A request for international cooperation, in other words, an international letter of request, is one of a range of instruments that the tax administrator can use in tax proceedings to assess tax correctly. Recently, the number of cases in which the tax administrator used this instrument in the inspection of cross-border transactions has been increasing. However, let us look at this instrument from the perspective of a taxable entity.
International letter of request is a relatively unpredictable instrument, as its length and outcome cannot be clearly predicted (i.e. whether it will actually result in obtaining the requested information). At the same time, however, it entails quite significant procedural consequences. Under certain circumstances, it leads to the suspension of a three-year limitation period for tax assessment and it thus prolongs the tax procedure. However, there are certain limits. For this “negative” effect to occur, it cannot be a simple formality performed by the tax administrator with the intention to suspend the limitation period.
In which cases can the effect of suspending the limitation period be linked to the request for international cooperation? The answer to this question is provided primarily by the case law of administrative courts, which is already relatively well established (for example the recent ruling No. 2 Afs 39/2020-56 of the Supreme Administrative Court of 29 July 2021; or the slightly older ruling No. 10 Afs 228/2019-53 of the Supreme Administrative Court of 26 November 2020). Within the review, the administrative courts focus in particular on whether the international letter of request was (i) legitimate and (ii) related to the case. However, for the limitation period to be suspended, it is not decisive whether the requested information has actually been obtained. Therefore, the legitimacy of an international letter of request cannot be automatically linked only to its success and actual contribution to the decision. Even a request for international cooperation, on the basis of which the requested and necessary information failed to be obtained, may thus be legitimate. In these cases, the courts verify whether the tax administrator was able to obtain relevant information on the basis of the request and whether it was not merely a completely superfluous formal act.
Detailed scrutiny may reveal that the tax administrator did not have a rational reason to initiate the international letter of request and that in the meantime, the tax assessment period may have expired. In general, however, we can conclude that only an international letter of request that is qualified to contribute to the correct tax assessment can justify suspending a limitation period for the tax assessment. As we can see, the administrative courts primarily base their reviews on the circumstances of an individual case – it is therefore necessary to take the situation seriously and, in terms of tax audit management, to pay due attention to the international letter of request.
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