Limitation of the purchaser’s due diligence in Italian case of VAT fraud

In the context of a VAT fraud, the Italian Tax Authority may challenge the recoverability of input VAT carried out by the purchaser on the grounds of, at the very least, negligent participation in the VAT fraud (i.e. failure to recognise the fraudulent scheme in which it has been involved).

The Italian Supreme Court, in judgment No. 14102/2024, clarified that, to meet the burden of proof of “knowledge” or “awareness” of a VAT fraud, the safeguards that the purchaser is reasonably required to put in place in order to exclude its own involvement in the fraudulent scheme cannot be based on complex and in-depth analyses, similar to those that only the tax authorities could carry out.

Therefore, it is not possible to hold the purchaser liable for being unaware of the deficiencies in their counterpart's commercial organisation when the characteristics of the transaction (e.g., the selling price, the potential repayment of the VAT paid by the supplier) are not such as to suggest the existence of a VAT fraud.

This decision of the Italian Supreme Court is part of a regulatory framework in which there are already several regulations, which are aimed at:

• attributing to each operator in the supply chain the responsibility for the regularity of the transactions carried out in order to prevent VAT fraud (i.e. Legislative Decree 231/2001);
• rewarding the development of due diligence activities in the context of each operator's tax control framework (i.e. cooperative compliance regime).

Key takeaway

Despite the widespread attitude in the Italian legal system of attributing liability to each operator in the supply chain in case of a fraudulent scheme – at least for a lack of diligence in their commercial transactions – the Italian Supreme Court sets an important limitation to the degree of control that can reasonably be attributed to a prudent operator to avoid being tainted with VAT fraud.

Reference

Italian Supreme Court, Judgment No. 14102 of 21 May 2024 – 14102/2024