A new spectre for VAT payers - the identification of the supplier and the customer

Recently, there have been several new decisions of the Supreme Administrative Court of the Czech Republic (hereinafter referred to as the “SAC”) and the Court of Justice of the EU (hereinafter referred to as the “CJEU” and together with the SAC hereinafter referred to as the “Courts”) concerning the application of VAT in the event that it is not possible to identify actual suppliers or customers by means of proof. Maybe you are asking yourself whether this is happening in your practice at all, since identifying suppliers and customers is no problem at all. However, the aforementioned problem exists, and is huge, especially in the chain supply of goods, and not only in these cases.

On the part of the purchase of goods and services, it is the duty of the buyer to identify a particular supplier and to demonstrate, for the purposes of the deduction of VAT, that the supplier fulfils the characteristics of a taxable entity registered as a VAT payer (hereinafter referred to as the “VAT payer”), since this is one of the important substantive conditions for the application of the right of deduction. The Courts have replaced the present concept of good faith by the strict obligation of the buyer to prove that the supplier fulfils the characteristics of a VAT payer, except cases where the position of the supplier to the tax administrator is apparent from the factual situation. If it is not possible to clearly identify the actual supplier by means of evidence, which is typical in chain supplies, it is in practice almost impossible for consumers to demonstrate that the supplier is a VAT payer, which can automatically lead to the loss of the right of VAT deduction.

In the case of the cross-border supply of goods (the delivery of goods to another EU Member State or export of goods), the proof of delivery of goods to the direct customer is important to demonstrate the justification for the application of the VAT exemption. According to the SAC, it is not enough to demonstrate that the goods have been physically delivered to another EU Member State (or similarly delivered outside the EU), but it must be demonstrated that they have been delivered in the manner and to the extent declared on the tax documents.

The issue described in the previous paragraph can be illustrated by an example of chain supply, where the goods are transported from a Czech supplier to a final customer, but are invoiced through one or more distributors. The SAC admits that for logistical reasons the goods can be transported directly to the final customer different from the contractual customer, but the actual delivery of the goods to the direct customer in its invoiced scope and value must be demonstrated for the purposes of the exemption. In practice, including cases assessed by the SAC, tax documents, delivery notes, transfer protocols, CMR, bills of lading or various declarations do not necessarily reliably identify direct customers, which results in a loss of the VAT exemption. If we stick with our example, it must be clear from all documents that the distributor has at least for a moment taken over the right to dispose of the goods as the owner directly from the supplier, who applies VAT exemptions.

Setting up appropriate contractual documentation and authorising individuals to sign this documentation is an extremely underestimated topic in practice, which often makes it impossible to prove the actual customer or supplier. Perhaps that is why the tax administration has been focusing on this area recently and disputes are ending up in the Courts.

In view of the above, we highly recommend that you familiarise yourself with the topic of identifying suppliers and customers in the light of the latest case law of the courts and set up your internal processes to avoid the risks of non-recognition of the right of deduction or refusal of the VAT exemption for cross-border supplies of goods, which inevitably leads to an additional measurement of tax and penalties.

Petr Drahoš, Senior Tax Manager