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Knew or should have known, a practical example

Daniel Silviu UDRESCU
Daniel Udrescu

Kittel principle: the person requesting the VAT refund knew or should have knownabout the existence of a fraud on the supply chain

Criminal prosecution, especially in the field of VAT, has evolved in the European Community, and the belonging of the expression “beyond any reasonable doubt” in the case law of the ECHR is provided in both the new Romanian criminal code of 2014 and the Romanian fiscal code, starting with 1 January 2018. “Beyond any doubt” is a standard of evidence specific to the Anglo-Saxon system, which takes into account the ability of the evidence to prove the accused’s guilt, beyond any reasonable doubt, an aspect that the Romanian Constitutional Court has promoted in decisions where the burden of proof has a greater relevance in our Romanian law.

297 (8) The competent tax authorities have the right to refuse the VAT deduction if, after administering the means of proof provided by law, they can prove beyond any doubt that the taxable person knew or should have known that the operation invoked to justify the right of deduction was involved in a VAT fraud that intervened upstream or downstream in the supply / delivery chain. ”

These elements of criminal law and litigation should also be linked to the issues of insolvency law, clarifying the notion of who is the person applying for the VAT refund who knew or should have known. The correct answer clarified by this article is COMPANY A, insolvent company, which is administered by a special administrator under the supervision of a judicial administrator who carries out his activity under the supervision of a syndic judge and, in which the shareholders have no decision, different from Company A, which has shareholders/associates and directors responsible for it.

Recently, I participated as part of an expert report, for a group of companies that have carried out activities with companies that are insolvent, bankrupt or deregistered, in what is considered by the Public Ministry chain or multi-level transactions, in which it was requested “Calculation the damage caused or that could have occurred, as the case may be, to the consolidated general budget, through each crime provided by Law no. 241/2005. “

In order to respond to the appearance of the legal, economic and / or personal links between the operators concerned, the Romanian Accounting Expert has, for the period requested by expertise, OMFP 3055/2009 which implements the European Directives IV and VII. The expert has to solve a dilemma – The legal nature of the material injury and the procedural effects of identification, quantification and recovery, regardless of whether the legal nature was by decision of imposition, the formulation of a criminal complaint or the request of the liability for insolvency. The injury is eminently a condition of the civil liability and by law, its establishment, if it is of fiscal nature, is determined by ANAF (Romanian Tax Autority), by fiscal inspection(tax audit/review). At this point in time, however, we are in three procedures that must be correlated and prioritized:
1. Fiscal procedure, in compliance with Law 571/2003 and OG 92/2003 or new Law 227/2015 and 207/2015
2. Criminal procedure in compliance with Law 241/2005, CP and CPP
3. Insolvency / bankruptcy procedure
a) In compliance with Law 85/2006 or Laws 85/2014
b) In compliance with Law 31/1990, Company Law, in compliance with the Civil Code
c) In compliance with Law 82/1991, Accounting Law
d) In compliance with Order MFP 3055/2009 and / or 1802/2014

A first aspect that I noticed as a shortcoming, both in the requested objectives and in the Public Defender’s Ordinances, from the point of view of calculating the damage, was the lack of consolidation as an overall image, without which the damage cannot be certain. In the analysis the experts must include the proof of the fulfillment / non-fulfillment of the legality procedure given by the Accounting Law 82/1991, the Special Law – the Law 31/1990, based on the constitutive act, ratified by the Extraordinary General Meeting of the Shareholders and to present the GMS Decisions, then the procedures of the Law 85/2006 or 85/2014, with the verification of the constitutionality of the amendments of the Fiscal Code and the Fiscal Procedure Code, respecting the principle of financial consolidation based on OMFP 3055/2009, modified by OMFP 1802/2014. The European Court emphasizes the applicability of the principle of economic prevalence over the legal aspect, and than, as long as transactions can be proven, the beneficiaries are entitled to deduct the corresponding VAT, regardless of the formal conditions imposed by the national legislation, except that the person requesting the VAT refund knew or he should have been aware of a supply chain fraud. The European Community has issued two Directives IV and VII regarding the observance of the accounting principles, or by violating them, the prejudice is brought to the accused, in the sense of violation of Art 1 to Protocol 1.

The overall picture needs clarification for a correct approach. All insolvency proceedings, all fiscal procedures and all the proceedings / judgments in the administrative litigation are vitiated by a simple consolidation accounting operation, which takes precedence in all the mentioned aspects. The correct sense of interpretation is that “only if the correct determination of the fiscal situation would involve the administration of evidence inaccessible to the fiscal body (but accessible to the criminal procedure), then the solution is expected in the criminal procedure”. So, two theses are worth pointing out:
– first, the hypothesis of the legal text envisages “the suspicion related to committing offenses” in the field of interest of the fiscal inspection;
– Secondly, the hypothesis of the legal text envisages an “impossibility” of the fiscal body to continue its analysis, based on the competences and the means of evidence that are accessible to it.

A second aspect is the one related to the insolvency procedure for the group of companies. The calculation of an injury for which the criminal prosecution bodies consider that they provide indications regarding the fictitious nature of the transactions with the working hypothesis given by the criminal prosecution body, in which the acquisitions did not have an economic purpose, being artificial or fictitious, is FALSE in insolvency, if the participation the special and judicial administrator or the syndic judge is not proven.

There can be no criminal damage, if the company / companies had the activity carried out during the observation period from the insolvency, for which the SPECIAL LAW applies.

However, it is necessary to present the reasoning on which the Public Ministry bases its classification of offenses:

I. The abusive practice (according to point 58 C-110/99) in the sense that the pursuit of a fiscal advantage constitutes the essential purpose of the operations with criteria that:
a) The object, purpose and effects of the transaction are criteria for assessing whether or not an operation constitutes an abusive practice (C-103/09)
b) The result envisaged is a fiscal advantage whose granting would be contrary to one or more objectives of the European Directives and
c) If it constituted the essential purpose of the contractual solution adopted (point 58 C-425/06) dedicated to obtaining fiscal advantages, elements that can show that obtaining the advantage constitutes the purpose pursued, having:
i. the purely artificial nature of the operations;
ii. legal, economic and / or personal links) between the operators concerned

II.The fictivity of the transactions in the accounting documents and in the declaration 300 for the invoices issued, recorded in the material documents of the tax evasion offense form continued as an author.

Between fiscal and criminal, there is a multitude of argued procedures for “half truths” starting from the detail and stopping each time in a wrongly applied procedure, without the overall image being clarified from top to bottom, for a correct approach. Any erroneous applications, even for short periods of time affect the capital flow and the possibility of functioning of the company, or by the late application of the legal procedures, ANAF has substantially damaged the normal course of business. Even if it perfectly documents every bit of truth found, ANAF ignores the procedures for consolidating the activities of the group companies and prevents, by half truths, the correct application of the law.

The overall picture shows that the transactions in question were carried out in the insolvency procedure, initiated on the basis of Law 85/2006, for which ANAF did not react until after all the terms were violated, including for solving the negative VAT return, for which the law does not provide sanctions, then carried out 6 fiscal inspections in which it issued 6 RIFs (Tax Audit Reports), with a fundamental error of delaying the deductibility of the VAT, procedure that does not exist in the Fiscal Code, after which it made a criminal complaint, for fiscal fraud. It should be mentioned that during the insolvency procedure the contracts were carried out continuously, some in proportion of over 80%, others stopped by the measure of canceling some tax warehouse authorizations, for products in zero excise duty, which do not accumulate outstanding obligations, for which it is NOT necessary to cancel the authorization.

Procedure we have an economic group, for which based on OMFP 3055/2009 consolidation adjustments were required. Other affiliated companies went into insolvency either under Law 85/2006 or Law 85/2014, having as insolvency legislation the obligations of Chapter 2 Section 2 starting with art 192, for which the consolidation of the companies were mandatory based on the insolvency Law.

An abusive practice cannot be invoked. The alleged illegal activity was under the jurisdiction of Law 85/2006, under the supervision of a judicial administrator who reported to the Creditors’ Committee, which approved the transactions of the decisions, that were ratified by a syndic judge and were published in the BPI (Insolvency Published Register). The legal procedure in Romania is one established by laws. For companies, within these procedures, where the court with expertise in Law 31/1990 judges liability regarding the payment of creditors, but establishes liability also for the administrator, according to Law 31/1990 and Law 85/2006, the liability of the associates / shareholders is within the limit of the capital. The expert would have found a law enforcement error, which cannot be under the jurisdiction of the Criminal Law, but is under the jurisdiction of Law 85/2006.

Company A, insolvent in the recovery procedure, was not protected against creditors. In the insolvency procedure, the special administrator signed X contracts that were presented to the judicial administrator, who prepared an activity report with receipts and payments, presented to the Creditors Committee and implicitly ANAF, which could be challenged in the insolvency procedure, which was then ratified by the conclusion meeting, which in turn could be challenged in the insolvency procedure, after which the activity report was published in the Insolvency Bulletin. Company A has gone through the bankruptcy procedure, which means that the insolvency procedure by contestation has remained final and irrevocable, WITH AUTHORITY OF JUDICIAL WORK and any other action is affected by the principle “ne bis in idem” and / or the principle of legal certainty. As for which the natural persons shareholders / associates in various companies have no responsibility for the actions of the special administrator, the judicial administrator and the insolvency judge, as long as the insolvency has not been attracted to them, and the Debtor Company A cannot answer beyond the established obligations in the bankruptcy decision.

The overall picture, from the accounting point of view, starts from the Reporting on Group of Companies, where according to OMFP 3055, an accounting consolidation was required, with intra-group adjustments.

Since the inception of Law 571/2003, Art 11 has been an article designated for the treatment of foreign repatriations, respectively of direct taxes related to them. From 2012 to 2015 there were various attempts to re-fit, by ANAF, all with an erroneous application, widely documented, with the changes in time and the application of the principle “tempus regit actum”. In numerous articles I showed that ANAF reconsidered the transactions as being without economic purpose, considering that the operations in question did not have economic content considered artificial. This is a fundamental error of the application of Art 11, corrected only with Law 227/2015 Fiscal code art 11 paragraph (5):

“The provisions of para. (1) – (4) shall apply for the purpose of establishing direct taxes. “

VAT is an indirect tax, which has as its fundamental principle the FISCAL NEUTRALITY defined in the Decision of the CCI 27/2016 THE COMPLETE FOR THE DELEGATION OF SOME MATTERS OF RIGHT, in the File no. 1731/1/2016:

on regime aims to relieve the entrepreneur entirely from the task of the TVAdatorate or paid in all his economic activities. The common VAT system therefore guarantees the neutrality regarding the fiscal burden corresponding to all economic activities, regardless of their purpose or results, provided that the mentioned activities are, in principle, themselves subject to VAT (see Dankowski, C-438/09, EU: C: 2010: 818, paragraph 24, Toth, C-324/11, EU: C: 2012: 549, paragraph 25, as well as Forvards V, C-563/11, EU : C: 2013: 125, paragraph 27, and Ordinance Jagiello, C-33/13, EU: C: 2014: 184, paragraph 25).

LAW FOR WHICH THE MOTIVATION OF ART 11 IS USED, it is mistakenly applied by ANAF, but taken over by the administrative litigation court.

By recognizing by ANAF in successive RIFs of VAT postponed, the transactions are not artificial, but REAL, but by revoking the tax warehousing authorizations, for Company A insolvent company, ANAF has canceled any possibility of recovery and payment, the company having the quality of captive consumer, in a legislation deficient in this respect. As a result of which the fictitious transaction charges cannot be withheld, only partially, if ANAF has revoked the fiscal warehouse authorizations, so it suspended production. This aspect is extremely harmful because the substantive and form conditions provided by the Sixth Directive for the birth and exercise of the right of deduction are met.

All these elements must be considered as a whole and not individually when analyzing a factual situation. The expertise cannot cause a CERT injury, without the adjustments required by OMFP 3055/2009, in consolidation as well as without the provisions of the Fiscal Code regarding adjustments between affiliates and / or adjustments following fiscal inspections. Likewise, the entry into insolvency followed an erroneous procedure, if no consolidations were performed for the group of companies that meets the conditions of consolidation.

The mechanism aspect of a chain-type tax fraud is presented for a group of affiliated companies, without adequate accounting treatment, applied in the insolvency procedure, for which the shareholders / associates, who actually have no authority in the decision, are responsible. The component analyzes a potential tax fraud that was committed by the taxable person, who knew or should have known that, through his acquisition, he participated in an operation involved in a VAT fraud. It has been suggested that the advance invoices carry a deductible VAT, which reduces the tax burden and the use of long-term payment orders favors a potential tax fraud. The two elements, namely the treatment of the commercial transaction, must be clearly separated from the financing method used by the promissory notes, which are part of the treatment of commercial credit payments. Company A is considered a participant in such fraud, regardless of whether it obtains or does not obtain an advantage by reselling the goods or using the services in the taxable transactions that it performs downstream. The chain activity is an operation that is part of the supply chain, before which, afterwards, the goods are marketed further, followed by the distribution in the large commercial chains of wholesale and retail activities after the one performed by the taxable person mentioned.

It is necessary to clearly identify the individual presumption regarding the potential tax fraud, which would have been committed by the taxable person, who knew or should have known that he is participating in an operation involved in a VAT fraud, which is different from an analysis. in the group situation, with the adjustments in the consolidation related to such an economic interest, which is fundamentally different, which must be applied and with the respect of insolvency procedures, where the shareholders / shareholders no longer have direct control.

Participation in the VAT fraud mechanism is not presumed, but the economic operator’s intention and effective involvement in the cancellation of the exercise of his tax deduction right must be proved. Either Company A and Company B, as well as others C, D, E … N, were either insolvent, or in liquidation, or deregistered. It is necessary to determine whether the applicant companies engaged in an economic activity when they took part, in the insolvency recovery procedure, without wanting and without knowing, in a carousel tax fraud mechanism. The notion he knew or should have known from the point of view of the insolvency court is much different from a normal activity without insolvency, because between the two, it is different that the economic decisions are no longer taken by the directors / associates / shareholders, but they are under the supervision of a syndic judge, who is supposed to protect against creditors, but ensures the element of legality. Or the own fault of ANAF, which does not have procedures / people / supervisory methodology, cannot be invoked as an excuse, if it does not perform in legal term, what the law provides. It is clear that the law favors the state, if it does not provide sanctions for non-compliance with the deadlines, but it is also true that insolvency proceedings must be taken by the judicial administrator and to protect the interests of the creditors in the activity he supervises.

In this case, the notion knew or should have known, as directly responsible persons, two insolvency courts, in which the decisions followed the insolvency procedure regarding decisions, that is, special administrator, judicial administrator, creditors committee, under the authority of two union judges, from different courts. Associations / Shareholders do not have a direct control role.

As a result of which the fictitious transaction charges cannot be withheld, only partially, for deferred VAT, especially as ANAF has revoked the tax warehousing authorizations, so it suspended production and it is not a tax advantage whose granting would be contrary to one or more. many objectives of the European Directives

I believe that the practice of the Fiscal Procedure Code and the Criminal Procedure Code has led to incompatibility situations, which have not been analyzed for the correlation of fiscal law with the criminal law, which is a preliminary issue that needs to be clarified. The competences of the prosecutor exemplified in art 56 Code of criminal procedure do not include the establishment / modification of the fiscal obligation, which is the EXCLUSIVE attribute of the fiscal body.

The fiscal administrative act decision of taxation or fiscal declaration enjoys the presumption of legality as well as the fact that the unilateral administrative act is itself an enforceable title, its non-execution being contrary to a good legal order, in a state of law and a constitutional democracy. The essence of the argument is that through a tax decision or a tax declaration NEANULATE we are in front of an administrative act, which has strict rules defined by the law to be annulled. I quote Judge Buta: Infringement prev. art. 126 paragraph 1 of the Constitution of Romania, the prosecutor substituting the courts, which are the only ones able to annul or find the invalidity of an administrative act, I add, or a sentence.

But if, the administrative document is issued in an insolvency procedure in violation of the accounting principles, for which we must admit that no accounting expertise is required to clarify the legality issues, then we are facing defective procedures and the administrative litigant does not judge a complete factual situation, which reaches the insolvency court which has no overall situation.

From the wrong premises you reach the wrong conclusions:
– ANAF – “all payments made under these contracts are illegal.”
– The Public Ministry – The prejudice is established by the prosecutor through this defective deduction. According to the rationale summing up the payments of the various participants in the supply of a finished product, the total amount of the damage would result. The total amount paid by the accused represents damage due to the fact that the prosecutor would have shown, that it would have been fictitious works when in reality the contract was carried out at a real non-standard price, which ANAF never challenged.
– The court of fiscal contentiousness – The partial argument, without considering ALL the aspects mentioned by ANAF, including the arguments of the Special and / or judicial administrator, without the REQUIRED consultation of an expert, implies that partially the arguments raised for each of the 6 individual RIFs , with applications for suspension, for refusal of authorization, would have no legal basis if the argument for consolidation, recording of operations during the insolvency recovery period were presented.
– The insolvency court – it does not retain the administrator’s responsibility, the criminal prosecution refers to totally other elements than the ones from the insolvency entry, but partly it requests the bankruptcy entry, even though all the procedures applied by ANAF were to prevent the recovery, but not respecting the consolidation. of the group of companies.

The simplistic and undifferentiated way in which the issue of injury was handled during the follow-up and the concrete examination of the answers, led to the conviction that the procedure of the Public Prosecutor’s Office did not properly legalize the information conveyed and did not understand the applicability in this case of the Contract Law. – Civil Code, Accounting Law 82/1991, Special Law – Law 31/1990, based on the constitutive act, ratified by the Extraordinary General Meeting of Shareholders and presenting the GMS Decisions, then the procedures of Law 85/2006, with the verification of the constitutionality of the Code changes Fiscal and the Fiscal Procedure Code, respecting the principle of financial consolidation based on OMFP 3055/2009, modified by OMFP 1802/2014, not understanding that the Kittel Principle only applies under certain conditions.

Certified accountant Daniel Udrescu

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