SAC: filing additional tax return a preferred option to initiating tax inspection
Where the tax authority has reason to expect that additional tax will be assessed, taxpayers must be given a chance to correct their error by filing an additional tax return. Typically, these are cases where the conclusions of a single tax inspection can be applied to numerous periods. The Supreme Administrative Court (SAC) thus confirmed our opinion that the tax administrator cannot immediately initiate a tax inspection, which, apart from the 20% penalty, also involves more time and effort on the part of the tax administrator.
In its recent judgment (7 Afs 229/2018) the SAC dealt with a case where a tax administrator, based on the results of a tax inspection of selected months from 2011 to 2014, initiated a targeted tax inspection of other, not yet inspected periods. In the first tax inspection, the tax authority disagreed with the VAT qualification of selected supplies of goods: at the heart of the dispute was whether the standard VAT treatment or a reverse charge should be applied to the goods in question. The taxpayer carried out similar trading in other periods as well. The tax administrator first checked, by means of an on-site investigation, which periods the trading involved, and subsequently initiated a tax inspection of these periods, targeted on the disputed supplies.
Courts of both instances disagreed with the tax administrator’s approach and noted that the hierarchy of procedures as per the Tax Procedure Code has to be followed, with a voluntary correction of errors by filing an additional tax return clearly being preferred over a tax inspection. Thus, if a tax administrator becomes aware, otherwise than by a tax inspection of the period in question, that additional tax should be assessed, then the tax administrator has to first call upon the taxpayer to file an additional tax return. If the tax administrator fails to do so and immediately initiates a tax inspection, such an inspection is unlawful, and shall be viewed as if it had not happened at all. It therefore can also not have any effect on restarting the time limit for assessing tax. The courts also refused to accept the tax administrator’s argumentation that the unlawfulness of the tax inspection might be rectified (and the inspection considered lawfully initiated) by not assessing the penalty in the end. No such option, however, is allowed by the Tax Procedure Code.
Both courts’ decisions are welcome, for numerous reason. After many months, our objections proved to have been justified. These objections then led to the discontinuation of an unlawful tax inspection. We are also seeing some indications that the courts’ conclusions are being respected, as in practice, we have already come across the first calls to file additional tax returns.