Updated MoF methodology – due diligence in VAT transactions


Recently (April 2019), the Ministry of Finance published updated “Evaluation methodology for due diligence compliance by purchasers of goods in domestic transactions”. The document explains what MoF considers in their evaluation of “due diligence”, when you unwittingly participate in a transaction aimed at VAT fraud or abuse, to exclude or limit your liability.

The document in full is available HERE

What is the methodology

The methodology determines guidelines for taxable persons on how to safely commence and continue business collaboration with counterparties to avoid problems with deducting input tax. It indicates two types of criteria, formal and transactional, that the taxpayer should consider in counterparty verification process.

Formal criteria – status of the counterparty

“Formal” steps that should be included in the process preceding dealings with new counterparties (or in appropriate extent repeated periodically in case of regular business) include:

  • Verification whether the entity is registered in relevant commercial register, like KRS or CEIDG, and also as a taxable person for VAT purposes (HERE);
  • Verification whether the counterparty is recorded in the list kept by The Head of the National Tax Authority of entities deleted from the register as taxable persons, or entities that  not been registered, or entities that had been re-registered (list available HERE);
  • Verification of any licence or permit required, etc. (in the context of the goods or services sold by the counterparty);
  • Verification of authorisations of the counterparty’s representatives (for example, on the basis of data in KRS or CEIDG registers – links above).

It is worth to make a memo and printouts / print screens / obtain relevant validation to confirm the actions undertaken, in particular in case of material or repeated transactions.

Transactional criteria – types of transactions and circumstances that should raise doubts of the taxpayer

Special caution should be exercised in the following circumstances:

  • Transaction was conducted without economic risk;
  • Payment is made in cash or has been divided in such way that individual parts of the price are below PLN 15,000;
  • Payment is made by bank transfer to two separate bank accounts, account of a third party, or an account abroad;
  • Price of the goods is considerably different than the market price without economic justification;
  • Goods offered are from an industry different than the usual industry of the supplier and had not been purchased before by the taxpayer if the change of the business profile is not economically justified;
  • Contact with the supplier or their representative was not appropriate considering the circumstances of a given transaction;
  • The supplier has registered office or a place of business at the address where there is no sign of actual business activity;
  • Payment terms are shorter than the terms offered by other suppliers from the same industry without economic justification;
  • Terms of the transaction are considerably different than those applied in the given industry to guarantee safe trading;
  • The supplier delivers goods that are non-compliant with the quality requirements of applicable laws;
  • The transaction is not documented by a contract, purchase order or other confirmation of its terms;
  • Share capital of the counterparty is disproportionally low considering the transaction’s circumstances;
  • The counterparty has no organisational and technical resources appropriate for the type and scale of the business;
  • The counterparty has no website (or is not present in social media) with information appropriate to the scale of its operations, despite the fact that it is common in the industry.

You know the criteria – what’s next?

The Ministry of Finance suggests that all criteria are just non-binding guidelines and compliance with them is not a determinant of positive outcome of potential tax audit, but it significantly increases the probability of finding that the taxpayer exercised “due diligence”.  In the case of material or “doubtful” transactions you should consider the use of the split payment mechanism.

What is important, every taxpayer may comply with due diligence requirements in a different way than by following the guidelines provided in the methodology. However, it is important to consider the above criteria when you develop internal procedures of counterparty selection or approval. In the age of broadly applicable compliance, it will be an “added value”.

Natalia Wojciechowska – legal adviser

Grzegorz Leśniewski – attorney at law