IC supplies, with chain reclassification – Polish tax authorities challenge 0% VAT rate

VAT settlement for intra-Community transactions often poses significant challenges for tax departments and accounting personnel due to the complexity and diversity of business models used in the market, intricate tax regulations and their often surprising interpretation – especially by Polish tax authorities, as well tight timeframes for analyzing VAT settlement. A crucial aspect of investigation how to settle VAT is the information obtained from operational departments (customer service, sales, logistics, etc.). Our experience shows that tax-accounting departments often receive information about a new supply model with a delay or even after the delivery has occurred, which can further prolong the process of gathering necessary information and lead to delayed reporting of transactions in a tax-compliant manner.

The consequences of improper classification of intra-EU supplies for VAT purposes can be severe for the supplier, even if the initial mistake is corrected / delayed reporting is submitted etc. Our recent experiences with the tax administration reveal that failing to submit EC Sales and Acquisition List in a timely manner can result even in the loss of the right to apply the 0% VAT rate for ICS.

Historically, this was not the case, but during recent discussions with the tax administration, a restrictive approach of the tax authorities has become increasingly apparent. According to their view, a taxpayer may request retrospective registration for VAT purposes in Poland to report overdue or initially misclassified transactions, but cannot obtain retrospective registration for VAT for intra-Community transactions. Tax officers argue that Quick Fixes implemented in 2020 are a base on much more restrictive approach). This unfavorable and somewhat surprising approach is confirmed by individual interpretations issued.

It seems that currently, filing EC Sales & Acquisitions List late does not automatically allow for the application of the 0% rate. In such cases, tax officers initiates a thorough verification procedure to determine the circumstances of the irregularities and the identities of those whose decisions or actions led to the incorrect recognition and reporting of ICS. This includes identifying who made the error or failed to fulfill obligations, whether there were internal procedures in place, and whether the issue was consulted with a tax advisor.

It is up to the tax administration to assess whether the taxpayer's omission is deemed adequately explained. Therefore, despite taking actions to correct irregularities, the taxpayer is not guaranteed that the tax authority will recognize the right to the 0% VAT rate for the transactions in question.

An open question remains whether the tax authorities might similarly challenge the 0% rate in cases of late ICS reporting, even when there is no basis for VAT fraud concerns in the supply model. Such restrictive approach might be then viewed as disrupting VAT neutrality and the principle of proportionality.

The Polish tax authorities acknowledge that the issue of late ICS reporting is not straightforward and requires comprehensive analysis. VAT regulations stipulate that a taxpayer may apply the 0% VAT rate for WDT if the following conditions are met:

the supplier has evidence confirming the export of goods from Poland to another EU member state and a valid VAT-UE number of the purchaser;
the supplier is registered as a taxpayer for IC transactions;
the supplier reports the correct data for this transaction in the appropriate ECSL.

A contentious issue remains whether the lack of VAT registration at the time of the transaction or even failing to report ICS within the statutory deadline prevents the application of the 0% VAT rate, even if the taxpayer rectifies their error and makes the necessary registration or corrects the settlements.

Consequences for the supplier

If tax authorities deny the right to the 0% VAT rate for ICS, the supplier may face several serious consequences:

VAT liability for completed supplies: the supplier will have to pay VAT at the applicable national rate (usually 23%) instead of 0%, which can significantly increase tax liabilities for the reporting period;
additional interest and financial penalties: in the case of tax arrears, the taxpayer will be charged interest for late payment and potentially a VAT sanction, further increasing the costs associated with incorrect VAT settlement;
cash flow problems: unplanned tax liabilities can negatively affect the company's cash flow;
risk of tax audit: late reporting if ICS may increase interest of tax authorities and result in a more detailed tax audit;
reputational consequences: problems with correct VAT settlement – in case will be raised in the media (what sometimes is happening in Poland) can negatively impact the entrepreneur's reputation among clients and business partners.

Consequences for employees involved in the process and company representatives

Not only can the company be held responsible for VAT reporting errors. The Polish Fiscal Penal Code provides for a range of individual penalties for tax obligation violations, e.g.:

lack of supervision;
issuing an invoice incorrectly;
exposing the tax authority to an undue VAT refund.

To ensure both the company’s and individual’s safety, it is crucial to consider check and coordinate of actions in the area of cross-border transactions. This requires cooperation among representatives of different departments within the company and an understanding that the tax area also plays a role in company management and governance.

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