VAT sanctions: Amendments under the Slim VAT 3 package | In Principle

No more rigid catalogue of sanctions for VAT offences. The tax authorities will be able to reduce the amount of sanctions taking into account the circumstances of the irregularities. But taxpayers who knowingly commit tax fraud will be hit with a sanction of 100% of the underpaid tax or excess input tax claimed.

In the spring of 2023, the Polish parliament adopted a number of changes to the VAT Act. Generally, the amendments took effect on 1 July 2023, but those relating to assessment of an additional tax liability (VAT sanctions) came into effect on 6 June 2023.

The amendments were adopted as a result of the judgment of the Court of Justice of 15 April 2021 in C-935/19, Grupa Warzywna sp. z o.o., concerning the compatibility with EU law of Polish provisions on VAT sanctions. The court found that the sanctions provided for in the VAT Act should take into account the nature and severity of the violation—and thus comply with the principle of proportionality.

Possible mitigation of sanctions

Art. 112b of the VAT Act has been amended to allow for moderation of the amount of additional VAT liability. Previously, the VAT Act contained a rigid catalogue of sanctions for tax offences (15%, 20%, 30%). Now the heads of tax offices and tax and customs offices can set the sanction within a certain range, up to 15%, 20% or 30% of the underpaid tax liability or overstated input tax.

A sanction of up to 30% will be imposed if the taxpayer has not filed a VAT return, has not paid the tax due under the return, or filed a return in which the taxpayer:

• Understated the amount of tax due
• Overstated the amount of the refund of the tax difference, or the refund of excess input VAT over output VAT
• Overstated the amount of the tax difference to be applied against VAT due in subsequent periods, or
• Instead of showing VAT due to be paid, showed VAT to be refunded.

A sanction of up to 20% will be imposed if, after completion of an audit or a customs and tax inspection, the taxpayer filed a corrected return reflecting the findings of the audit and paid the tax liability no later than the date of filing the correction.

A sanction of up to 15% is provided for taxpayers against whom a customs and tax inspection has been initiated and who, within 14 days from service of the inspection authorisation, filed a corrected return and paid the tax liability or repaid the undue amount of the refund.

Guidelines for tax authorities

The new provisions include guidelines that the tax authorities should take into account when imposing VAT sanctions. The authority must analyse:

• The circumstances in which the irregularities occurred. The authority must assess whether the taxpayer’s behaviour consisted of conscious participation in tax fraud (organising and directing), or shows that the taxpayer failed to exercise due diligence and was unknowingly involved in tax fraud by dishonest counterparties.

• The type and degree of violation of the taxpayer’s obligation resulting in the irregularities. The authority must consider the circumstances under which the irregularity arose and determine whether the taxpayer, or the taxpayer’s employee, partner or representative, took all the actions they could have taken under the circumstances. If so, the sanction will be reduced; if not, the sanction will be increased.

• The type, degree and frequency of past irregularities with respect to non-barred tax liabilities. The authority must demonstrate what obligation the taxpayer has failed to fulfil. Then the authority must determine the extent to which the taxpayer has committed the violation (e.g. failed to record an invoice, failed to issue an invoice, deducted input tax in the wrong amount, or taxed activities at the wrong rate). Additionally, the authority must determine the frequency of the violations.
• The amount of irregularities found, including the amount of understatement of tax liability, overstatement of the refund of tax difference, refund of input tax or tax difference to be applied to tax due for subsequent periods. The authority must verify the materiality of the taxpayer’s violations, and the nature and degree of the obligations violated.
• Remedial actions taken by the taxpayer after discovery of irregularities, e.g. prompt filing of returns or payment of tax due.

100% sanction. Art. 112c of the VAT Act maintains a tax sanction in the amount of 100%, but it is subject to additional conditions the authorities should take into account. A 100% VAT sanction is provided for taxpayers who knowingly commit tax fraud. The amount will be the tax arising from an invoice that:

• Was issued by a non-existent entity
• States activities that were not performed—in the part concerning those activities
• States false amounts—in the part concerning the items for which false amounts were provided, or
• Confirms actions covered by Civil Code Art. 58 (transactions that are unlawful, intended to circumvent the law, or against public policy) or Art. 83 (sham transactions)—in the part concerning those actions.

The authority must assess whether the taxpayer’s actions were taken intentionally and deliberately. Only knowingly participating in tax fraud will result in imposition of the 100% VAT sanction.

In justifying the changes to VAT sanctions, the drafters noted the need to structure the regulation so that the VAT sanction rate can be reduced depending on the facts of individual cases. Therefore, the tax authorities have been empowered to assess whether and to what extent a taxpayer should be penalised with VAT sanctions.

Maria Kotaniec, adwokat, tax adviser, Tax practice, Wardyński & Partners