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What constitutes a tax inspection?

Recently, the Supreme Administrative Court (SAC) repeatedly commented on which tax administration procedures should be regarded as a tax inspection. The court’s answers may have a major impact on the success or failure of tax proceedings. The court indicated that if in certain situations the limits of on-site investigations are exceeded, a subsequent tax inspection may then be held inadmissible as a repeated tax inspection.

In case 7 Afs 231/2021, the SAC dealt with a tax administrator initiating a tax inspection of corporate income tax in which they verified the lawfulness of claiming a research and development allowance for tax years 2013 and 2014. Previously, an on-site investigation had been carried out at the taxpayer for the same purpose for tax years 2010, 2012, 2013 and 2014. Following the commencement of the tax inspection, the taxpayer sought protection against unlawful interference by the tax administrator, arguing that what was going on was an inadmissible repeated tax inspection.

Within the on-site investigation, the taxpayer had provided the tax administrator with calculations and explanations and produced a considerable number of documents concerning the allowance. The SAC stated that the purpose of an on-site investigation is to obtain preliminary or background information, i.e., to ‘map the terrain’, but not to ascertain, verify, or determine a tax liability. Indeed, that is what a tax inspection is for: in its course, the tax base or other circumstances relevant to the correct assessment of tax are determined or verified; and a different scope of taxpayer rights also corresponds to this.

The limits set by the regulation of on-site investigation are crossed if instead of than merely finding the underlying information and ‘mapping the terrain’, the tax administrator already ascertains and verifies the correctness of the determination of a tax liability. However, according to the SAC, the fact that complete accounting records were requested does not in itself mean that the limits of on-site investigation have been crossed. The SAC also referred to judgment No. 4 Afs 14/2017, where the court held that the limits of on-site investigation had been crossed, even though a rather small number of documents was requested and a rather small extent of circumstances investigated.

The SAC agreed with the taxpayer that in this case, the tax administrator’s procedure was in fact a tax inspection and not an on-site investigation. However, the SAC pointed out that these conclusions only apply to the present factual situation, given inter alia the relation between the quantity of documents requested and received, and the extent of the area inspected. The conclusions thus can neither be generalised nor applied to all tax inspections initiated after an on-site investigation.

Still, the decision provides important guidance on where the line between an on-site investigation and a tax inspection lies. Hence, if a tax inspection is initiated on the same subject matter as a previous on-site investigation, it is certainly appropriate to pay attention to whether the on-site investigation did not already meet the characteristics of a tax inspection. If yes, the on-going tax inspection should be considered repeated and hence unlawful.