What is merchant due diligence?
The concept of due diligence in the context of VAT takes its origin from a document prepared and published by the Ministry of Finance in 2018 titled: Methodology for assessing the exercise of due diligence by buyers of goods in domestic transactions (Methodology…). The publication details a list of circumstances that should be taken into account during the assessment, and although no definitive definition is given, it is with reference to the Methodology… that due diligence is mentioned . The document was addressed to tax authorities, but it was (and still is) available to everyone. Thus, the Methodology can be used by all entrepreneurs – if only to find out what the fiscal and other tax authorities expect from them. So who does buyer due diligence apply to? It’s about protecting buyers who have purchased goods in the course of domestic trade.
There is always a risk that a transaction a taxpayer enters into will be used by criminals to carry out VAT fraud. Any businessman can find himself in such a situation, and the mere purchase of goods in such a transaction is enough to be held liable – if, of course, the purchaser has not exercised due diligence.
Due diligence is thus a kind of shield to protect buyers from the unpleasant consequences of fraud – unless, of course, they participated in it.
Important!
Although the document titled: Methodology… was released in 2018, an updated version is now in operation . If you want to review its content, make sure you use the latest version, available here.
How to do due diligence?
It is the buyer’s responsibility to take appropriate steps to verify the counterparty and the circumstances of the transaction. In other words: the taxpayer must make sure he can trust the counterparty before doing business with him and entrusting him with his money.
Important!
Due diligence is not just a set of actions required when engaging with a new contractor. Even in subsequent transactions, appropriate steps must be taken, although they are no longer as restrictive as when first dealing with a seller.
Due diligence guidelines – formal criteria
First: CEIDG or KRS
First of all, the buyer should check new contractors in the Central Register of Business Activity and Information or the National Court Register. It is enough to enter in the search engine of the relevant portal the entrepreneur’s TIN, his name and surname, REGON or other data allowing identification of the taxpayer.
There are many ways to accurately check a contractor, all of which we described in our article titled: How to check if a company is registered?
Second: List of VAT taxpayers
The next step is to verify the entry on the seller in the VAT Taxpayer Directory maintained by the Head of the National Tax Administration. In this inventory you will find detailed information about the company’s relationship to VAT. The contractor can be:
- registered as an active VAT taxpayer,
- VAT exempt,
- restored to the VAT register,
- removed from the VAT register,
- unregistered.
Particularly important in checking the VAT Taxpayer List is the search date. Make sure that the counterparty you are about to transact with is currently (before or on the date of the transaction) registered for VAT (or exempt).
Important!
The National Tax Administration, when assessing due diligence, will pay attention to deadlines – this means that even if a counterparty registers as a VAT payer after a period of time or is restored to it, it will not matter. What matters is his status at the time of the transaction.
Third: licenses and permits
If the merchandise you are about to purchase requires that you have the proper authorization to sell it (e.g., a concession or other type of permit), ask the seller to present the relevant documents. Verbal confirmation of the possession of permits is not enough – the seller should show the letters in such a way that the buyer can read them without hindrance.
Fourth: powers of attorney
Many companies have attorneys within their ranks who make decisions or represent them on behalf of the taxpayer. In order to perform due diligence, it is necessary to verify the attorneys and the authority of the contractor’s representatives to grant powers of attorney.
Due diligence – transaction criteria
If we have already checked the counterparty and used all available means to minimize the risk of entering into a transaction with an untrustworthy company, it is time to look at the operation itself. Methodology… mentions a dozen circumstances that should be paid special attention to – although they do not automatically have to mean fraud, they can indicate it and should not be ignored.
A transaction without economic risk
Under this term is a situation in which the seller offers to purchase products for resale to a designated buyer, with the indication that the final buyer will remit the amount due (usually plus an agreed amount) to your company in advance. Thus, it is a transaction without economic risk, that is, without having to spend your own money. In such circumstances, we often speak of brokering a commercial transaction.
Example:
Company X proposes to Company Y to purchase goods, which should then be sold to Company Z. Under this arrangement, Company Z will pay Company Y PLN 150,000, while the value of the goods is PLN 130,000. Thus, for the brokerage, Company Y is to cash in a round 20,000 zlotys – all this without economic risk.
Such a proposal, while tempting, should serve as a strong warning – there is a huge chance that Company Y from the example above will be involved in a tax fraud if it agrees to enter into a transaction on the terms proposed by Company X.
Emphasis on cash payment
Some sellers look for ways to illegally optimize their taxes, for example, by splitting one transaction into several smaller payments – each under PLN 15,000. In such a situation, fraudsters often push for cash payments – it’s harder to track, leaves fewer traces, and puts the buyer at greater risk if difficulties arise.
A dishonest seller may offer a discount for paying in cash – precisely in order to gain illegal tax benefits. Agreeing to participate in such a practice is tantamount to taking part in tax fraud and failing to exercise due diligence.
Important!
Any payment for the purchase of goods or services, which are listed in Appendix 15 to the VAT Act, and whose gross value exceeds PLN 15,000, must be made through the split payment mechanism. If a contractor tries to avoid split payment in such a situation, the situation should be reported to the tax office.
Transfer to the wrong bank account
A red light should also go on in the buyer’s mind when the seller offers to make payment – instead of to his own account – to another account number. Popular variants of this action are:
- Splitting payments into two or more accounts,
- A request to make payments to a third-party account,
- request for transfer to a foreign account.
Important!
In some situations, making a transfer to different accounts is justified – for example, when making a split payment to a VAT account or when using factoring. In such situations, however, the situation should not be questionable. If you are not using factoring and the other account is not a VAT account, you should be very careful.
If the seller is an active VAT taxpayer, it is the buyer’s responsibility to make payment for purchases to an account that is on the white list of VAT taxpayers. If the counterparty insists on making payment to another account, the head of the relevant tax office should be notified. Failure to do so may lead to joint and several VAT liability.
Suspiciously low price
The market regulates itself to a large extent, which means that buying a brand new car for PLN 10,000 should arouse strong suspicions. In a situation where we have been working with one contractor for many years, we can of course accept the discount offered by him or take advantage of an attractive rebate, but before making a transaction it is worthwhile to discern the market value of the item we want to purchase.
Pay attention to whether the exceptionally low price has been confirmed publicly – for example, the seller has promoted the offer on social networks, on his website or elsewhere. If possible, document the offer.
What else can justify a low product price? Factory damage, used condition, end of series – but in none of these cases should you fail to do your due diligence.
Sales that don’t fit the business profile
Buying home appliances from an electronics store surprises no one, but if the same company offers to sell groceries or building materials, the move should make the buyer suspicious. This is a rather glaring example, but a likely one. However, it does not always indicate an attempted scam. Often offers that appear unusual at first turn out to be legitimate. The seller may simply be expanding his business or fulfilling a special order (e.g., when the sale of unusual goods is the result of a buyer’s inquiry).
Problems in contacting the contractor
If we enter into a transaction with a company that operates in the country, our attention should be drawn to the situation in which the counterparty:
- avoids telephone contact,
- Only allows contact in a foreign language,
- is not a resident in Poland,
- contacts from a foreign e-mail address,
- pushes for contact via instant messaging, such as WhatsApp or Telegram,
- Does not have a place of business in the country,
- does not allow itself to be identified (e.g., in e-mails it signs itself as “Company X Customer Service”).
In any of the situations mentioned above, efforts should be made to identify the counterparty, seek opinions about it, make sure we are not dealing with a shell company or other suspicious entity.
Virtual office or headquarters not suitable for the business
In this case, much depends on the profile and scale of the contractor’s business – a one-person company that sells handicrafts may be based in its own apartment, and this should not raise particular suspicion. However, when a similar premises as a place of business is indicated by a clothing importer or an online store of finishing and construction materials, this should be looked at carefully.
It is also worth verifying that the business address provided is not just a virtual office, that is, a place that provides addresses for business registration purposes. Again – the choice of such a place may be justified by the scale of the company, but it is worth paying attention.
Shortened payment period
It’s obvious that sellers are anxious to obtain payment as soon as possible. However, when a counterparty’s proposed payment term differs significantly from those offered by competitors, such a move should raise questions – especially if it goes hand in hand with other suspicious circumstances regarding the transaction.
Peculiar conditions for carrying out the transaction
Each transaction may look slightly different, but it is worth noting the characteristic elements. The following circumstances should cause particular suspicion:
- The seller reserves the “right” not to grant a complaint,
- The seller does not allow insurance of the delivered goods or the introduction of additional security in case of problems with the execution of the order,
- The seller insists on handing over the order in unusual circumstances – in a park, at a gas station on the road, in a desolate place.
Goods that do not meet the requirements
There are industries with special requirements for goods. It is illegal to sell goods that do not meet the established criteria. These requirements apply, for example, to liquid fuels, fertilizers, natural mineral waters or tanks intended for the storage of inflammable materials. The full list of goods covered by special technical regulations, which specify special requirements, is available here.
In order to avoid negative consequences, it is necessary to carefully check the documents intended to prove that the technical standards for the products sold are met. If the seller for some reason does not want to provide the required documentation, it is better to withdraw from such a transaction.
Low share capital
If any of the counterparty’s behavior or the circumstances of the transaction arouse the buyer’s suspicions, it is also worth verifying the amount of share capital. It doesn’t always matter, but a situation in which a previously unknown company has a grossly low value of share capital, but trades in high-value goods, is a circumstance worth checking.
Lack of transaction documentation or problematic documentation
Not every transaction needs to be confirmed by a written contract, but this is still the surest way. However, simply receiving a document for signature is not the same as completing the formalities. Pay attention to whether the wording of the contract precisely defines the subject of the transaction and whether all the agreed clauses are included.
However, when it is not possible to conclude an agreement in writing, take care to document the transaction in other ways – record correspondence with the contractor, take screenshots of emails you receive from him. Try to conduct the operation in such a way that you have all the most important details in a form that allows you to record them – don’t set the terms of payment and delivery details over the phone, if possible. Pay attention to whether the seller does not insist on maintaining forms of contact that make it impossible to verify joint arrangements after time.
No verification of documents
It is not only the document certifying the sale that should be carefully checked. All documentation that pertains to the transaction entered into should be reviewed, such as for fabrication or the presence of irregularities. Special attention should be paid to the language used in the documentation, relevant dates, amounts, description of the subject of the transaction, account numbers, addresses and other details of the parties to the agreement.
If you decide to proceed with the transaction despite the irregularities, KAS may consider it a symptom of a failure to exercise buyer due diligence.
Contractor’s lack of online presence
Companies are not required to maintain social media or have their own websites, but in many industries this is a natural practice. In this case, the assessment depends largely on your understanding of the industry. However, if a contractor claims to be a large national distributor, you should have no problem finding traces of their business online.
Similarly, if a contractor boasts of working with well-known brands (e.g., claims to be a partner of an auto parts manufacturer), you can try to contact the company in question to check the seller’s credentials.
Summary
Doing due diligence – while difficult – is possible. Particularly difficult may be the fact that many of the guidelines listed above are open-ended. It is difficult to foresee all the circumstances that may indicate an intent to defraud, and new ones will arise over time. However, if the buyer takes care to verify in accordance with the points described, and, when necessary, makes payments via the split payment mechanism, he can rest assured about the outcome of a possible KAS assessment.
