Czech Republic vs. JUTTY GROUP s.r.o., December 2016, Supreme Administrative Court , Case No 6 Afs 147/2016 – 28

« | »

On the basis of the detailed evidence provided by the tax administration, the defendant stated that the essence of the case is to assess whether the applicant has proved that the taxable supply declared in invoice No 2010036 took place, i.e. that Dosnetex plus s.r.o. provided the invoiced supply (production of graphic designs) to the applicant. However, it found that Dosnetex plus had become uncontactable at the end of 2010 and had filed a VAT return for the previous period, but that procedures for the removal of doubts had been initiated and that the company had not paid the actual tax assessed on the basis of those procedures. The company did not file an income tax return for 2010. It was established from the Commercial Register that on 12 November 2010 there was a change in the company’s composition, when the company’s managing director, Mr J.S., was replaced by Mr R.T., who also became the sole shareholder. Mr T. is a homeless person, without financial means and not contactable by the tax authorities; he could only be reached in the building of the District Social Security Administration in Přerov. Nevertheless, he was supposed to buy Dosnetex plus from Mr S. for the value of the contribution of CZK 200 000 (when he was supposed to hand this amount over to Mr S. personally, at the same time taking over all the accounting documents, all in the car park). Although Mr S. is virtually unknown to Mr T., he remains the general representative of Dosnetex plus.

The applicant brought an action against the contested decision before the Regional Court. He disagreed with the defendant’s assessment of the various witness statements which showed that the applicant had obtained graphic work from Dosnetex plus. However, all the discrepancies found by the tax authority were not caused by the applicant but by its supplier, which were therefore in no way within the applicant’s control, particularly since he was unaware of them. It stressed that Dosnetex plus only became uncontactable at the end of 2010, which could not have been foreseen by the applicant in October 2010, when the invoice in question was submitted. The defendant breached its duty to correctly determine and assess the tax, as it did not correctly assess the evidence adduced, and therefore considered that the tax authority had not discharged its burden of proof with regard to challenging the witness statements and the applicant’s involvement in the VAT fraud. It was for the tax authorities to prove beyond doubt that the applicant knew or ought to have known that the delivery was part of a tax fraud committed by Dosnetex plus. The defendant argued that the principle of liability for tax, on which the defendant appears to rely, was introduced into the VAT Act only as from 1 April 2011 and therefore cannot apply to the present case. He therefore concluded that, in relation to Dosnetex plus, he had always acted in good faith in the correctness of its conduct.

Judgement of the Court

In view of all the above, the Supreme Administrative Court found no reason to depart from the judgment of 5 October 2016, No 6 Afs 170/2016-30, which concerned a similar situation, and therefore concluded that the appeal was manifestly unfounded and dismissed it in accordance with Article 110(1) in fine of the Code of Civil Procedure.

“The Supreme Administrative Court has consistently held that the conclusions that the taxable supply was not proven to have been effected by the taxable person and that the taxable person was involved in fraud are not compatible. Before the tax administration starts to investigate and prove any possible participation in tax fraud, it must be certain whether the taxable supply was actually carried out (cf. e.g. the above-referenced judgment No 6 Afs 170/2016 – 30). It is necessary to distinguish carefully between cases in which the taxpayer is not entitled to deduct VAT at all, because the taxpayer fails to prove that the taxable supply was carried out at all or to the extent declared, and situations in which the right to deduct does arise (because the taxable supply was actually carried out), but for certain reasons cannot be granted to the taxpayer (which, as the complainant correctly points out, would be in accordance with the case-law of the CJEU, particularly in the case of a claim for deduction made in an abusive manner or as a result of tax fraud). It is only if the taxpayer can prove that the transaction to which the deduction relates actually took place that it is appropriate to ask whether it was the result of abusive or fraudulent conduct. However, if the taxable supply did not take place at all, or the taxable person did not bear the burden of proof in this respect, it is unnecessary to deal with possible fraudulent conduct by the nature of the case, since there was no (abusive or other) tax-relevant conduct of the VAT payer. The conduct of a taxable person who declares a non-existent supply on the basis of which he subsequently claims a VAT deduction may also be regarded as fraudulent in a certain sense, but in that case his tax liability will be increased not because he has committed or participated in fraud, but because he has not been entitled to the deduction at all, since no taxable supply has actually been made. The appellant should therefore have first examined the tax authorities’ conclusion that no taxable supply had been made, a consideration which must necessarily be reflected in the grounds of the appeal decision. Only if the complainant had reached a conclusion contrary to that of the tax administrator, i.e. that the taxable supply had been effected, even if it was not certain from which supplier the applicant had obtained the graphic designs, could it have further examined the existence of circumstances giving rise to suspicion that the applicant had been involved in tax fraud (cf. By analogy, the judgment of the Supreme Administrative Court of 11.11.2009, no. 2 Afs 122/2008 – 58).

The complainant’s objection that the Regional Court contradicts itself in that it cannot accept the conclusion that neither the applicant nor the complainant carried the burden of proof stems from a misinterpretation of the case. As stated above, the failure to prove that a taxable supply has been effected (by the taxable person) and the failure to prove that the taxable person has participated in the fraud (by the tax authorities) cannot be confused. If the Regional Court concluded that the tax authority had reasonable doubts as to whether a taxable supply had been effected and that the applicant had failed to rebut them or had failed to discharge the burden of proof, that does not contradict the assessment that, in the present case, the complainant had failed to prove that the applicant had participated in tax fraud and had failed to describe what the fraud was supposed to consist of. The burden of proof in tax proceedings shifts between the tax authorities and the taxpayer, and only one of them can bear it at any given stage of the proceedings. However, a situation may arise where the burden of proof falls first on the tax subject and then on the tax administration. Typically, this will be the case where the taxable person proves that the taxable supply was carried out as declared, but the tax authority subsequently disallows the VAT deduction on the grounds of proving VAT fraud of which the taxable person knew or should have known. It is therefore not the conclusions of the Regional Court that are contradictory, but the conclusions taken in the contested decision, as stated above.

The tax administration shall prove, inter alia, the facts decisive for the use of a legal presumption or legal fiction or the facts refuting the credibility, conclusiveness, correctness or completeness of the obligatory records, accounting records, as well as other records, documents and other means of evidence claimed by the tax subject. The taxpayer shall meet its burden of proof if it proves the facts alleged (e.g. by accounting and other records). Subsequently, the tax administration may raise and prove doubts about such evidence, and if it carries its burden of proof, it is up to the tax entity to prove the truth of its allegations or to correct its allegations. In the case of transfer pricing, these rules are modified by the substantive provisions of the Income Tax Act.

Click here for English Translation

Click here for other translation


Related Guidelines