One of the most important judgments of 2023 was the judgment in case No. 6 Afs 59/2023, by which the Supreme Administrative Court (“the SAC”) upheld the taxpayer’s cassation complaint concerning the tax administrator’s unlawful interference. The unlawful interference involved conducting a tax audit after the time limit for tax assessment had expired, since the actual commencement of the tax audit occurred earlier than its formal commencement.
Case law of the SAC
In its previous judgments, the SAC has held that if the tax administrator intends to comprehensively examine the facts crucial for the correct determination and assessment of tax, it may do so only within a tax audit or a procedure for removing doubts. This is because only these two control procedures allow the tax authorities to produce evidence. On the other hand, evidence cannot be produced during a search activity, which involves gathering background information and ‘mapping the terrain’. Consequently, the correctness of the taxpayer’s allegations and the determination of tax liability cannot be ascertained and verified as part of the search activity. If the tax administration’s search activity exceeds these legal limits, it effectively constitutes the initiation of a tax audit.
Facts of the case
As part of the search activity, the tax administrator requested contracts, tax documents and informal e-mail communications from the taxpayer to verify data provided in control statements. Additionally, the tax administration issued several requests for international exchange of information to confirm the existence of specific chains of companies trading with the taxpayer, including specific movements of goods. After a period of time, the tax authority initiated a tax audit of the taxpayer regarding the facts under examination. The taxpayer contested the tax audit, claiming unlawful interference on the grounds that the time limit for tax assessment had expired, arguing that the actual start of the tax audit occurred earlier.
The Regional Court dismissed the taxpayer’s claim, but the SAC sided with the taxpayer. Nevertheless, the SAC agreed with the Regional Court that the request for documents to resolve discrepancies in control statements did not in fact initiate a tax audit. However, in its assessment of the requests for international exchange of information, the SAC departed from the Regional Court’s view.
Assessment of a request of international exchange of information by the SAC
According to the SAC, a request for international exchange of information is intended for more detailed investigation. Thus, if such a request indicates it was made to examine and evaluate specific taxable transactions, it cannot occur outside a control procedure without the taxpayer’s knowledge. In this case, the tax administration, through the requests for international exchange of information, inquired foreign tax authorities about specific companies trading with the taxpayer in specific tax periods and specific taxable transactions. The inquiries focused on the delivery of goods, storage facilities and employees of the foreign customers. Therefore, the SAC concluded that this went beyond ‘mapping the terrain’ and involved examining specific taxable transactions, which can only be done during an ongoing tax audit. Consequently, the SAC determined that the requests of international exchange of information effectively initiated a tax audit.
The SAC found that the Regional Court had incorrectly assessed the initiation of the tax audit and overturned its judgment. The assessment of the time limit for tax assessment depends on when the tax audit was initiated. In subsequent proceedings, the Regional Court will re-examine the running of the limitation period, acknowledging that the period for tax assessment may not have run during the waiting period for a reply to the request for the international exchange of information.
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