New methodological guidance on procedures following expiry of tax assessment period

The Extended Chamber’s ruling produced two key conclusions regarding the expiry of the time limit for tax assessment and changed existing administrative practice.

The first key conclusion is that, once the time limit has expired, the tax administrator cannot assess the tax. This has practical implications particularly where the tax administrator has initiated an inspection of a taxpayer’s tax return claiming a VAT deduction or a tax reduction and has failed to issue a decision within the time limit for tax assessment. Whereas previously, in such cases, the tax administrator accepted the taxpayer’s assertion and paid out the VAT deduction or reflected the overpayment claimed in the tax return in the taxpayer’s tax account, under the new rules the proceedings will be discontinued without ruling on the tax.

The financial administration’s guidance outlines how to address the expiry of a statutory time limit, or the (subsequent) discovery that such a time limit has expired, across the various stages of proceedings (first instance proceedings, appellate proceedings, and the time thereafter). The General Financial Directorate has prepared a practical annex for specific scenarios, featuring clear flowcharts that illustrate the applicable procedures.

In connection with the change in approach, the guidance also reflects the financial administration’s conciliatory approach towards taxpayers: under the new rules, if the tax authority fails to assess a VAT deduction within the statutory time limit, the taxpayer may in principle be required to seek compensation from the state for the resulting loss. Therefore, in line with the principles of procedural economy and good administration, the financial administration will not demand refund of any advances for VAT deduction granted or portions of VAT deductions not yet final and effective. This means that the taxpayer shall keep any deductions thus granted, without the need to pursue a claim under the Act on State Liability for Damage Caused in the Exercise of Public Authority.

The second key conclusion of the Extended Chamber relates to situations in which the objective time limit for tax assessment may be extended to eleven years instead of the standard maximum of ten years. Where a taxpayer submits an additional tax return claiming a lower tax liability within the final twelve months of the ten year objective period, both the court’s decision and the new guidance allow the tax authority to carry out an inspection. However, the outcome of such an inspection may not result in a higher tax liability; it may only lead to the partial acceptance of the claim stated in the additional return or to its rejection. For these cases, the guidance also outlines several possible scenarios for how an inspection may be concluded, given the expiry of the tax assessment period.