News

Decision of Supreme Administrative Court: Breakthrough in three-year lapse period for tax assessment?

Two years ago, we informed you of a judicial decision made by the Constitutional Court, which significantly changed the long-established administrative practice for tax reassessment periods, from the 3+1 principle to 3+0. The recent decision of the extended senate of the Supreme Administrative Court has brought about another breakthrough in the counting of periods; however, not this time in favour of the tax payer.

The most important conclusions are summarised below:

A tax decision may be reviewed even after the three-year lapse period expires
Under the general provision of Section 47 (1) of the Administration of Taxes Act, tax cannot be assessed or reassessed later than three years from the end of the tax period in which the obligation to file a tax return occurred, unless this, or a special act, provides otherwise.

In its recent decision (dated 23 February 2010, File No. 7 Afs 20/2007 - 73), the extended senate of the Supreme Administrative Court considered exceptional periods for using extraordinary remedial measures in such a way that if such an exceptional period is preserved, the three-year lapse period may not affect the further course of proceedings on an extraordinary remedial measure.

In other words, tax proceedings may be reviewed after expiration of the three-year lapse period; whether basic or extended by three more years, as within the meaning of Section 47 (2) of the Administration of Taxes Act. A review of tax decisions may be commenced no later than two years following the year in which the decision under review became effective.

It will be interesting to observe the reactions of tax administrators in practice, as the Supreme Administrative Court did not specify the scope of possible acts to be carried out by tax administrators after the three-year lapse period expires. At the same time however, the Court decided that tax administrators would not be allowed to postpone their decisions until the very end of the two-year review period.

Therefore, the ten-year lapse period for tax assessment (reassessment) remains the final limit for changing tax obligations (whether in favour of, or detriment to a tax entity). A review must also be completed within ten years from the end of the tax period in which the obligation to file a tax return occurred. This period cannot be extended by any action taken by a tax administrator. One has to bear in mind that this ten-year lapse period does not run during court proceedings, which can drag on for several years.

Breakthrough of three-year lapse period by filing additional tax return?
The extended senate of the Supreme Administrative Court believe that the aforementioned facts relating to an exceptional objective period for assessment (reassessment) also apply to proceedings on an additional tax return – in spite of it not being lawfully classified as an exceptional remedial measure.

The basic three-year period shall not apply to further proceedings on an additional tax return and these proceedings will be limited in time to only the remaining part of the ten-year period under Section 47 (2) of the Administration of Taxes Act.

Here, the extended senate deviated from its existing practice; under which an (additional) payment assessment is not an act of a tax administrator extending the three-year period, under Section 47 (2) of the Administration of Taxes Act. Despite the existing practice, however, the three-year period may be extended based on the filing of an additional tax return by a tax entity.

In addition to the decision referred to above, we would like to inform you of the following:

VAT for employee benefits – deputies outvoted the president’s veto
The Chamber of Deputies adopted the amendment to the VAT Act, returned by the Czech president, which omits employees from the list of persons that are subject to a tax payer’s obligation to determine the VAT base at the level of an arm’s length price, as of 1 January 2010. Regarding employee benefits, employers will, in certain cases, use VAT based on the price paid by employees in 2009. We have already provided more detailed information on this provision in the last few issues of our newsletter. The amendment was promulgated in the Collection of Acts under No. 120/2010 Coll.

The amendment can be used retroactively from the effective date of the previous provision of the VAT Act. This means that tax payers who have used VAT based on the arm’s length price in certain transactions between employer and employee (e.g. the provision of privilege tickets, food services, the option to use the employer’s equipment at a reduced cost, or the sale of goods to employees at reduced prices) since 1 January 2010, may file additional VAT returns.

Be reminded that employee benefits provided free of charge must be in compliance with Section 36 (6) of the VAT Act.

Reduced rate for repair of residential buildings also valid for 2011
In the third reading, the Chamber of Deputies adopted the amendment to the Income Tax (Parliamentary Document No. 959), which also contains an indirect amendment to the VAT Act.

Pursuant to the current text of Section 48 of the VAT Act, a reduced rate applies to the repair, reconstruction and renovation of buildings, houses and flats. This provision was to expire on 1 January 2011, but the amendment passed the cancellation of this time limitation, and now the reduced rate will also apply in 2011.

General Financial Directorate and Specialised Tax Office for large companies
The aforementioned proposed amendment to the Income Tax Act (Parliamentary Document No. 959) included a major change to the Act on the Regional Financial Authorities.

Effective as of 1 January 2011, the newly-established General Financial Directorate will take over a part of the administration of the Ministry of Finance, which will include, above all, conception of tax regulations, negotiating international agreements, international co-operation, managing financial directorates and reviewing decisions.

From 2012 (depending on the tax payer’s tax period), a Specialised Tax Office will be established as a subordinate to the Financial Directorate for Prague. The Specialised Tax Office will be the relevant authority for banks, subsidiaries of foreign banks, insurance and reinsurance companies, and legal entities established for business purposes with a turnover exceeding CZK 2 billion. In justified cases, the General Financial Directorate may decide that the Specialised Tax Office will also be the relevant authority for natural persons or for legal entities other than those referred to above, and vice versa. Apparently, the objective is more thorough and qualified control over large businesses. The Specialised Tax Office is expected to be the relevant authority for approximately 800 entities.

If you are interested in obtaining more details, please do not hesitate to contact us.



Jaromír ZBROJ, Senior Manager, TACOMA Tax
Tel: +420 731 411 268
E-mail: jaromir.zbroj@tacoma.eu  
www.tacoma.eu