Tax penalty with a prison sentence on top?

The dispute concerned an Italian taxpayer who failed to pay properly reported VAT on time. Under Italian tax law, the taxpayer was charged a penalty of 30% of the unpaid tax (a flat penalty for the default). The tax proceedings were closed and the taxpayer paid the first instalments. However, as the owed amount exceeded the limit stipulated by the criminal code, criminal proceedings were also initiated against the taxpayer, with a possible sentence of up to two years of imprisonment.

 

As the Charter of Fundamental Rights of the EU prohibits double punishment for the same act (ne bis in idem), and as the VAT Directive requires member states to adopt measures to prevent tax evasion, the Italian court referred to the CJEU for a preliminary ruling on whether it was possible, under the EU Charter of Fundamental Rights, to initiate criminal proceedings although the taxpayer had already been charged a final administrative penalty.

 

The CJEU first held that the ne bis in idem principle stipulated by the EU Charter generally applied to all types of sanctions of a criminal (punitive) nature, irrespective of how they are named or viewed by the member state’s law. A flat 30% penalty fine for a failure to pay tax clearly is of a punitive nature. According to the court, however, the ban on double punishment is not absolute and can be limited by the state’s legitimate effort to combat tax evasion in the VAT area. Applying criminal-law sanctions concurrently with administrative sanctions (of a punitive nature) is possible, albeit subject to strict conditions. The states must namely ensure that:

The judgement is rather pragmatic: on one hand, the CJEU confirmed the possibility of concurrently, or rather subsequently, applying administrative and criminal sanctions, while on the other hand it suggested that punishing of taxpayers has its limits and cannot be excessive. In the Czech context, it will be interesting to see whether the judgement will have any effect on the approach applied by tax administrators and, in particular, public prosecutors, as there is now a visible trend towards prosecuting tax-related offences more often.