As our experience suggests, the Financial Administration has been exerting significant pressure on tax collection, which is reflected not only in an actual increase in tax proceeds, but also, for example, in the number of tax seizures ordered. However, the Financial Administration sometimes seeks to collect tax in highly unorthodox ways. One such procedure has been reviewed by the Regional Court in Hradec Králové – Pardubice Office (the “Regional Court”).
In the case in hand, tax (including accrued interest and fees) was additionally assessed in respect of an entity following a tax audit on the grounds of its failure to prove the VAT deduction entitlement due to not having submitted sufficient evidence demonstrating the performance of construction work. As the company did not pay the additionally assessed tax, it was subsequently unsuccessfully enforced in distraint proceedings. In most cases, the tax administrator would stop short at this point. However, in this case, the tax administrator proceeded to issue a guarantor’s call in which it required that the company’s statutory executive pay the tax arrears on its behalf. The tax administrator inferred the statutory executive’s liability from the following facts.
Consequences of a Failure to Act with Due Managerial Care
According to the tax administrator, the statutory executive erred in that it assumed that it would not be necessary to prove the performance of the construction work in the future. In the tax administrator’s view, this error must be necessarily interpreted as a failure to act with due managerial care as the statutory executive was obliged to keep both a copy of the construction log and of the actual documents. As the tax administrator states, this error resulted in the company incurring detriment for which, if it is not settled, the statutory executive is liable and, as a result, he or she may be required to pay the additionally assessed tax.
A Positively Negative Regional Court Ruling
The Regional Court revoked the ruling of the Appellate Financial Directorate; however, this was not on account of the incorrectness of the whole structure of the statutory executive’s liability. Instead, the Regional Court directly addressed the conditions under which the above stated liability obligation may originate.
Firstly, the Regional Court stated that additionally assessed tax cannot be automatically considered to constitute detriment incurred on account of a failure, if any, to act with due managerial care, the reason being that the amount of tax is determined by law and its payment is mandatory. Nevertheless, according to the Regional Court, interest and fees accrued in respect of the tax – ie, default interest or fees, whose amount is, in some cases, as high as the tax itself – could be considered to constitute such detriment. The Regional Court subsequently reviewed whether the statutory executive failed to act with due managerial care in not having stored the documents. The Regional Court arrived at the conclusion that no legislation stipulates such an obligation and, if the Financial Administration wished to infer a failure to act with due managerial care from this “negligence”, it would have to provide a thorough justification thereof. Therefore, the ruling has been revoked for unverifiability.
Tax Audit Implications
The Appellate Financial Directorate has not filed a cassation complaint against the Regional Court’s ruling. However, sooner or later, the Supreme Administrative Court is bound to address the issue of whether it is at all possible to infer management’s liability for additionally assessed tax. Therefore, as the Regional Court has so far confirmed the theoretical possibility of recovering tax arrears from persons who have violated their obligation to act with due managerial care (ie, namely from all members of statutory bodies), it is possible that, in performing tax audits, the whole Financial Administration will, besides proving the facts resulting in the additional tax assessment, also focus on proving the violation of obligations by the entity’s management.
Entities, or, to be precise, their elected bodies, should, therefore, consider what obligations may be expected of them by tax administrators in relation to their activities. The statutory body of an entity which, in relation to its activities, is at heightened risk of involvement (albeit unintentional) in VAT carousel fraud should focus on setting effective and efficient control measures in respect of its business partners.
The article is part of dReport – November 2018, Tax news; Grants and investment Incentives.
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