1. Definition of the “movement of goods” in tax examination

In tax examination and inspection activities, the concept of “movement of goods” is increasingly applied by the tax authorities, especially in
VAT refund applications.

This concept refers to the entire actual movement of goods throughout their lifecycle,
from origination to final consumption.

• Origin of goods (F1,F2,F3 supply chain…)
• The process of purchasing – receipt into inventory – issuance from inventory – internal transfers
• The process of sales – delivery – final consumption
• Consistency among the flow of goods – cash flows – invoices – accounting records

The tax authorities examine not only the invoices, but also whether the goods actually exist and whether there has been a genuine physical movement of such goods.

2. Why are the tax authorities particularly interested in the movement of goods?

In tax administration practice, many violations do not lie in the form of invoices or supporting documents, but in the substantive absence of actual goods.

• Detection of fictitious or fraudulent invoice trading
• Identification of non-genuine expenses for corporate income tax purposes
• Control of unlawful input VAT deductions
• Detection of omitted revenue and off-book revenue
• Assessment of the integrity of the accounting, inventory, and logistics system

3. Factors considered by the tax authorities during examination

3.1. Goods documentation flow

• Sales contracts and purchase orders
• Goods receipt notes – goods issue notes
• Delivery records (vehicle license plates, drivers’ signatures, photographs, weighing slips, etc.)
• Bills of lading, vehicle dispatch orders, and GPS data (if any)
• Warehouse stocktaking records

3.2. Invoice flow

• Input and output invoices
• Whether the invoice issuance date is consistent with the delivery date
• Whether the description of goods and services is consistent with the actual business activities

3.3. Cash flow

• Payments made through bank transfer
• Timing of payments and counterparties
• Relationship between the buyer and the seller

3.4. Accounting flow

• Opening inventory – inflows – outflows – closing inventory (negative inventory represents a high risk)
• Cost of goods sold (COGS)
• Profit margins
• Consistency among inventory records, accounting records, and tax filings

A single inconsistency in any of these data flows may provide the tax authorities with grounds to suspect that a transaction is not genuine.

4. Common risk scenarios

4.1. Invoices exist, but the existence of goods cannot be substantiated

• No goods receipt notes
• No transportation or shipping documents
• Insufficient warehouse capacity
• Personnel levels inconsistent with the scale of goods handled

Risk: Disallowance of expenses and back taxes on VAT and corporate income tax.

4.2. Illogical movement of goods

• Large volumes of goods recorded as received and issued on the same day
• Negative or abnormal inventory balances
• Storage and transportation capacity inconsistent with the volume of goods

Risk: Tax assessment and classification of transactions as non-genuine.

4.3. Internal transfers lacking supporting documentation

• Warehouse transfers without transfer orders
• Processing/outsourcing activities without processing contracts
• Consignment or agency sales not tracked separately

Risk: Treated as sales without invoicing.

4.4. Cash flows not aligned with the flow of goods

• Unusually prolonged accounts receivable
• Payments made through third parties without clear justification
• Counterparties classified as high-risk

Risk: Rejection of the economic substance of the transactions.

5. Tax authorities’ perspective: “Substance over form”

Tax declarations must accurately reflect the economic nature of the transaction, and
not merely the form of the invoices.

• A valid invoice or contract alone is not sufficient
• Payment via bank transfer alone is not sufficient
• The actual movement of goods must be substantiated

6. What should enterprises do to control risks?

1. Establish robust procedures for managing the movement of goods
2. Maintain complete documentation of transportation, delivery, and stocktaking
3. Perform periodic reconciliations among inventory, accounting, and tax records
4. Be able to explain the business logic and the consistency of data flows