In certain Central European countries, tax administrators also try during or after the tax audit to derive criminal liability of taxable entities. This raises a question whether criminal law consequences of tax disputes could materialise more frequently in the Czech Republic as well.

The above questions were some of the topics of the colloquium organised in late May 2018 by the specialised tax litigation team of the law firm Ambruz & Dark Deloitte Legal with the participation of colleagues of the same specialisation from Slovakia, Poland, Germany, Hungary and Romania. The objectives of the seminar included sharing current trends in the tax administrations of the individual countries, comparison of key institutes of tax law and sharing of experience in this area.

A variety of facts concerning tax administration differ in the individual countries (e.g. the three-year statute of limitations for the possibility of opening a tax audit in the Czech Republic is one of the shortest in the Central European countries), but certain similarities can also be observed (e.g. the VAT area in relation to carousel fraud, which is one of the harmonised tax areas, or the length of court proceedings).

Like most other Central European countries, the Czech Republic has seen an increasing tendency of the tax administrator to tighten its tax audit procedures in recent years. This trend is confirmed by the statistics from the area of additional tax or imposed fines. On the other hand, compared to other countries the Czech Republic recorded a lower increase in the number of cases where the tax administrator derived criminal liability of the taxable entity.

However, experience from Central European countries clearly confirm that success in the tax area can often be achieved in administrative justice. Aside from a relatively high probability of success, an increasingly motivating factor for taxable entities is the possibility of obtaining compensation, in case of success, for the incurred detriment or interest on the tax administrator’s unjustified actions. However, a fact that continues to discourage entities from entering into a dispute with the tax administrator is the length of the court proceedings, which represents approximately to 2 – 5 years in the Czech Republic.

The following matters are worth mentioning with respect to the individual countries:

• Poland achieved major success before the Court of Justice of the European Union (CJEU) in the matter of Kompania Piwowarska (C-30/17). The dispute concerned the excise tax on flavoured beer. The CJEU confirmed in its ruling that in the collection of excise tax on flavoured beer, the tax administrator is not entitled to take into account the aromatic substances/sugar syrup added after the end of fermentation.
• With respect to the repeated cases of prosecution and criminal liability of the management of companies operating in Germany where law enforcement authorities were involved during and after a tax audit, there has been an increase since 2015 in interest of these companies in legal services consisting in legal supervision of the design and implementation of processes and audits that are intended to prevent tax fraud and at the same time protect the company’s management and the company itself from potential sanctions (Tax Compliance Management System).
• In Romania, the tax administrators often challenge the evidence provided by taxable entities during tax audits. Legal disputes in the tax area are common in Romania and taxable entities prepare for them diligently, including for example a simulated court hearing with their advisor. Courts correct the decisions of the tax administrator in many cases.
• In Hungary, tax audits often focus on transfer pricing. The tendencies of the tax administration in this area lean towards the conclusion that if a taxable entity has not prepared transfer pricing documentation, the tax administrator is entitled to calculate the price freely using its own techniques. However, the Hungarian Administrative Court has not upheld this strict opinion of the tax administrator.
• In Slovakia, the tax administrators’ methods are similar to the Czech Republic. The most common area of additional tax assessment is VAT (carousel fraud and exemption of international transactions) and the area of transfer pricing.

The article is part of dReport – July 2018, Tax news; Grants and investment Incentives.