Introduction to New Article 54 (bis)
New Article 54 (bis) represents a major turning point in how tax authorities assess input VAT claims when supply chains are affected by tax evasion. The provision empowers the Federal Tax Authority (FTA) to deny input VAT recovery where transactions are connected to fraudulent or abusive supply chains, even if the taxpayer is not the direct perpetrator of the fraud. This development places a stronger responsibility on businesses to understand not only their own tax position but also the integrity of their suppliers and customers.
In modern VAT systems, input VAT recovery is a fundamental right. However, this right is not absolute. Tax authorities worldwide have increasingly tightened rules to combat missing trader fraud, carousel schemes, and artificial arrangements designed to erode the tax base. New Article 54 (bis) aligns with this global trend by clarifying when the FTA may lawfully reject an input VAT claim due to tax-evasion risks embedded in the supply chain.
Understanding the Purpose of New Article 54 (bis)
New Article 54 (bis) is designed to close gaps that allowed fraudulent supply chains to operate while downstream businesses continued to recover input VAT. The core objective of this provision is deterrence. By denying input VAT where a taxpayer knew or should have known that a transaction was connected to tax evasion, the FTA aims to remove the financial incentive that keeps fraudulent chains alive.
The provision reflects an underlying policy choice. Instead of focusing solely on the entity committing the fraud, the law now examines the entire commercial context. If a business benefits from artificially low prices, unusual trading patterns, or suppliers with no real economic substance, the FTA may conclude that the transaction forms part of a tax-evasion scheme. In such cases, the recovery of input VAT can be refused, even if the invoices appear valid on their face.
When the FTA Is Likely to Reject Input VAT
Supply Chains Involving Artificial or Non-Economic Transactions
Under New Article 54 (bis), the FTA may deny input VAT where transactions lack genuine commercial substance. This includes arrangements where goods or services are repeatedly sold through multiple entities without any real value being added. Such structures are often used to disguise tax evasion, particularly in carousel fraud schemes.
The FTA will typically analyze whether the transaction makes commercial sense. If the pricing is inconsistent with market norms or the profit margins are unrealistically low, this may indicate that the supply chain exists primarily for tax avoidance or evasion purposes.
Knowledge or Constructive Knowledge of Tax Evasion
A key concept introduced by New Article 54 (bis) is the idea of constructive knowledge. Even if a business did not actively participate in tax evasion, input VAT may still be rejected if it can be shown that the business should have known about the fraudulent nature of the supply chain.
Indicators such as dealing with newly incorporated suppliers, repeated changes in trading partners, requests for unusual payment methods, or refusal to provide standard documentation can all point toward constructive knowledge. The FTA does not need to prove intent beyond doubt; it is sufficient to demonstrate that a reasonable business person would have identified the risk.
The Due Diligence Standard Expected by the FTA
Supplier and Customer Verification
New Article 54 (bis) effectively raises the bar for due diligence. Businesses are now expected to take proactive steps to verify their suppliers and, in some cases, their customers. This includes checking trade licenses, VAT registration status, physical presence, and the commercial credibility of counterparties.
Failure to conduct basic checks may be interpreted by the FTA as willful blindness. In such circumstances, an input VAT claim may be rejected on the grounds that the taxpayer failed to act with reasonable care.
Ongoing Monitoring of Transactions
Due diligence is not a one-time exercise. The FTA expects businesses to continuously monitor their supply chains. Sudden changes in pricing, delivery routes, or payment terms should trigger internal reviews. If anomalies are ignored and VAT is reclaimed regardless, New Article 54 (bis) provides the legal basis for denial.
Impact of New Article 54 (bis) on Businesses
The introduction of New Article 54 (bis) significantly alters the risk profile for VAT-registered businesses. Input VAT, which was once considered a relatively secure recovery, now carries a compliance risk if supply chains are not properly managed.
From a financial perspective, the denial of input VAT can have serious consequences. Businesses may face substantial tax assessments, penalties, and potential reputational damage. From an operational standpoint, companies must invest more resources into compliance, documentation, and internal controls.
Defending an Input VAT Claim Under New Article 54 (bis)
Demonstrating Commercial Substance
To defend against a denial, businesses should be prepared to demonstrate that their transactions have real economic substance. This includes clear contracts, evidence of delivery or performance, market-based pricing, and genuine business rationale.
Proving Reasonable Due Diligence
Documentation is critical under New Article 54 (bis). Businesses should maintain records of supplier checks, correspondence, payment trails, and internal risk assessments. These records can help show that the business acted in good faith and took reasonable steps to avoid involvement in tax-evasion supply chains.
Relationship Between New Article 54 (bis) and Global VAT Principles
New Article 54 (bis) mirrors principles established in international VAT jurisprudence, particularly the notion that VAT rights cannot be exercised abusively. Many jurisdictions apply a “knew or should have known” test to deny input VAT in fraud cases. By adopting this approach, the FTA strengthens cross-border cooperation and aligns local practice with global standards.
This alignment also sends a clear signal to multinational businesses operating in the region. Compliance frameworks used in other jurisdictions are now equally relevant when dealing with local VAT obligations.
Practical Steps to Stay Compliant
Businesses should treat New Article 54 (bis) as a catalyst for improving internal VAT governance. Regular training, updated compliance manuals, and periodic supply-chain audits can significantly reduce exposure. Engaging professional tax advisors to review high-risk transactions is also a prudent strategy in the current enforcement environment.
About My Taxman
My Taxman is a trusted tax advisory and compliance firm that supports businesses in navigating complex VAT regulations, including the implications of New Article 54 (bis). With a strong focus on practical solutions, My Taxman assists clients in conducting VAT health checks, strengthening due diligence processes, and defending input VAT claims during FTA audits. By combining technical expertise with real-world experience, My Taxman helps businesses remain compliant while minimizing tax risk.
