The essence of the tax on goods and services is the right of the taxpayer to deduct the amount of input tax against the amount of due tax. As can be easily guessed, this right is also the crux of many disputes between taxpayers and tax authorities. Inland Revenue is especially interested in circumstances surrounding preferential VAT rates, corrections to VAT declarations, the cross border supply of goods, often involving the return of VAT paid, the cross border import of goods, and the cross border provision of services, as well as goods and services classified as 0% VAT.
VAT tax is extensively regulated in Polish law. With regard to the application of these regulations, a vast body of administrative court decisions has arisen which comprise a valuable clue for taxpayers as to how to proceed in a given situation. The large body of court precedents means that the legal situation of the taxpayer and legal consequences resulting from actions taken may be fairly confidently predicted. In the most complex cases, it is possible to request an individual, prior interpretation of the tax law.
The right of the taxpayer to reduce tax due by the amount of input tax is fundamentally important for the economic sense of VAT, and generally speaking may not be restricted. VAT is meant to be a tax on consumption, and is supposed to tax the expenditures of consumers. From the public administration point of view, this is a relatively simple way of grasping the added value. VAT taxpayers are those who provide products to consumers; these taxpayers may reduce their tax due by the amount of input tax, because by definition VAT should be neutral for them.
In Poland, VAT is paid by every business, not only those who sell goods directly to consumers. The mechanism of deducting input tax against due tax, is intended to allow businesses to maintain tax neutrality at every stage of the production process.
When refusing the taxpayer the right to deduct input tax against due tax, tax authorities most often question documentation of transactions, in particular the correct issuance of VAT invoices. Tax authorities may challenge those transactions which raise doubts about whether they actually took place.
Establishing by a tax authority that VAT has not been paid in the correct amount will result in the issuance of a decision which sets forth the actual amount of tax due. If the taxpayer has made a payment which is too low, it will be necessary to pay the remaining amount with interest. In such cases, the possibility of fiscal penal liability also arises.
It is also possible that, as a result of a verification, the tax authority may come to the conclusion that the tax has been paid in excess of the required amount; such cases occur, though considerably less frequently than the reverse. In such event, the tax authority will refund the taxpayer the overpaid amount of tax with interest.