Institution of abuse of VAT law - what is it?

Service-Tax

Revenues from value added tax constitute the main source of financing of the state budget. No wonder then that the tax office wants VAT collection to be as effective as possible. This effectiveness is ensured by the legislator mainly by introducing newer and newer mechanisms sealing the tax system. One of such structures is the institution of abuse of VAT law.

Statutory definition

It is worth starting the analysis of the issue by quoting the statutory definition contained in Art. 5 sec. 4 and sec. 5 of the Value Added Tax Act. Pursuant to the above-mentioned provisions, abuse of law is understood as performing an action as part of a transaction which, despite meeting the formal conditions laid down in the provisions of the Act, was essentially aimed at obtaining tax benefits, the granting of which would be contrary to the purpose of these provisions.

In the event of an abuse of the right, the activities performed produce only such tax consequences as would occur if the situation that would have existed in the absence of the abusive activities was recreated.

In the light of the presented definition, abuse of law is understood as a situation in which a taxpayer abuses a specific right in a way that is contrary to the purpose for which that right was established.

By the way, it should be added that the legislator indicated in the justification to the draft that the addition of a new provision is only supplementary, as the structure of an abuse of law has long appeared in judgments issued by courts. For example, in the justification of the judgment of the Supreme Administrative Court of 5 September 2016, I FSK 2/15, we can read:

The entirety of the findings made in the case, both in the matters preceding and accompanying the disputed transaction, allows, in the opinion of the Court, to divide the position of the authorities and the court of first instance that the transaction took place in the conditions of abuse of law, because the sequence of economic events was consciously arranged in such a way, in order to enable the applicant to obtain a refund of input tax without paying the output tax from T. It follows from the objective circumstances of the case that the objective, and therefore a deliberate assumption underlying the organization of the chain of transactions presented, was to artificially generate a tax advantage on the applicant's part contrary to the ratio legis of the law to deductions (…).

Institution of abuse of law in VAT - the idea of ​​abuse of law

When translating legal language into life situations, it should be clarified that abuse of law is understood as the performance of activities subject to taxation as part of a transaction which, despite meeting the formal conditions laid down in the provisions of the Act, was essentially aimed at obtaining tax benefits, the granting of which would be contrary to the purpose they serve. these recipes.

As a consequence, the abuse of rights is legal and lawful, but the purpose and concept of taking them are inconsistent with it. This was also explained by the Court of Justice of the European Union, which emphasized that for an abuse of the law there must be two elements:

  • objective element - manifested in the artificial creation of conditions for obtaining certain benefits; The "artificiality" of the action is that the actions are undertaken solely for the purpose of obtaining an advantage and have no other justification; the occurrence of these circumstances must always be determined on the basis of a specific case;

  • a subjective element - the will to obtain benefits inconsistent with the objectives of EU law.

Consequences of an act constituting an abuse of law

Pursuant to the analyzed provisions, in the event of an abuse of the law, the taxable activities performed produce only such tax effects as would occur if the situation that would have existed in the absence of the activities constituting the abuse of law was recreated.

Therefore, tax authorities may disregard the legal effects, as a rule, attributed to given activities, and instead assign such effects as would occur if the parties had performed the appropriate activities.

The legal definition of an abuse of law is very general and does not contain any examples of what may constitute an abuse of the law. The answer to this question is provided by the doctrine and factual situations that appear in economic transactions. Among the cases that may potentially be exposed to the risk of being considered as transactions abusing the VAT law, the following are listed:

  • classification of discounted goods with different VAT rates;

  • using the concept of complex benefits;

  • making sales for PLN 1;

  • use of a chain supply scheme;

  • concluding contracts with related entities;

  • compensation of deliveries with financial penalties;

  • outsourcing of services;

  • subcontracting services.

Finally, it is worth noting that the concept of abuse of law may be applied regardless of the value of the transaction, as the Act does not introduce any limit. As a result, tax authorities may, on the basis of the above-mentioned provisions, examine and analyze each transaction.