7 questions – 7 answers on tax compliance inspections
The tax authority can inspect taxpayers in two ways: conducting tax audits and tax compliance inspections. – Currently, tax compliance inspections account for nearly 93% of tax authority investigations. Deloitte experts have collected the main features and risks of this procedure, which are important for all taxpayers to be aware of due to the increased number of inspections.
Budapest, 4th October, 2022.
1. What is the difference between a tax compliance inspection and a tax audit?
An important difference is that a tax compliance inspection does not create a period closed by audit. This means that the tax authority may conduct a new audit against the taxpayer regarding the same period and facts. Also, the tax authority cannot assess a tax difference or impose a tax penalty as a result of the tax compliance inspection, but it is entitled to impose a default penalty.
In extreme cases, this alone can be a heavy burden on taxpayers. For example, in a case of the Court of Justice of the European Union, a more than HUF 100 million default penalty was imposed on a taxpayer, who was considered to be a high risk taxpayer in a tax compliance inspection for a number of administrative errors.
– dr. Dávid Ramocsa, attorney at the tax litigation team of Deloitte Legal Law Firm explains.
In this case the court found that the taxpayer was right, and the penalty was to be reduced.
2. What can be investigated by the tax authority during a tax compliance inspection?
The fundamental difference is that unlike in a tax audit, in a tax compliance inspection the tax authority examines the settlement of certain tax liabilities but not all during the given period. However, the tax authority has a wide range of rights in this procedure, too. Among others, it can collect information on the validity of the data disclosed in tax returns, the circumstances of the business events and, for example, check if the tax return has been properly completed. The precise scope of the inspection is defined by the credential letter, which is often issued as a "general credential letter", so that the scope of the inspection may be close to that of a tax audit.
3. What can the tax authority oblige you to do in the course of a tax compliance inspection?
The tax authority acts as a negotiating partner in tax compliance inspections, drawing the taxpayer's attention to any unlawful tax treatment practices and the possibility of corrections through self-revision. It is important to note, however, that a self-revision can only be filed on the basis of the taxpayer's own decision and that the tax authority cannot impose any obligation to do so. It is advisable to note that self-revisions are becoming increasingly costly for taxpayers, as the amount of the self-revision surcharge is adjusted to the central bank base rate.
4. Can a tax compliance inspection turn into a tax audit?
The tax authority may initiate a tax audit for the same period without limitation after a tax compliance inspection. This may be the case as the tax authority often conducts compliance inspections in order to gather information. If they reveal information that could be the basis for a tax audit, they have every possibility to initiate it, as a tax compliance inspection does not create a period closed by audit.
In one case, for example, the tax authority imposed default penalty during a tax compliance inspection in relation to an unregistered employee, and the taxpayer filed no appeal. However, the procedure did not end there, as the tax authority initiated a tax audit based on the same facts. In this audit the tax authority now also assessed the tax shortage, imposed a tax penalty and a late payment surcharge six times the value imposed in the tax compliance inspection.
– dr. Ákos Balázsi, attorney at the tax litigation team of Deloitte Legal Law Firm explains.
5. Can the tax authority later use the statement I made during a tax compliance inspection?
The tax authority can use the statements made during the compliance audit, and indeed it usually does in a following tax audit. It is therefore important to be careful when making a statement during these inspections, as it may reoccur in subsequent proceedings. In a subsequent tax audit however, it is much more difficult to dispute statements made earlier.
6. Is the tax authority bound by its findings made in tax compliance inspections in following procedures?
According to the judicial practice, if the tax authority classifies the legal relationships based on their content, during a compliance inspection, this is also binding for the tax authority in a subsequent tax audit. However, the case law has also established that a subsequent audit may change the classification of a legal relationship, but until that happens, the tax authority is bound by its previous classification.
7. Why should a tax compliance inspection be taken seriously?
In this type of procedure, the tax authority does not act as a sanctioning authority, but as a "partner authority" orienting the taxpayer towards compliance with the law. However, it is the taxpayer's responsibility to ensure that its interests are taken into account as widely as possible. It is therefore also worth examining whether the tax treatment proposed by the tax authority, either for the past or even for the future, is indeed required by law, and is the most optimal one out of the available tax alternatives and treatments.
+1 What should you look out for if your company is subject to a tax compliance inspection?
A compliance inspection is a fast, focused procedure. It is essential to allocate sufficient expertise and capacity to the process. It is also worth asking the question at the outset of an inspection: why is the company subject to this procedure? The tax authority has a complex and effective risk management selection system. If a tax compliance inspection has been opened, there must be a reason.
It is worth providing the tax authority with all the documents supporting the taxpayer's position, and also to provide a statement to help them understand the tax treatment chosen. These can be relied on in the event of a potential tax audit and the tax authority is also obliged to assess them.
– summarised dr. Dávid Ramocsa.