The decision of the State Revenue Service to deny the right to deduct input tax is declared unjustified
22 November, 2019
On November 22, the Department of Administrative Cases of the Supreme Court (Senate) left unamended the judgment of the Administrative Regional Court, which upheld the application of SIA Altic and annulled the decision of the State Revenue Service which imposed an obligation to pay value added tax, fine and late payment fee. The Senate upheld the Regional Court’s conclusion that the applicant was entitled to deduct input tax.
Applicant SIA Altic purchased rape seeds from SIA Sakorex and SIA Ulmar receiving and storing them in the grain elevator of SIA Vendo. The applicant deducted input tax on these transactions. The State Revenue Service audited value added tax paid by the applicant. The Service found that the applicant's transactions with SIA Sakorex and SIA Ulmar had not taken place and imposed an obligation on the applicant to pay value added tax, fine and late payment fee. The applicant applied to the court for annulment of the decision of the State Revenue Service
In the judgment, the Senate states that in order to justify denying an applicant the right to deduct input tax on the transactions at issue, it must be established that the applicant knew or should have known that it was involved in an abuse of the value added tax system. What matters is the nature of the transactions and their actual conduct. In the opinion of the Senate, the Regional Court had given consideration to the business model and nature of transactions of the applicant and its supplier, and had found it feasible that the applicant did not see the need for in-depth research on the business partner.
Having examined whether the applicant knew or should have known that it was involved in the abuse of the value added tax system, the Regional Court concluded that the case files and explanations provided by all persons about how the grain was received, how the quality of the grain was determined and how the certificate of acceptance of the grain and invoices drawn up corresponded to nature of the grain purchase transaction.
The documents in the case file confirm that the applicant was not involved in the search for business partners, they found the applicant by themselves by referring to an advertisement in the media about the applicant's economic activities. Thus, the nature of the transaction did not require verification of the counterparties' ability to provide the services, since the goods were delivered by the seller to the place of delivery specified in the contract. The supplier of the goods (the carrier) does not deny the carriage of the goods, and the documents relating to the carriage are in the case file.
The Senate had stayed proceedings in the case to refer questions to the Court of Justice of the European Union for a preliminary ruling. The Court of Justice of the European Union stated in this case that European Union law does not preclude a taxpayer engaged in the food turnover from being entitled to deduct input tax on the sole ground that the taxpayer failed to comply with his/her obligations to identify suppliers. However, failure to comply with those obligations could be one of the indications which, taken together, consistently show that the taxpayer knew or ought to have known that he/she was involved in a transaction involving value added tax fraud and that it was for the referring court to assess.
The Senate states in its judgment that there is no doubt that the applicant has carried out a general identification procedure of its business partners by clarifying their name and address, which in principle allows the identification of the participants to the food turnover and is sufficient to achieve the purpose of traceability. Likewise, no specific circumstances have been identified in the case which have given rise to serious doubts on the part of the applicant as to the actual existence or the true identity of the suppliers of the products in question, which is justified by the specific nature of the grain purchasing transactions.
In response to questions asked by the Senate, the Court of Justice of the European Union also stated that the fact that a taxpayer involved in the food turnover did not verify the registration of his suppliers with the competent authorities, including the Food and Veterinary Service, is irrelevant in assessing whether he/she knew or should have known that he/she was involved in a fraudulent transaction regarding value added tax.
The Senate states in its judgment that, contrary to the argument of the State Revenue Service, the fact-finding of a counterparty's registration with the Food and Veterinary Service cannot be relevant in assessing whether an entrepreneur knew or should have known that he was involved in a transaction with fictitious business.
The judgment of the Senate is not subject to appeal.
Case No SKA-5/2019; A420549912
Information prepared by Baiba Kataja, the Press Secretary of the Supreme Court
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