Supervisory statement: the new version that came in July and our tips and tricks on how to solve problematic situations

VAT supervisory statement, introduced by Financial Administration of Slovak Republic, has a new version as of 01 July 2023. For the tax period of July 2023, meaning Q3 2023 it is necessary for the first time ever to submit a form in the new version. However the new change to the statement is purely formal, which is the addition of a new option: stating a rate lesser than 10%. To be precise, the lower rate of 5% applies to certain supplies of goods and services connected to public housing with a regulated rent price.

The number of VAT tax audits is declining despite the large amount of findings

It was published on the Financial Administration’s site that Open Data published a statistic about the number of tax audits and local inquiries executed based on an analysis of supervisory statements from years 2017-2023.

(Source: https://opendata.financnasprava.sk/en/opendata/category/165-pocet-kontrol)

This statistic results in some interesting findings

• The largest number of tax audits and local inquiries occurs in Q4 (October – December).
• Comparing this with years 2017 – 2019 the number of tax audits and local inquiries based on an analysis of a supervisory statement has declined.

(Source: https://opendata.financnasprava.sk/en/opendata/category/165-pocet-kontrol)

The smaller number of tax audits and local inquiries is contrary to the fact that almost 75% of all VAT tax audits in years 2020-2022 ended with findings. This statistic also proves that taxable entities often times do not exercise all their rights during a tax audit for the purpose of proving facts, which in turn rids their position of evidence. It is an alarmingly high number, which makes the number of VAT tax audits being done yearly, the number being five to six thousand, abysmally small. On the other hand, it is possible that the final amount of findings can be smaller since taxable entities can defend themselves with appeals or through court. However, no information about these steps is easily accessible and in our line of work, we often see that entrepreneurs rarely defend themselves in court, as it is often a long and a financially draining process.

Two common problems during VAT tax audits and our recommendations on how to solve them

The total of all submitted supervisory statements was approximately 2,3 million. To check and analyse such a high number of statements, the Financial Administration uses certain technical and analytical means, which makes the whole thing pretty much automatic.

A tax authority compares the information stated in every single supervisory statement of the customer with the information stated in the supervisory statement of the provider. In our line of work, there is often two types of problems:

• Discrepancy between the null supervisory statement of the provider and the statement of the customer
• Additional request of supervisory statement during local inquiry.

The former usually occurs when providers submit their null supervisory statement, while missing all data on the day of VAT being submitted. This step does prevent the sanctions that would come from not the legal deadline on submitting the supervisory statement, but this situation can affect customers who claim VAT deductions on submitted invoices. A tax authority identifies a discrepancy between supervisory statements and initiates either a tax audit or a local inquiry of the provider.

What we recommend: In this case, it is better to properly argument with the tax authority so that your VAT deduction is not rejected for the reason of evidence of transaction.

The latter happens when the tax authority, either during a local inquiry, on the basis of a call or during a tax audit, requests that all documents, supervisory statement included, be submitted directly by the taxable entity. This can happen even though the entity has already submitted those documents and the tax authority has received the information and has them available in the system.

What we recommend: In this case, account must be taken of the taxable entity‘s powers and the fact that documents and information provided in the context of a local inquiry or during a data call may appear in the tax audit file of another taxable entity if used as evidence against him. This step results in the disclosure of information, which in most commercial cases is a detailed description. The problem is that this step may allow competitors to learn the taxable entity‘s trade secrets.

It is vital that proper argumentation is chosen already during the beginning of the tax audit or a local inquiry, precisely during the data calls so that you can prevent unwanted disclosure of sensitive information.

More about our experiences of tax audits can be found in the article here. 

Supervisory statements are going to be cancelled the question is when

When launching the supervisory statement in 2014 the Financial Administration thought that starting 2016 taxable entity will no longer be required to file a VAT return and that the administration will extract all necessary data from the supervisory statements. Until this day no such change has occurred. His may also be due to the fact that the VAT return also includes some types of transactions that are missing from the supervisory statement, such as pro rata deduction of VAT, refund of VAT on theft of goods or adjustment of deducted tax. However, this causes a certain administrative burden for the taxable entity.

Nevertheless, it is possible that supervisory statements will soon be cancelled. This should happen as a consequence of the new European legislation (ViDA - VAT in the Digital Age). One of the forthcoming changes, which will apply in all Member States, is the introduction of the "e-invoice". In recent years, the Ministry of Finance of the Slovak Republic has started working on a legislative proposal regarding the e-invoice and the new real-time reporting of data from each invoice to the financial administration. We expect the Ministry of Finance to present a legislative proposal after the ViDA directive is accepted across Europe.

How will it work? VAT payers will have to inform the tax administration electronically of the essential details of the invoice (supplier's/customer's details, date of delivery and date of issue, tax base, tax and VAT rate, etc.) when issuing or receiving an invoice within a very short time (currently the proposal is within two days). This should also be the end of the summary invoice. It is expected that the right to deduct VAT will later be conditional on the invoice being reported to the tax authorities.

However, the Slovak Republic wanted to go even further and condition the tax deductibility of the expense for income tax purposes on the invoice being reported to the financial administration. The Slovak executive hopes that this would improve tax collection and subsequently further eliminate the possibility of tax fraud (as the tax administration would learn about tax fraud in real time and would not have to wait for the filing of an audit report). With this change, which will once again increase the administrative burden for taxable entities, we are expecting at least a partial compensation in the form of elimination of the supervisory statements.

The question of which change will be implemented first still remains. Nonetheless, in both cases one of the outcomes of these changes would be the cancellation of supervisory statements.

You can read more about the e-invoice in our article.