E-journal: tax law (June 2015)
This GLIKMAN ALVIN’s e-journal of tax law introduces the following and relevant thematic news:
1. Surprising pre-arrest in tax proceedings
2. Is it service or employment?
3. Many tax changes, i.e., just passed multi-law
4. Surveillance in tax proceedings?
5. Earlier coverage
1. SURPRISING PRE-ARREST IN TAX PROCEEDINGS
The so-called pre-arrest in tax proceedings is meant to be implemented on very exceptional cases. The practice of tax authority has unfortunately become different and if necessary, one must enforce their rights in court. The latest court decision should expectedly put a brake on the activity of the tax authority.
Conducting the activities that ensure the enforcement before the financial claim or obligation is prescribed, is commonly referred to as pre-arrest. The implementation of such in tax proceedings became possible in 2009.In order to implement a pre-arrest, there must be a reasoned doubt that as a result of the activities of the specific tax payer the enforcement of the prescribed tax sum may become significantly more difficult. As it is an extreme measure, the tax authority must ask for
permission from the administrative court. In deciding of the permission, the tax payer has no possibility of co-determination. According to the explanatory memorandum of the act, the permission from the administrative court shall protect the tax payer “[…] from the hasty decisions of the executives […]”. At the same time, the memorandum stresses that the conduction of the ensuring of respective enforcement activities are very extraordinary and about 25 applications for these permissions are filed to the administrative court per year.
The reality is different, though, and the implementing of pre-arrest is not at all rare. Often, people find out about the implemented pre-arrest when they want to innocently sell their apartment, for example.
The recent decision in matter 3-14-52392 from Tallinn Circuit Court analyzed once again a case where tax authority had implemented pre-arrest. In this case the tax authority had a doubt that the enforcement of tax claim becomes significantly harder, amongst other for the reason that the company had not submitted the last year’s report.
The court decision gave a harsh assessment to the doubts and their reasoning of the tax authority. As the bringing out of reasoning from the tax authority is often a problematic spot, the question of the legality of several other pre-arrests may arise. It is worth knowing that the removing of the pre-arrest can be applied from the court also in case the term of contestation of the permission to set the pre-arrest has already passed.
2. IS IT SERVICE OR EMPLOYMENT?
The latest decision of Supreme Court en banc is pioneering in several senses. The Supreme Court treated the approach to tax claim in bankruptcy proceeding and the tax topic of labor tax evasion by PLC thoroughly.
This court decision was long awaited for its tax law approach by the companies, taxation officials and tax consultants. There was hope that it would solve the permissibility or non-permissibility of labor tax evasion by PLC and provides clear directions to limit it.
Labor tax evasion by PLC in narrower sense is a situation where one-man-company provides another company consultation services, for example. Tax Board has seen an employment in this situation and demands taxes on labor from the receiver of the service. As background, the case of Eesti Post should be reminded, where the tax authority considered the self-employed postmen as employees. The tax authority’s wish to tax the other end of the transactions, i.e., taxation of dividends as remuneration, shall not be forgotten as well.
We advise to read the blog of our office on the named topics or Ärileht. A more thorough approach shall be published soon in the magazine MaksuMaksja.
2 similar cases (case no 3-3-1-12-15 and 3-3-1-25-15) are in the proceeding of the Supreme Court right now. We can only wish that the court shall provide additional and specific directions on the basis of which one could limit the permissible services of tax law from the non-permissible.
The parliament of Estonia passed many amendments in tax law on 15.06.2015. President of the Republic criticized the process of law making, but still announced the tax changes.
In the previous e-journal we expressed hope that our tax environment will become more stable. This was related to the amendments in law, which should limit the possibilities to conduct tax changes overnight – the time between passing the amendments and implementing them should be at least six months. The multi-law does not appear to be going against this rule, but the turbo proceeding of this law without the possibility of co-determination is definitely not a sign of a stable and reasonably developing tax environment. The significant changes that mostly enter into force as of the beginning of 2016 are given, as follows:
Increase in VAT of accommodation services as of 01.01.2017. Pursuant to the passed amendments, the 9% rate shall be increased by more than a half, i.e., to 14%. With this amendment, the VAT rate on accommodation services in Estonia shall be higher than in most EU countries. For example, in Latvia it is 12%, in Lithuania 9%, Poland 8%, Finland 10% and Sweden 12%.
Reduction of social tax rate. Reduction of the social tax rate from 33% to 32% is divided between two years. As of 1st of January 2017, the social tax rate shall be 32,5% and as of 2018, 32%. The reduction of the rate shall take place on the account of the part of health insurance.
The tax burden of rental income of residential space shall be reduced. Pursuant to the amendment, the physical persons (but not self-employed) can deduct one fifth of the rental income for the expenses. This means that the effective tax rate of the rental income shall be 16%. The deduction does not depend on actual expenses and therefore the existence of the expense receipts is not of significance.
Pursuant to the explanations of the legislator the incentive can be used only in case an income tax return is filed. If the income is left not declared and it is later established by the tax authority, the incentive rate shall not apply.
Income tax return has a separate space through which the tax authority shall be informed of the existence or non-existence of the rental income. The purpose of such space is to help fix declaring of the rental income and reduce the opportunity of not declaring the rental income.
Reduction of the income tax incentive. The rate of basic exemption shall be increased step by step from 154 to 205 by 2019. In 2015, the rate of basic exemption is 170 euros. The tax exempt from the pension by 5 euros to 225 euros per month. Therefore, if the pensioner does not have any other income, his/her pension shall be exempted from tax in the amount of 395 euros (170+225).
Tax exemption related to children shall remain at the 154-euro level.
The total amount deductible from housing loan interests, training expenses
and charitable gifts and donations shall be reduced by 720 euros. When before
the maximum limit of those deductible amounts was 1920 euros, the new limit
will be 1200 euros. The amendment concerns the 2016 income which shall be
declared in 2017.
The expenses deductible as training expenses shall be limited. Driving school and adults’ informal learning expenses shall not be considered as deductible training expenses any more.
The daily rate of assignment abroad shall be increased. The rate of the daily allowance of assignment abroad which has been on the same level for decades shall increase from 32 euros to 50 euros on the condition that the number of days on assignment abroad does not exceed 15 days within one month. The daily allowance of the sixteenth day and every following day remains on the same level, i.e., 32 euros.
Excise duty increases. The legislative amendments initiated by the government fastens significantly the increase of excise duties.
The 10% excise duty increase of alcohol planned for 2016 shall be replaced with 15% increase (enters into force on 01.02.2016). For the next years up to year 2020, the excise duty on alcohol shall increase 10% per year. Exceptions are the excise duties of wine and fermented beverages in 2019 and 2020 which increases 20% each year.
The 5% excise duty increase for cigarettes planned for the next year shall be replaced by an 8% increase. The amendment enters into force on 01.06.2016. During the next following years, the excise duty shall increase 8% per each year. In years 2019 and 2020 the excise duty shall increase yearly 10% more.
The excise duty of gasoline shall increase during the next 3 years, i.e., in 2016-2018, 10% per year. The excise duty of diesel and heating gas oil shall increase in 2016 14% and during the two following years 10% per year. The excise duties of fuel oils, specific diesel and solid fuels used for the production of heat.
The declaration and payment of excise duties shall be forwarded from the 15th calendar day to 20th.
There is a danger in relation to excise duty increase that it is creating quite a lot of work for the courts. The problem is that the progressive increase of excise duty on alcohol was already prescribed in the law. With the passed multi-law, the excise duties are increased hastily, as compared to the earlier prescribed. These problems have already been treated by the Supreme Court, where the hasty tax increase was declared as unconstitutional.
Interesting and unusual for legal text is the new provision by which the
Government of the Republic is obliged to submit by 01.03.2018, the latest, a
proposal for amendment of the excise duties in case the increase of the
commented excise duties may be accompanied by negative circumstances failing
the expectations. Therefore, the next excise duties increase may be heard of in
the first quarter of 2018, the latest.
4. SURVEILLANCE IN TAX PROCEEDINGS?
The Supreme Court made a significant decision, pursuant to which the evidence collected by surveillance in tax proceedings in limited.In the named case, Estonian Tax and Customs Board (ETCB) obliged Kiviõli Keemiatööstus OÜ to pay the VAT and income tax by a notice of assessment, as on ETCB’s evaluation, the cooperation partners of Kiviõli Keemiatööstus OÜ were fictitious companies whose invoices
were formulated only to groundlessly deduct input VAT and get money out its account tax-free. In addition to tax proceedings, a criminal proceeding was initiated against Kiviõli Keemiatööstus OÜ which was terminated due to the expiry of the term of criminal offence.
The curiosity of this dispute lies in the fact that ETCB started to transfer the evidence inherent to criminal proceeding to the tax proceeding. On ETCB’s evaluation they were entitled to use the protocols of surveillance gathered during the criminal proceeding on Kiviõli Keemiatööstus OÜ in their tax proceeding. This way ETCB wanted to prove the non-conduction of the transactions between Kiviõli Keemiatööstus OÜ and its cooperation partners. Here it is important to note that the usage of data received from a criminal proceeding by surveillance in the tax proceeding is prohibited as of 1st of January 2013, but the legislation prior to that did not provide such prohibition. The latter was the cause of dispute between the parties – whether ETCB was entitled to use the protocols of surveillance as evidence in tax proceeding pursuant to the legislation valid before 1st of January 2013?
In this case it is important to understand the difference of proof in criminal proceeding and tax proceeding, as being guided by different procedural laws the requirements and procedure of proof are very different in those proceedings. For example, when the most general purpose of criminal procedure is to establish whether the person is guilty and has committed a criminal offence then the main purpose of tax proceeding is to find out the tax sum payable by the person. So therefore, in criminal proceeding in order to establish whether the person is guilty, it is allowed to conduct surveillance, as in the tax proceedings such possibility is excluded. Therefore, the question remains – how justified is ETCB’s position to use the information gathered by surveillance in a tax proceeding that is of completely different nature.
The Supreme Court made a significant decision and explained that in tax proceedings it is allowed to use the information received by surveillance only in the amount it is provided, assessed and checked in the judicial criminal proceeding.
In other words, the usage of information received by surveillance in tax proceeding is allowed only in case the respective information has been checked by criminal court. But also in that case the evidence used in tax proceeding is the decision of criminal court, not the evidence received by surveillance (e.g., recording of telephone tapping).
Therefore it is worth knowing that using the information received by surveillance in tax proceeding is generally not allowed.