In ruling no. II. ÚS 819/18 of 22 February 2019, the Constitutional Court granted the constitutional complaint of a company that was suspected by the tax authority of being involved in a so-called “tax carousel” and the tax authority consequently retained an excessive value added tax deduction for received taxable supplies that the tax authority had doubts about, as well as for received taxable supplies that were not disputed.
The taxpayer required a limitation of the tax audit only to the disputed supplies, and a refund of the portion of the excessive deduction that had not been challenged. Although the tax authority confirmed that the audit concerns only a part of the taxable supplies and did not communicate any doubts regarding the remaining taxable supplies, it retained an excessive deduction with respect to all the taxable supplies reported in the relevant taxation period.
Subsequently, the taxpayer turned to the administrative court with an action for the protection against illegal interventions by the tax authority, which allegedly consisted in the method of performing the audit, since the tax authority had not proceeded without undue delay and performed needless acts contrary to the principle of adequacy and purposefulness. However, neither the Regional Court nor the Supreme Administrative Court accepted the argumentation and they confirmed the procedure of the Financial Administration.
The Constitutional Court’s ruling
In the constitutional complaint the taxpayer objected to the disproportionate length of the tax authority’s audit procedures and the lack of procedural rules, meaning that the tax authority was not limited by any deadline for performing an efficient act, which caused disproportionate and negative demands on assets, causing a breach of the constitutionally guaranteed right for the protection of ownership.
The Constitutional Court stated in its ruling that the domestic legal provision is based on EU law whose transposition in the VAT Act and interpretation and application in practice by public authorities are subject to ongoing proceedings on a preliminary ruling of the Court of Justice of the European Union (in case C-446/18 AGROBET CZ). Although the preliminary question is practically identical to the legal question that was the subject of these proceedings before the Constitutional Court, the Constitutional Court reached the conclusion that the constitutionality of the procedures of the tax authority and general courts can be separated from the interpretation of EU law. The Constitutional Court thus inferred that the requirement of constitutionality of the procedures of the tax authority and general courts is independent from the criterion of compliance with EU law.
Regarding the possibility of retaining an excessive deduction to intervene in the asset rights, the Constitutional Court stated that the intervention in the taxable entity’s asset sphere consists not only in the obligation to pay tax or the related interest and charges, but also in the obligation to allow long-term retention of excessive deductions. For this reason, audit procedures must be performed while respecting the rights and legally protected interests of the taxable entity, with the intervention in these rights being subject to the proportionality test.
Constitutional Court: Unconstitutional encroachment on the taxpayer’s rights
Since “the Tax Code (Section 90 (3) in connection with Section 85 (1)) allows the tax authority prior to tax assessment to examine only the portion of supplies about which there are reasonable doubts” and “it [thus] does not give the tax authority the power to retain the undisputed portion of the excessive deduction derived from the taxable supplies that cannot be the subject of examination due to being undisputed,” the Constitutional Court concluded that the intervention in the taxpayer’s ownership rights lacks any legal basis and the tax authority’s procedure automatically represents an unconstitutional encroachment on the taxpayer’s rights.
In addition, the Constitutional Court commented on the tax authority’s approach conforming to the Constitution in line with the Tax Code by stating that “the tax authority could have achieved the goal of proper tax collection even without the illegal encroachment on the plaintiff’s asset rights, by dividing the amount of the excessive deduction claimed into the disputed amount, corresponding to the taxable supplies that were subject to the tax authority’s investigation, and the undisputed amount, which could have been automatically adjudged and paid out to the taxable entity.” Section 134 (2) of the Tax Code can serve as a legal basis for this approach, stipulating that for the purposes of defining the subject of tax proceedings, tax is assessed either with respect to the taxation period or with respect to an individual fact.
“In other words, the Tax Code allows repeatedly (additionally) assessing tax or tax deduction not just for the entire taxation period but also with respect to specific performed taxable supplies, i.e. with respect to one business case. The tax authority’s decision to assess the undisputed amount of the excessive deduction (i.e. a decision pursuant to Section 101 (1) of the Tax Code) does not in any way prevent a later assessment of tax on the examined supplies, as follows from Section 143 (1), second sentence, of the Tax Code.”
The article is part of dReport – March 2019, Tax news; Grants and investment Incentives.