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The verification of counterparties is especially important for businesses operating in the retail sector. Both transactions with many counterparties and the constant search for new business contacts are at the very heart of this industry.
It is because of the large scale and dynamic nature of the business that it is so important to verify counterparties. Lack of relevant verification procedures may result in the business being considered to not have exercised due diligence. This in turn could have serious consequences for the taxpayer.
What is due diligence?
The concept of due diligence is not explicitly mentioned in the VAT Act itself, although its observance is crucial from the VAT perspective. However, due diligence is nothing more than a set of circumstances which should be taken into account by taxpayers when entering into transactions and making VAT settlements.
Why is it important?
It follows from the jurisprudence of the Court of Justice of the EU that when a taxpayer commits fraud or malpractice – and also when he knew or should have known that he was participating in doing so, it is possible that the tax authorities will refuse the VAT deduction.
Moreover, in case of a lack of due diligence, in certain situations it is permissible to hold the taxpayer jointly and severally liable for VAT which was not paid by a counterparty. With respect to Intra Community Supply of Goods (ISG), lack of compliance may result in the denial to apply the 0% VAT rate and the need to tax the transaction domestically.
Taking into consideration the fact that these consequences may be connected with meeting subjective criteria (relating to the taxpayer’s knowledge) it is worth taking care to properly document the verifications made in the enterprise. Therefore, taxpayers should verify their counterparties – both when concluding new contracts and continuing their cooperation – and properly document the actions taken.
The White List is helpful, but it is not everything
The so-called White List of VAT payers is associated with an instrument that makes it possible to check the number of the counterparty’s bank account so as to avoid the risk of excluding expenditures from tax deductible costs. Apart from this information, the White List provides various other information about the counterparties. This data may help to prove that an enterprise exercised due diligence.
When beginning cooperation with a new business partner, there would be a need to verify whether the given entity is a registered VAT payer (the White List enables such verification for a selected day up to 5 years back) as well as the entity’s registration with the National Court Register (KRS) or Central Registration and Information on Business (CEIDG).
In addition, according to the Ministry of Finance guidelines relating to exercising due diligence, there is also need to check whether the taxpayer has the required concessions or permits and whether the parties to the contract are appropriately authorized to do so.
To exercise due diligence, the transaction criteria (concerning both the counterparty and the circumstances of the transaction) should also be considered - i.e., in particular:
whether the transaction was conducted without business risk;
how the entity pays for larger transactions (over PLN 15 thousand), i.e. whether the counterparty prefers cash transactions or whether the payment is to be made to more than one bank account – or to the account of an entity other than the counterparty, or to a foreign account;
whether the price and the deadline do not differ from the market prices;
whether the transaction does not differ from the conditions that guarantee the safety of trading in the industry and whether the goods comply with the quality requirements;
whether the purchased goods/services relate to the industry in which the counterparty operates;
how criteria such as contact with the counterparty, its registered office, share capital, organizational and technical facilities and the manner of documenting the contract look.
In the course of business contacts with the counterparty it is also important to regularly and periodically verify the status of the above information – additionally checking whether the counterparty has not changed the terms and conditions of the transaction (e.g. the manner of transporting the goods).
These actions should be properly documented in a manner that – if necessary – would enable the quick submission of confirmations of having performed such actions to the relevant authorities. Only such measures will prove that due diligence has been exercised. Apart from the mentioned tax consequences, exercising due diligence would also mitigate the risk of cooperation with dishonest and unreliable entities, as well as the risk of engaging in fraudulent transactions (especially so-called VAT carousels).
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