kind of non-standard circumstances of a transaction should raise doubts of a taxpayer and trigger detailed analysis of a counterparty. The Ministry is also developing a due diligence action list.

Suspicious circumstances of a transaction

According to the Ministry of Finance due diligence in counterparty checking should not be limited to obtaining a copy of registration documents certifying assignment of a statistical number (REGON), tax identification number (NIP) or other documents (such a fuel trader’s licence). Circumstances of establishing and carrying out business relations should also be closely inspected. According to the Ministry of Finance non-standard circumstances of trading in given goods should raise doubts of a taxpayer. Such non-typical situations include cases where:

  • an entity reporting a considerable revenue has a registered address in a place with no signs of any business activity and it has no technical resources necessary to carry out this type of business activities;
  • suppliers and buyers in the supply chain often change without any economic reason (new companies are established, other businesses are re-established with a changed shareholding structure);
  • a supplier does not intend to enter into a long-term business relationship;
  • business facilitators indicate preferred or acceptable suppliers and buyers with no clear reason;
  • considerably short payment terms, considering the transaction size;
  • reversed payment chain - the last entity in the chain makes advance payments to finance the entire purchase transaction;
  • low transaction margins for most companies in the chain (with low profit margin) and no price negotiations;
  • fast trading, goods are not warehoused, but immediately sold to other entities.

Circumstances listed above should raise doubts as to the integrity of the counterparty. In other words, in these circumstances, a taxpayer is expected to inspect in detail if the counterparty actually exists, to check its integrity and VAT registration.

Due diligence guidelines

The Ministry of Finance decided to consider the proposition of determining a list of actions indicating a taxpayer’s good faith or due diligence or guidelines in this respect, as suggested in the related interpellation. The list would instruct honest entrepreneurs what actions should be taken to avoid the risk that tax authorities may question their right to deduct tax. The Ministry of Finance is said to be developing the list in question.

On the other hand, the Ministry of Finance emphasises that even if the same goods are traded, the actual circumstances of a given transaction will decide of the good faith and due diligence of a taxpayer. If the list of obligations is made too specific, it may disregard some situations, in particular, those of a non-standard nature. Moreover, the Ministry of Finance indicates that the list could be used by dishonest buyer to fake acting in good faith.

Authors:

Ernest Frankowski | Partner in Tax Advisory Department

Tomasz Stankiewicz | Senior Manager in Tax Advisory Department

Igor Roman | Senior Manager in Tax Advisory Department

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