SAC: To err is human even for accountants
The Supreme Administrative Court has finally and conclusively clarified the issue of applying the accrual principle to the taxation of accounting revenues by rejecting the retrospective current period taxation of revenues forgotten for many years. The SAC again confirmed that for taxation purposes it is vital to include revenues to the period to which they relate in terms of substance and time, irrespective of whether this period has already been closed.
Errors that occur in the accounting books can in principle be corrected in the period in which they were identified. When an entity forgets to account for some taxable revenues, what will be the tax implications? The SAC’s recent decision again offers a clear answer to this question.
In case No. 2 Afs 58/2015, the SAC discussed a forgotten tax provision to a receivable that was created by a bank in the early 1990s and should have been released already in 1993 as the receivable had been offset and therefore ceased to exist. As a result of an operational error, the provision remained in the system until 2008 when this inconsistency was identified and the provision in question released for accounting purposes. The forgotten revenue could not have been reflected in the tax for 1993 owing to the lapse period, for which reason the tax administrator refused to accept the bank’s additional tax return for this period. This led to a dispute between the taxpayer and the tax authority over whether revenues from the release of the provision in question should be taxed in 2008.
The SAC agreed with the taxpayer’s argumentation and concluded that revenues from the released provision relate - in terms of substance and time - to the period in which reasons for its creation ceased to exist and not to the period in which the provision was actually released for accounting purposes. If the provision was not released in the correct period, the taxpayer should have rectified the error in an additional tax return. The court pointed out that even the expiration of the right to assess additional tax for the period in which the provision should have been released does not justify the taxation of this error in a later period, as this would in its effect result in a tax duty with no time limits, which is entirely against the concept and purpose of lapse periods.
The court also drew attention to the criminal-law aspects of the case. In cases having similar merits some persons may also have criminal liability. It would have to be proved, however, that a provision was created and forgotten with the intention to evade paying taxes. The court thus warned the readers against such intentional “forgetfulness”.
The court clearly and firmly states that, when identifying any errors in expenses (which did not raise doubts in the past) and revenues, it is always necessary to follow the accrual principle. Where an error relates to the period for which the time limit for assessing tax has not yet expired, the problem should always be resolved by filing an additional tax return.