SLIM VAT 3: Individualized VAT Penalty Instead of a Fixed Rate

Since June 6, 2023, new regulations introduced under the SLIM VAT 3 package have come into force, which, among other things, implement the judgment of the Court of Justice of the European Union (CJEU) in Case C-935/19 (Grupa Warzywna sp. z o.o.). The CJEU ruled that the provisions of the Polish VAT Act were not compliant with the EU VAT Directive. The change concerns the way VAT penalties are determined when a VAT declaration shows an understated amount of tax, an overstated tax refund, or when a tax declaration is not submitted, and the tax liability is not paid.

Prior to the amendment, the regulations were non-individualized and disconnected from the specific facts and circumstances of each case. They imposed uniform penalties on taxpayers, regardless of whether the situation involved a simple mistake or tax fraud. There was also no possibility of mitigating the penalties. A breakthrough in these regulations occurred following the aforementioned CJEU judgment.

In the case heard by the CJEU, the taxpayer (Grupa Warzywna sp. z o.o.) purchased a property and included a statement in the notarial deed of the property transaction confirming that the price was stated as gross amounts, including VAT. The seller issued an invoice showing the VAT amount for the transaction. The company paid this amount and considered it as input VAT, which it believed was eligible for deduction. The company then submitted a VAT return claiming a VAT refund. During the audit, the tax authorities concluded that the transaction was VAT-exempt, and the parties to the transaction had not effectively waived this exemption. As a result, the company corrected the VAT declaration. After submitting the correction, the authorities issued a decision imposing a penalty in the form of an additional tax liability amounting to 20% of the overstated VAT refund.

In this case, the taxpayer voluntarily corrected the declaration, and the state did not suffer any financial loss. The case was referred to the Administrative Court in Wrocław, which referred a question to the CJEU to assess the compliance of the provision enabling the imposition of a fixed penalty with the principle of proportionality and the VAT Directive, which sets out the objectives of VAT penalties in Article 273, specifically ensuring the proper collection of tax and preventing tax fraud. However, these objectives cannot conflict with the principle of proportionality.

The CJEU ruled that the principle of proportionality requires that penalties imposed on taxpayers take into account, in particular, the nature and seriousness of the violation and provide a method for adjusting the penalty amount. Penalties should not be imposed automatically and without regard to the factual circumstances. This means that the penalty should not exceed what is necessary to achieve the stated objectives.

The SLIM VAT 3 package modified the principles for determining the amount of VAT penalties. The previous fixed rates (15%, 20%, and 30%) now serve as maximum percentages, allowing the tax authorities to impose penalties, for example, at 1%, 2%, or 18%. A new set of circumstances has also been introduced, which the tax authorities must consider when determining the penalty amount. According to the new provisions in Article 112b(2b) of the VAT Act, when determining the additional tax liability, the head of the tax office or the head of the customs and tax office must take into account:

• The circumstances surrounding the irregularity;

• The type and severity of the violation of the taxpayer’s obligation that resulted in the irregularity;

• The type, severity, and frequency of any previously detected irregularities related to non-prescribed tax obligations;

• The amount of the irregularities, including the amount of the understated tax liability, the overstated tax refund, the input tax refund, or the reduction of tax due for the following accounting periods;

• The actions taken by the taxpayer after the irregularity was discovered to eliminate its effects.

The new penalty determination process allows tax authorities to adjust the penalty amount to the specific factual circumstances, and, importantly for taxpayers, the penalty will be individualized and no longer imposed automatically. It is hoped that these changes will allow a distinction to be made between clear mistakes and conscious participation in tax fraud.