Overstepping search procedure boundaries may affect tax assessment deadline

In a recent decision, the Supreme Administrative Court commented on a tax administrator's overstepping of the boundaries of a search procedure, stating that the activity had in fact been a tax inspection. This had a major impact on the expiry of the period for assessing tax.

In case No. 7 Afs 39/2020, the SAC dealt with a tax administrator assessing additional corporate income tax for 2013 based on the results of a tax inspection. The taxpayer challenged the point in time when the tax inspection started, as prior to its formal commencement on 2 April 2015, the tax administrator had already been carrying out a search activity concerning transfer pricing at the taxpayer from November 2014. During this period, the taxpayer provided the tax administrator with information about the company's activities, partial accounts of transactions carried out with related parties, some contracts for the provision of services, and other accounting documents.

The taxpayer challenged the additional tax assessment, claiming, inter alia, that the limitation period/deadline for assessing additional tax had already expired: the tax inspection had in fact started already in January 2015 when the tax administrator had requested accounting data used as a basis for compiling the tax return. The taxpayer thus argued that they had been delivered the assessment of additional corporate income tax for 2013 only after three years had already elapsed since the actual commencement of the tax inspection.

The SAC stated that if the tax administrator intends to comprehensively inspect the facts decisive for the correct determination and assessment of a particular tax, they must choose a procedure that allows them to take evidence. In this respect, the Tax Procedure Code does not recognise any procedure where this is possible other than a tax inspection and a procedure to remove doubts. Search activities are not such procedures.

The SAC agreed that the tax administrator's activities in the period from November 2014 to the drafting of the protocol on 2 April 2015 significantly overstepped the boundaries of a search activity, which consequently had the character of a tax inspection. By writing a protocol, the tax administrator only remedied their formal shortcomings. As a result, the tax was assessed after the deadline for assessing tax had already expired, meaning that the tax authority no longer had the power to assess the tax for the relevant tax period.

The SAC's decision thus once again shows how crucial breaches of the tax procedure rules and the overstepping of boundaries of tax administration procedures can be in the final outcome of tax proceedings (for more information, see also the article What constitutes a tax inspection?). If a tax inspection based on which an additional tax was assessed was preceded by the tax administrator's search activity, we recommend always watching out and assessing whether this may affect the procedural defence strategy.

Sdílet článek