During a tax audit, the tax authority must ensure that fundamental principles are respected, as compliance with these principles affects the legality of the audit process. In this second article on the topic of tax audits, we will therefore outline and clarify the fundamental principles of tax audits, drawing on case law.
It may not be obvious at first glance, but the fundamental principles of tax audits are also linked to the rights and obligations of the audited taxpayer. A violation of a principle may result in a violation of the audited entity’s rights. Consider, for example, a situation where the tax administrator conducts a repeat tax audit without a legal basis for doing so. By acting in this manner, the tax administrator would violate the principle of legal certainty and, at the same time, infringe upon the rights of the audited entity. The audited entity has the right to have a tax audit conducted only if the statutory conditions are met.
When conducting a tax audit, the tax administrator is bound by the constitutional principle of legality, which is clearly expressed in Article 2(2) of the Constitution of the Slovak Republic: “State authorities may act only on the basis of the Constitution, within its limits, and to the extent and in the manner prescribed by law.” However, one may ask whether the tax/customs office is a state authority and whether Article 2(2) of the Constitution of the Slovak Republic applies to it. The group of state authorities consists of state administration bodies. Act No. 35/2019 Coll. on Financial Administration and on Amendments to Certain Acts explicitly states in Section 2(1) that tax and customs offices are state administration bodies in the field of taxes, fees, and customs. From this principle, it follows that the tax administrator may not act beyond the scope of its statutory duties.
Pursuant to Section 44(1) of Act No. 563/2009 Coll. on Tax Administration (hereinafter the “Tax Code”), a tax audit is conducted to the extent strictly necessary to achieve its purpose. This means that the tax administrator must not unduly burden the audited entity by conducting a tax audit. At the same time, in accordance with the principle of using the most appropriate means, the tax administrator must use means to determine the tax that burden the taxpayer as little as possible and through which the purpose of the tax audit can be achieved as quickly and economically as possible.
The tax administrator cannot conduct a tax audit indefinitely. In accordance with the principle of acting within a reasonable time, the legislature should ensure that a time limit is always set for resolving the matter.
Setting a time limit is in the interest of the audited entity so that it can make the necessary arrangements. The principle of proceedings within a reasonable time can be derived from Article 48(2) of the Constitution of the Slovak Republic, pursuant to which everyone has the right to have their case resolved without undue delay. In the case of a tax audit, the legislature establishes a one-year statute of limitations from the date of its commencement. The statute of limitations means that the right to conduct a tax audit expires if it is not carried out within the prescribed period.
The principle of proportionality is also related to the time limit for conducting a tax audit. The Constitutional Court of the Slovak Republic commented on the principle of proportionality in tax proceedings in Resolution III.ÚS 247/09 as follows: “Any intervention by a public administration body into the private-law sphere of a legal entity is governed by the universal principle of proportionality, and the establishment of time limits for conducting a tax audit is an expression of the principle of proportionality. The Supreme Court states that a tax audit may continue after the expiration of the statutory deadline for its conduct only with the consent of the taxpayer concerned. Otherwise, the tax administrator’s conduct may create an unlawful situation in the form of an illegal intervention by a public administration authority.”
The tax administrator is also bound by the principle of legal certainty, which includes the requirement for the predictability of the tax administrator’s conduct. The Constitutional Court addressed a violation of this principle in its ruling, Case No. I.ÚS 314/2015, as follows: “If the tax administrator conducts a tax audit despite the existence of a statutory obstacle (expiration of the statute of limitations, repeated tax audit without meeting the statutory conditions) that prevents the tax audit from being conducted, this constitutes a violation of the principle of legal certainty in tax proceedings and, therefore, an unlawful interference with the rights of the taxpayer.”
The principle of legitimate expectations is part of the principle of legal certainty. The significance of this principle lies in the predictability of the tax administrator’s decisions. The tax administrator must ensure that no unjustified differences arise when deciding on factually identical cases. The principle of legitimate expectations provides protection against unpredictable exercise of power.
The Tax Code also enshrines the principle of cooperation, which consists of both the right and the obligation of taxpayers to cooperate closely with the tax administrator. On the other hand, the tax administrator is also bound by this principle and must proceed in close cooperation with the taxpayer when administering taxes. The tax administrator and the audited entity must cooperate during the conduct of a tax audit.
The essence of the principle of instruction lies in the tax administrator’s role to inform the taxpayer and other persons of their procedural rights during a tax audit and the consequences of failing to fulfill procedural obligations.
In accordance with the principle of equality, taxpayers have the same rights and obligations in tax administration.
The principle of presumption of innocence is also applied during a tax audit, which the Nitra Regional Court (11S/125/2011) defined as follows: “When conducting a tax audit, the tax administrator proceeds from the presumption of innocence, meaning that until proven otherwise, the taxpayer is regarded as innocent from the perspective of tax regulations; and in the event that facts are discovered resulting in an adjustment of the tax liability compared to the tax return, the tax administrator is obligated, in accordance with legal regulations, to prove to the taxpayer that they acted incorrectly and that they will bear the consequences of their actions.”
Tax audits are also governed by the principle of objective truth, under which the tax administrator is not obligated to conduct an investigation until the taxpayer’s claims stated in the tax return are proven and confirmed, but it is up to the taxpayer to prove that the facts affecting the correct assessment of the tax and the information stated in the tax return are complete and accurate.
The principle of free evaluation of evidence also applies during a tax audit. The tax administrator evaluates the evidence at its discretion, considering each piece of evidence individually and all evidence in their mutual context, while taking into account everything that has come to light during the tax administration. Under the Tax Code, anything that may contribute to the determination and clarification of facts decisive for the correct assessment of tax and that is not obtained in violation of generally binding legal regulations may be used as evidence. This includes, in particular, various submissions by taxpayers, witness statements, expert opinions, public documents, tax audit reports, minutes of on-site investigations and inspections, mandatory records and registers maintained by taxpayers, and supporting documents.
Another principle characteristic of the conduct of a tax audit is the principle of non-publicity, which, simply put, means that a tax audit is not open to the public.
Also very important is the principle of two-instance proceedings, which is implemented through an appeal as a regular remedy; its purpose is to enable a superior authority within the public administration system to review the legality of a decision made by a subordinate authority in most administrative matters.
An expression of the two-tier nature of administrative proceedings is the obligation of the appellate authority to review the contested decision in its entirety and, if necessary, to supplement the proceedings to date or to remedy any identified defects. However, this principle must also be understood to include the right of the taxpayer to have their case heard within the scope defined by the relevant legal norms and subsequently decided by two independent instances of the competent authorities. It is absolutely unacceptable for persons serving within the second-instance authority to be involved in any way in proceedings conducted at the first instance. If such independence were not observed, it would constitute a violation of the taxpayer’s right to a two-instance proceeding, because if the second-instance authority intervenes in the proceedings as early as the first instance, this precludes an independent review of the first-instance decision.
Within the framework of tax proceedings, it is certainly possible to identify other principles that stem from general legal principles, whether from constitutional law, administrative law, or the like.
Adherence to the principles of tax proceedings—including, for example, during tax audits and subsequent proceedings—is significant, as proceedings conducted in violation of these principles will often suffer from procedural defects that may affect the legality of the tax proceedings as well as the decision issued in those proceedings.
The law firm Hronček & Partners, s. r. o. has extensive experience in representing clients in tax audits involving various types of taxes, where it assists taxpayers in defending and asserting their rights and protecting their interests against improper or unlawful actions by public authorities. In the area of tax matters, we work closely with a recognized tax expert, tax advisor Ing. Mgr. Martin Tužinský, PhD. If you are facing a tax-related issue and need assistance, our experts are ready to lend a helping hand.
