On 30 July 2020, the Supreme Administrative Court (the ‘SAC’) upheld the favorable rulings of the Provincial Administrative Court in Wrocław, according to which administrative courts are entitled to examine whether the initiation of fiscal penal proceedings was instrumental and, consequently, whether the tax authorities abused the law. The judgments may be of significant importance to all taxpayers who are parties to disputes regarding potentially time-barred periods.
Background
The SAC judgments concerned cases which were previously settled by the judgments of the Provincial Administrative Court in Wrocław (the ‘PAC’) regarding tax decisions in which the tax rate applied by the taxpayer in years 2012-2013 had been questioned.
One of the objections raised by the taxpayer at the stage of the proceedings before the PAC related to the expiry of the limitation period for VAT liabilities being the subject of the dispute.
In response, the tax authority argued that the taxpayer was served with a notice on the initiation of an investigation into the disclosure of false information in the corrections of VAT-7 returns for the period from January 2012 to September 2013. Therefore, the limitation period was suspended pursuant to Articles 70 § 6 and 70c of the Tax Ordinance.
Position of the court - the PAC
The court of the first instance revoked the contested decisions and discontinued the proceedings, as it considered as justified the objection concerning the expiry of limitation period.
Above all, the PAC pointed out that since certain legal institutions in the field of fiscal penal law were included in the Tax Ordinance, they became an element of tax law institutions. Consequently, this entitles administrative courts to assess their effects.
And so, if in the case at hand the taxpayer was a diligent and cautious entrepreneur (having obtained individual tax rulings on the basis of which it applied a specific VAT rate) - and therefore no fault can be attributed to the taxpayer - the possibility of initiating and conducting fiscal penal proceedings was excluded.
Thus, the court of first instance concluded that the initiation of fiscal penal proceedings was instrumental in this case and could not have resulted in the suspension of the limitation period for the tax liability.
Position of the court - the SAC
Cassation appeals submitted by the tax authority against the judgments of the PAC were dismissed by the Supreme Administrative Court (ref. no. I FSK 128/20 and I FSK 42/20).
In an oral statement of reasons, the SAC underlined that it did not share all theses of the PAC judgements. However, the SAC agreed with the main conclusion that administrative courts are entitled to verify whether the fiscal penal proceedings were initiated justifiably, i.e. whether they are connected with the case and the fact of their initiation does not constitute an abuse of law by the tax authorities.
At the same time, the SAC explained that the initiation of fiscal penal proceedings should be assessed in particular in terms of possible breach of the principle of taxpayers' trust in tax authorities.
On this basis, it was found that if the proceedings were initiated instrumentally, administrative courts are entitled to question its effect in the form of suspending the limitation period for the tax liability.
Impact on other cases
The SAC judgments accepting the administrative courts’ right to examine the legitimacy of initiating fiscal penal proceedings may constitute a turning point in the counteract against the observed practice of initiating such proceedings shortly before the expiry of the limitation period of tax liabilities.
The arguments mentioned in the currently expected written reasoning of the SAC judgments should also serve as an important weapon for taxpayers who are in disputes related to tax liabilities for time-barred periods.
In a broader perspective, the SAC ruling is the first piece in the judicial doctrine of prohibiting the abuse of law by the tax authorities, which may constitute a reasonable counterbalance to the instruments currently used against taxpayers (for example - such as introduced into the Tax Ordinance and the increasingly applied clause against tax avoidance).
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