Reasonableness of penal fiscal proceedings initiated to suspend the limitation period for a tax liability subject to examination by administrative courts
On 24 May 2021, the Supreme Administrative Court passed a long-awaited resolution on instrumental initiation of penal fiscal proceedings for the purpose of suspension of the limitation period for tax liabilities.
The Court, represented by seven judges, held that reasons for opening penal fiscal proceedings were subject to examination by administrative courts.
Practice of tax authorities
It is a common practice at the moment, which is frequently objected to by taxpayers, that penal fiscal proceedings are opened just before the end of the limitation period for tax liabilities. Penal fiscal proceedings are opened alongside pending tax proceedings. Frequently, the sole purpose of such a step is to suspend the period of limitation.
In this way the tax authorities gain more time to end the tax proceedings.
Discrepancies in rulings
So far the judicature approached the issue of examining the reasons for initiation of penal fiscal proceedings by administrative courts in two ways.
The first approach was that administrative courts were not competent to investigate whether penal fiscal proceedings were opened instrumentally because this was beyond the scope of their cognition. Such a position was expressed, without limitation, in the rulings of 24 November 2016 (case I FSK 759/15) and of 9 November 2018 (case I FSK 2149/16).
According to the second approach (represented in the rulings issued by the Supreme Administrative Court on 30 July 2020, case I FSK 42/20 and case I FSK 128/20), the reasons underlying initiation of fiscal proceedings were subject to examination by administrative courts. Under this approach, artificial measures taken by authorities competent to initiate penal fiscal proceedings, taken for the sole purpose of extending the time for issuance of a tax decision, must not be the basis for effective suspension or stoppage of the limitation period.
The latter approach was favourable for taxpayers and offered hope that tax authorities would not abuse their competence and instigate penal fiscal proceedings with the sole aim of suspending the limitation period.
Resolution of the Supreme Administrative Court
In the resolution of 24 May 2021, case no I FPS 1/21, the Court supported the latter approach and held that administrative courts of first instance were obliged to examine whether a procedural measure of opening penal fiscal proceedings in a case involving a fiscal crime or offence was not used solely for the purpose of suspension or stopping the limitation period. In this context the Court pointed out that the current legislation did not offer legal means under the criminal procedure to enable assessment of reasonableness of initiation of penal fiscal proceedings.
The Supreme Administrative Court, in the oral reasons for the judgment, mentioned that examination of reasons behind penal fiscal proceedings was only possible after comprehensive analysis of the circumstances of a specific case (e.g. approaching end of the limitation period, evidence taken in previous tax proceedings, activities of the tax authorities). The Court held that the lack of actual activities undertaken by authorities involved in preparatory procedure after instigation of the proceedings may indicate the absence of an intention to accomplish goals of penal fiscal proceedings, and may thus indicate that the proceedings are intended to prolong the limitation period.
Importantly, the Court stated that tax authorities are obliged to explain that their intention in a specific situation was not merely to disrupt the limitation period. Thus, already at the stage of issuing a decision in tax proceedings, the tax authorities should provide reasons for initiation of penal fiscal procedure, and analyze the circumstances which underlie the initiation.
Consequences of the resolution
The resolution supporting the possibility of examining reasons behind initiation of penal fiscal proceedings may prove a turning point for the practice of instrumental initiation of such proceedings by tax authorities just before the end of the limitation period.
Moreover, the resolution may be crucial for all taxpayers who are in dispute concerning settlement periods potentially barred by limitation.
If you are in the course of pending proceedings before tax authorities or administrative courts, it is recommended that the arguments presented are supplemented to include circumstances of instrumental initiation of penal fiscal proceedings, particularly in a situation where the proceedings were opened just before the end of the limitation period for the tax liability.
As a consequence of the resolution passed by the Supreme Administrative Court, a change of the practices adopted by tax authorities may also be expected. To avoid a complaint of instrumental initiation of penal fiscal proceedings, the authorities will be more active in the course of penal fiscal proceedings. On the other hand, taxpayers will be in a position to assert their rights more effectively in a situation where the penal fiscal procedure is initiated solely to prolong the tax proceedings.