In its judgment of 13 May 2020, the Supreme Administrative Court (SAC) rejected the previous years of practice by tax authorities as regards the so-called chaining of tax losses. A team of legal and tax specialists from BDO, led by Lenka Lopatová, Vít Křivánek and Jiří Šmatlák, challenged the current practice and the SAC agreed with them.
The Financial Administration illegally exceeded the length of tax audits, which normally should not go beyond three years in one loss-making year. This practice not only led to a high administrative burden for businesses, but ultimately extended the audit period practically "indefinitely". In practice, it was not unusual for the tax administrator to audit a business's tax obligations going as far back as 10 years.
Thanks to the judgment of the SAC, the established procedure of tax administrators is fundamentally changing. Businesses have now been assured that the tax administrator cannot require a longer audit period than stipulated by law. In addition, all businesses for which the tax administrator has been carrying out a tax audit for years with reference to so-called chaining losses have the opportunity to effectively defend themselves against this illegal practice.
What exactly was the dispute about?
In its judgment, the SAC dealt with the case of a domestic company that in 2008 and 2009 reported losses which it applied in its tax returns in subsequent tax periods in accordance with the Income Tax Act. The question at issue between the taxpayer and the tax administrator (hence the Regional Court) was whether the loss-making year 2009 or its deadline in which the tax administrator is entitled to audit the tax also affects the loss-making year 2008 or its deadline (by using the principle of so-called chaining of losses).
As stated in Section 38r (2) of the Income Tax Act, the deadline for determining tax for the tax period in which the tax loss arose, as well as the deadline for determining tax for the following five tax periods in which this loss can be claimed, expires simultaneously with the deadline for the last tax period in which the loss can be claimed. In the case under review, the deadline for 2008 expired at the same time as the deadline for the tax period from 1 April 2013 to 31 March 2014 (financial year). The same rule applies to the loss for 2009 - in this case, the last (reference) tax period was 2015.
Note that the 2009 tax period is, on the one hand, the year in which the loss occurred, and thus the first year determining the tax assessment deadline for this and the following five tax periods, but also the tax period in which the loss for 2008 can be claimed for the first time. The year 2009 therefore finds itself in a dual position.
The Financial Administration has long and consistently adhered to the interpretation of the so-called chaining of losses, i.e. a state, in light of the case under consideration, in which the 2009 tax loss directly affects the course of the 2008 deadline due to the dual position of 2009 indicated above. One of the consequences of this legal opinion could be an infinitely long deadline for carrying out a tax audit (if, for example, the taxable person declares a tax loss every fourth tax period).
The SAC heard our objections - according to it, from several possible interpretations of the provision of the Income Tax Act in question, it is necessary to clearly give priority to the one that completely prohibits the possibility of chaining. Another application would not respect the meaning of the legal standard in question and, above all, would disproportionately interfere with the legal certainty of taxpayers. According to the court, an interpretation admitting the so-called chaining of losses does not even have explicit support in the text of the law itself and represents only an inadmissibly expanding interpretation of the given provision.
As the SAC points out, the purpose of clearly setting the deadline for tax assessment and its preclusive nature is on the one hand to ensure legal certainty both on the part of taxpayers and the tax administrator, but also to create an incentive for the timely organisation of legal relations between the two parties. At the same time, this deadline represents a certain barrier to possible arbitrary interventions in the legal sphere of taxpayers, which could occur in its absence. We can reasonably assume that this appeal of the court is a clear reference in the proceedings under consideration to the laconic, passive and thus uneconomical and inefficient approach of the tax administrator, which audited the tax liability for the 2008 tax period more than 10 years after the end of this tax period.
What does the court decision mean for further practice?
First, it is finally not necessary to worry about tax audits in the order of five years or more with reference to the principle of so-called chaining of losses. Following the court's decision, the tax administrator is limited to a standard length of a maximum of three years. In conjunction, the chances of successfully defending tax claims before the tax administrator therefore increase, as it will not be necessary to prove facts, for example, up to 10 years or more old. The court's opinion should also help make tax proceedings faster and more efficient, as the tax administrator will no longer be able to legitimately demand "extended" deadlines for carrying out tax audits with reference to the principle of so-called chaining of tax losses. Finally, the court ruling showed that justice in taxes still exists.
Lenka Lopatová, Vít Křivánek, Jiří Šmatlák
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