Lithuania Court Ruling on VAT Fraud and Due Diligence

Let us examine what circumstances are important when calculating VAT after the tax administrator has established that the applicant's contractors have committed VAT fraud, and the applicant knew or had the opportunity to know that they were participating in transactions related to VAT fraud.

In this situation, the appellant did not collect important necessary data about the companies before concluding transactions with UAB X and UAB Y. Although the appellant claims to have collected all publicly available information about the contractors, the documents in the case file show that information about the contractors (their debts to Sodra) was searched for on the website after the transactions with them had already been concluded.

Furthermore, the tax case documents do not contain any information about the representatives of UAB X and UAB Y with whom communication took place when concluding the disputed transactions – in his explanations to the tax administrator, the owner of the applicant only indicated the e-mail addresses of the contractors used to communicate with the representatives of UAB X and UAB Y, but did not indicate the names and surnames of these persons. 

In addition, the director of UAB X died, but documents (3 VAT invoices and 3 cash receipts) continued to be issued in his name. It should be noted that 41% of the amount payable for diesel fuel was paid by the applicant UAB X in cash according to 3 cash receipts issued after the death of the aforementioned person. The orders were signed by a person This means that diesel fuel was sold on behalf of UAB X by other, unidentified persons, but not by representatives of UAB X, because after the death of the director, there were no employees left in the company and no new director had been appointed. 

Thus, the Supreme Administrative Court of Lithuania agreed with the tax administrator's position that it was unlikely that the applicant's owner and/or chief accountant did not verify the identity and authorisation of the person who presented the documents (cash receipts) before paying a large sum of money in cash.

The court explained that the applicant, being a professional in his field, should have noticed the shortcomings in the documents submitted by the contractors: discrepancies in VAT invoices, waybills and quality certificates, the absence of the seller's (supplier's) stamp, the name, surname and signature of the responsible person, the uniformity of documents (contracts, VAT invoices and waybills) issued on behalf of UAB X and UAB Y.

The Supreme Administrative Court of Lithuania rejected the appellant's argument that it had no obligation to make additional inquiries into the reliability of its contractors, as this had been assessed by the competent authorities (the State Tax Inspectorate when registering them as VAT payers, and the relevant municipal administrations when issuing licences), since the company cannot justify its inaction by the actions of other institutions when it did not verify the identity and powers of the representatives of UAB X and UAB Y to act on behalf of those companies, did not pay attention to obvious deficiencies and discrepancies in the documents, such behaviour is not characteristic of a prudent entrepreneur and honest taxpayer.

The Supreme Administrative Court of Lithuania noted that the appellant's claims that it is intolerable in a state governed by the rule of law that, due to the possibly negligent assessment and control of the legality and validity of the economic activities of an economic entity by state institutions, after the latter has carried out transactions related to VAT fraud, the tax liability that the fraudulent entity failed to fulfil is transferred to an honest economic entity that pays all taxes on time, are abstract in nature and do not provide specific facts regarding the unlawful actions of the authorities.   Furthermore, it is the direct responsibility of the appellant, not the authorities, to establish the identities of the persons acting on behalf of UAB X and UAB Y when concluding transactions and paying money.

It should also be noted that another relevant issue was decided in this case: the court of first instance, having recogni

sed that the fuel invoiced on behalf of UAB X and UAB Y was actually supplied to the applicant and that the company incurred costs, and applying the provisions of Article 69(2) of the MAĮ, it ruled that the company was entitled to recognise the fuel purchase costs as deductible expenses and cancelled the order to pay income tax, late payment interest and a fine.

In the opinion of the Supreme Administrative Court, the evidence in the case shows that the applicant ignored obvious signs of tax fraud and essentially failed to take basic measures to ensure that the supply operations did not result in tax fraud. The circumstances indicated by the appellant, namely that the transactions concluded by the company with  UAB X and UAB Y covered a small part of the fuel market purchased by the applicant, and that the company has been operating for a long time and in good faith, do not refute the circumstances proven in this case that the company should have known that by purchasing the goods it was participating in a transaction involving VAT fraud.

Meanwhile, the State Tax Inspectorate disagreed with this assessment and claimed that the court had unjustifiably recognised, in the context of other established circumstances, that the expenses on the basis of which the costs were recognised could be based on documents that had no legal force; it pointed out that the court had not assessed Article 11(4) of the PMĮ. The LVAT recognised the aforementioned arguments of the VMI as justified and upheld the VMI's appeal in this part. 

It is important to note that the Supreme Administrative Court of Lithuania stated that the court of first instance had applied the principle of substance over form in calculating the tax, which, inter alia, provides that in cases where a taxpayer makes a mistake in completing accounting documents and submitting a tax return, as well as in other cases where the taxpayer's activities do not comply with the formal requirements of the law, but their content complies with the circumstances to which the tax laws link taxation, the tax is calculated by applying the relevant provisions of the aforementioned tax laws (Article 69(2) of the Tax Administration Act). Thus, the aforementioned principle is a general principle of tax law, which is applied in accordance with other tax law provisions. 

The Supreme Administrative Court of Lithuania emphasised that the practice of the Supreme Administrative Court of Lithuania has noted that "the fact that the accounting documents (in this case, VAT invoices) on which the taxpayer's right to deduct certain expenses from gross income when calculating income tax is based do not reflect the true content of the economic operation per se (in itself) allows for the presumption of the legal fact that a person, based on these accounting documents (VAT invoices) and the data recorded therein, cannot recognise (justify) expenses that reduce income tax. In such a case, the taxpayer, similarly to proving his right to VAT deduction on the basis of the relevant VAT invoices, must provide evidence (prove) of the legal facts that entitle him to write off the expenses – the type, quantity and value of the goods (services) purchased, the seller of the goods (service provider) and other circumstances related to the incurrence of expenses in earning income.

The explanations and court practice provided are considered to be very important in practice, as they are binding on both the tax administrator and entities in the proper fulfilment of their tax obligations.