SAC: Justifiable grounds for waiving penalties broader in practice than specified in GFD guidance

In the case in question, the SAC examined in more detail the interpretation of the provisions of the Income Tax Act allowing the tax authority to waive the penalty for the failure to report exempt income if such a failure occurred on grounds justifiable in the light of the circumstances of the case. The penalty amount ranges between 0.1% and 15% of the unreported income.

The involved taxpayer had sold his ownership interest in a corporation, which was exempt from tax, but without submitting a notice of exempt income of natural persons until called upon by the tax administrator. As a result, the obligation to pay a penalty of 10% of the sum of exempted income arose to this taxpayer. The taxpayer asked for a waiver of this penalty on the grounds that his health had deteriorated sharply, with him having to undergo dialysis several times a week. However, the tax administrator did not find this reason justifiable, referring to the GFD’s Instruction D-28 that specifies four justifiable reasons. It concluded that the facts alleged by the taxpayer did not constitute any of the grounds specified in the guidance. 

According to the SAC, the waiver of a penalty is not an option in a situation where the notice has not been filed intentionally or on the grounds of passivity or irresponsibility. On the other hand, the court also stated that the law intentionally does not specify justifiable reasons, to allow the administrative bodies to respond to the specific circumstances of individual cases. The GFD’s methodological instruction is not relevant for subsequent judicial review purposes. Hence the court concluded that in the given case, the described health problems of the taxpayer could be regarded as serious enough as to constitute justifiable grounds for the waiver of the penalty for the failure to comply with the above reporting duty. 

In practice, the judgment along with its commentary may affect not only the waiver of the penalty for the failure to report exempt income but also the assessment of circumstances for the waiver of default interest, interest on the deferred tax amount and the penalty for failure to file a VAT ledger statement where the legislation and related GFD’s methodological guidance have been constructed in a similar manner. When waiving such sanctions, the tax authorities should always take into account the individual circumstances of the case and consider whether they constitute justifiable grounds. The GFD's interpretation contained in the instruction can only help deal with the issue but cannot cover all conceivable life situations.