The Legal 500

In the Czech Republic, a country with a continental legal system, court decisions do not set precedents as they do in common law jurisdictions. Nevertheless, court decisions in tax proceedings may not be ignored, as to a considerable extent they modify the interpretation of legislation.  Without knowledge of court decisions one may not succeed in tax proceedings. Recently, two substantial decisions of the Czech Constitutional Court concerning tax reviews have been published.

Recently, decisions of the Constitutional Court concerning the authorisation of a tax administrator to commence a tax review, and the definition of the period in which the review may be commenced, have been under discussion. The rulings are essential with respect to the decision of the Supreme Administration Court Ref. No. Afs 134/2006-57, which in fact states that decisions of the Constitutional Court are precedents: "If the Constitutional Court is the major interpreter of the Constitution, an administrative body is obliged to submit to its opinions as any procedure to the contrary would result in the unpredictability of its decisions".    

 

Though a tax review is governed by the Administration of Taxes Act (the so-called Tax Procedure Code), this legislation must be applied in light of the related case law. The general provisions of the Tax Procedure Code on the basic principles of tax proceedings also have significance here.  These general principles are often a key element in the arguments of tax payers in defence of their rights in the course of a tax review, or in the subsequent application of recourses against payment assessments. It is mainly with reference to these basic principles that administration courts have set many important rules in recent years, which were often not directly obvious from the wording of the Tax Procedure Code. The following examples illustrate the important role of case law in tax proceedings.  

 

 

Tax Review

 

The Tax Procedure Code does not define a tax review. It only describes its purpose, in that by means of a tax review a tax administrator ascertains and reviews the tax base or other circumstances decisive for correctly qualifying taxes. In the reasoning of one ruling (File Ref. I. ÚS 1835/07) the Constitutional Court stated that "in tax proceedings a tax review represents the most apparent interference with the autonomous sphere of an individual approved by law". Regarding the investigative power of tax authorities, the commencement of a tax review was compared to the commencement of criminal proceedings. The Constitutional Court deduced that "a tax review may not be commenced if no reasonable justified ground exists to believe that a relevant entity is alleged to have failed to observe its tax duty or to have observed it in an insufficient extent".  

 

However, it is the conclusion which is subject to technical debate. Even the panel of the Constitutional Court was not unanimous.  The comparison of tax proceedings to criminal proceedings was, amongst other things, rejected by Judge Ivana Janů in her dissenting opinion. It will certainly be interesting to see the further development of case law. The first response is the judgment of the Supreme Administrative Court, File No.5 Afs 43/2008-60, under which a suspicion justifying a tax review may only be based on whether when completing the form for a supplementary tax return a businessman reports a loss of millions of Czech crowns in the period under review, which is carried forward to the following years.   

 

Time-Limit for Commencing a Review

 

For a businessman, determining a day when a review is to be commenced is paramount with regard to the consequences of a commenced tax review. These consequences include the fact that a supplementary tax return relating to the period under review may no longer be filed after a tax review is commenced.  

 

In its decision File No. 2 Afs 69/2004-52 the Supreme Administrative Court defined the time-limit for commencing a tax review as the day when a tax administrator actually commences reviewing the tax base or other circumstances decisive for determining taxes.

 

Suspending the course of a three-year lapse period for assessing taxes is another key consequence of a commenced tax review.  Defining the beginning of this period was the subject-matter of another principal ruling of the Constitutional Court (File Ref. I. ÚS 1611/07). In the ruling, the Constitutional Court confirmed an applicant's arguments that a three-year period for assessing taxes for a tax period does not start running at the end of the year in which the relevant tax return is filed but at the end of the year in which the tax duty arose. For example, if a tax duty arose in 1998, under this interpretation the tax could be assessed no earlier than 1999, and consequently the three-year lapse period starts to run at the end of this year and expires at the end of 2002. However, in the same case, under the new method of calculating the period, the three-year period started to run at the end of 1998 and expired on 31 December 2001. The consequences of this new calculation of the period affect the commencement of a tax review and the impossibility to file a supplementary tax return after the period expires.   

 

Under this ruling, whose conclusions are basically respected by tax administrators, tax entities have a new possibility to seek the termination of a tax review commenced after the newly determined period has lapsed, and complete an already filed recourse by pleading that the decisions issued based on tax reviews commenced after the new defined three-year period has lapsed are unlawful.

 

Prohibition of a repeated review

 

The case law of the Supreme Administrative Court may be considered as settled in this respect. When a tax administrator reviewed the tax base in the past, it could not repeat it automatically if no new circumstances were ascertained. This basically means that a tax payer's tax for one tax period may be reviewed only once by a tax administrator. This prohibition applies even if the review is done outside the scope of a tax review.

 

Place and term of review

 

Under the Tax Procedure Code a tax review is conducted in a businessman's seat or at a place which most suits the purpose of the tax review. It is at the tax administrator's discretion to select a place where a tax review is conducted, though this selection is not unlimited.  For example, the extent of documents under review, the time-consuming nature of the review and availability of the place are considered. The selected place should be a minimum burden for the tax payer.  Similar principles apply to the term of the review.  

 

The legislation does not directly set any limit within which a review must be completed. The imbalance between the statutory limits for acts by tax payers and the absence of limits for acts by tax administrators was criticised by the Supreme Administrative Court (Ref. No. 2 Ans 1/2005).  Amongst other things, criticism was expressed in its statement regarding instruction D 144 Ref. No. 252/34859/1996 on determining limits for terminating reprimanding proceedings by means of which certain administrative practices were established. It is binding on an administrative body when it has a statutory duty to consider and it should not deviate from it. An adverse principle would be arbitrariness and unjustified unequal treatment inadmissible under Article 1(1) of the Constitution. Consequently, s34c on protection against a tax administrator's failure to act was included in the Tax Procedure Code. The Ministry of Finance, with regard to the principles of "good administration", responded in instruction D-308 Ref. No. 43/18 392/2007-431 on setting time-limits in tax proceedings.

 

If the selected place or term of the review represents a considerable burden, an objection may be raised against the tax administrator's procedure. If a review is too long, the provisions of the Tax Procedure Code on the protection against failure to act may be applied. These provisions allow to move for proceedings against the tax administrator's procedure if the tax administrator does not issue a decision within six months of the day when the last step in the relevant proceedings was taken against the tax payer, or if the tax administrator does not issue a decision despite the source documents necessary for the decision being collected, or the tax administrator does not take action in the usual time-limit.   

 

 

Evidence

 

During a tax review the burden of proof is on the tax payer, who must prove the veracity of its statements concerning its tax duty.  In practice this means the tax payer must support all facts stated in the tax return. A statement proven by the tax payer's accounts is in most cases sufficient to meet the burden of proof.  The burden of proof may then be transferred to the tax administrator, who either accepts the proof of accounting records or must prove that the tax payer's accounts are implausible, incomplete, non-transparent or incorrect in relation to the stated facts. For example, if in a VAT inspection a tax administrator proves that reasonable doubts exist whether the stated taxable supply physically existed and was implemented, the burden of proof is transferred back to the tax payer (Ref. No. 2 Afs 24/2007-119). If the tax payer proves the implemented purchase or export of goods by referring to its accounts and the existence of the supplier and the unified customs declaration, the further existence of the taxable supply does not have to be proven, unless the tax administrator rebuts these proofs completely (Ref. No. 5 Afs 58/2006-41). 

 

Practical conclusions from other judgments concerning the evidence are as follows: a businessman may not be reprimanded for not bearing the burden of proof in tax proceedings concerning the tax duty of another tax payer, such as its supplier (Ref. No. 5 Afs 131/2004-45). A businessman may also not be required to prove facts which fall completely outside their influence and which may not be ascertained or reviewed by them due to statutory impediments or the factual state of affairs (Ref. No. 2 Ans 1/2005-57). And finally, a businessman need not prove what they do not state in their tax return (Ref. No. 1 Afs 16/2008).

 

Tax Review Report

 

A tax review terminates after it has been discussed and after a tax review report is signed or delivered.  With comprehensive reports a tax payer has the right to an adequate time-limit to study them. It is always useful to exercise this right. If tax payers do not want to take the opportunity to express their opinion on the report for any reason and they sign it directly, they may not claim that a comprehensive report could not be discussed at the meeting (Ref. No. 2 Afs 96 96/2007-134).

 

A small fraction of all judgments concerning a tax review have been cited in this article. Complex knowledge of these judgments is essential to succeeding in tax proceedings. Though the content may not always be generalised, case law today is a necessary part of a tax payer's arguments during a tax review.  

 

Should you need any further information concerning the matters discussed in this article, please contact PETERKA & PARTNERS v.o.s.

Jiri Cerny

Partner

Peterka & partners v.o.s. law office

Na Prikope 15, 110 00 Prague 1, Czech Republic

Tel.: (+420) 246 085 300
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email: office@peterkapartners.cz
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