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Additional Tax Returns vs. Tax Audit: How Shall Companies Proceed if They Are about to Undergo a Tax Audit?

We have recently noted an upcoming trend under which tax authorities, with the General Financial Directorate as their principal representative, re-assess the approach that they have so far taken in terms of the taxation of certain areas of interest. As a result of these reconsiderations, tax audits are initiated in the relevant companies.

In cases like this, companies have to decide in quite a short period of time as to whether they will wait for the outcome of the tax audit or if they had better file an additional tax return in order to avoid additional tax assessment penalty. This article highlights the matters to which companies should pay attention in events like this.

Firstly, we would like to note that if the tax administrator has any signs indicating that a company’s latest assessed tax should be altered, prior to initiating a tax audit, in line with the ruling passed by the Supreme Administrative Court, the tax administrator should invite the relevant company to file an additional tax return, by which it will be able to avoid the imposition of penalty (refer to Ruling of the Supreme Administrative Court of 6 May 2015 No. 2 Afs 209/2014–23). Given this, in circumstances where companies themselves additionally declare an increased tax liability, penalty may not be imposed as in the case of tax audits.

Therefore, if invited to file an additional tax return, companies should respond to that. If a tax administrator’s invitation is not answered, the tax administrator may assess additional tax for companies using the relevant instruments. However, cases may arise in which companies do not agree with the tax administrator’s interpretation. In respect of such events, the Supreme Administrative Court ruled that if taxable entities do not agree with the conclusions and/or reasons giving rise to a call for filing an additional tax return and if they have informed the tax administrator in writing via a response to the call within the effective deadline, the tax administrator shall not be entitled to assess additional tax for the taxable entity using the relevant instruments (refer to ruling of the Supreme Administrative Court of 6 May 2015, No. 9 Afs 66/2015–36). In other words, companies are given the right to be able to assess their position and decide whether they will file additional tax returns and thus avoid the risk of fines, or whether they are ready to defend their originallydeclared tax liability before the court.

Recently, in respect of this matter, the Supreme Administrative Court confirmed the legitimacy of cases when companies perform an internal audit prior to a tax audit and file an additional tax return one day before the tax audit is about to start (refer to ruling of the Supreme Administrative Court of 9 December 2015, No. 10 Afs 105/2015–44). Moreover, the point at which a tax audit is deemed initiated is not the point at which a protocol on the tax review’s beginning is signed, as under such circumstances the taxable entity is merely informed of the fact that a tax audit is about to take place in this company in the upcoming period of time; thus, the effective date of a tax audit’s start is the date at which the tax administrator actually starts to identify the current state of matters. Therefore, by this time, companies are able to additionally declare their tax liability on their own (refer to ruling of the Supreme Administrative Court of 20 June 2005, No. 5 Afs 36/2003–87).

If the tax administrator is about to perform a tax audit in your company or if you have been informed that the tax administrator has re-assessed its previous approach to certain matters, we are ready to assist you in assessing your situation and help you select the most appropriate steps.

Tomáš Babáček +420 246 042 814 tbabacek@deloittece.com

Jiřina Neumannová +420 246 042 430 jneumannova@deloittece.com