Where Does Tax Risk End and Criminal Liability Begin?

 

When tax planning or abuse of law can grow into a criminal law problem and what role proof of culpability plays

What risks are posed by incorrectly set transfer pricing and management inactivity when dealing with intra-group transactions

Under what circumstances executives can rely on the advice of an expert and how the conclusions of criminal proceedings are reflected in tax disputes

 

The boundary between legitimate tax planning, abuse of law and criminal liability remains one of the most discussed issues in tax practice. These topics were the focus of the 9th annual conference on Criminal Tax Law, which took place at the Faculty of Law of Charles University. Expert discussions focused mainly on the development of case law, the liability of statutory bodies, transfer pricing and the relationship between tax and criminal proceedings.

Abuse of law and limits of criminal sanctions

One of the most important topics was the possibility of criminal penalties for abuse of tax law. In particular, there was a discussion about whether conduct that does not formally violate a specific legal provision can still be assessed as a criminal offence.

Attention was also paid to the development of criteria for assessing the purpose of transactions. While in the past, the assessment of abuse of law emphasized obtaining a tax advantage as the sole purpose of the negotiations, the expert discussion pointed to a shift towards the assessment of the predominant or sufficiently significant purpose.

This development may be particularly important for companies using holding and other group structures. However, the mere finding of abuse of law does not automatically mean that the characteristics of a criminal offence have been met. Illegality and proof of culpability are always essential for criminal liability. The existence of the so-called “cover-up act” is important for their fulfilment.

Transfer pricing and management responsibility

A significant part of the discussion was devoted to transfer pricing between related companies. In addition to the correct setting of intra-group transactions, the issue of management liability in cases where the company has not addressed the issue of transfer pricing for a long time was raised.

The experts drew attention in particular to situations where management is aware of the existence of significant intra-group transactions and the need for their tax assessment, yet does not take any measures. The discussion also included experience from foreign practice, where similar inaction by management was the subject of criminal proceedings.

For Czech companies, it is especially important to continuously assess transfer pricing, document the economic substance of transactions and clearly define responsibilities. For example, intra-group management services deserve special attention, where it is necessary to document the actual provision of the service and the benefit for the recipient.

When can you rely on the advice of an expert?

What about the liability of executives and other persons who rely on the opinions of legal or tax advisors for tax decisions?

The discussed decisions of the Supreme Court have shown that expert advice can be important in assessing fault. However, the mere claim that a person has consulted an expert may not be sufficient.

The specific circumstances are essential, in particular whether the consultation actually took place, what information the advisor had at his disposal and whether his conclusions could reasonably be relied upon.

Criminal judgments and their impact on tax proceedings

The conference also raised the question of the extent to which tax administrators are bound by the conclusions of criminal courts. The discussion mainly touched on the possibility of additional tax assessment on the basis of a final criminal judgment, the use of evidence from criminal proceedings and the procedural rights of companies that were not participants in it.

The current case law of the Supreme Administrative Court and the Constitutional Court plays an important role here. Experts have pointed out that some issues remain the subject of different legal interpretations, especially with regard to the binding nature of the criminal court's factual conclusions and the possibility of challenging them in tax proceedings.

Cross-border tax fraud and European cooperation

The programme also included a presentation by representatives of the European Public Prosecutor's Office (EPPO). On specific cases of cross-border VAT fraud, they presented problems in proving the actual movement of goods, determining the place where the tax liability arises and identifying persons involved in fraudulent retail chains.

The discussion confirmed the importance of international cooperation in investigating cases that go beyond the borders of individual EU Member States. Electronic evidence and coordination of investigative actions across countries play an important role in this.

What does this mean for companies?

The conclusions of the conference show that in tax risk management it is not enough to assess only the formal compliance of transactions with legal regulations. Their actual economic content, the verifiability of decision-making processes and the responsibility of persons who decide on transactions are becoming increasingly important.

It is therefore essential for the management of companies to pay particular attention to the setting up of intra-group relationships, the documentation of significant transactions, the continuous evaluation of tax risks and the timely involvement of qualified professionals.