Important judgment on the issue of instrumental initiation of tax proceedings. Infringement of the principle of protection of legitimate expectations | CASE STUDY

Our client received a favourable verdict from the Provincial Administrative Court (WSA) in Warsaw in a dispute with the tax authorities which had lasted over 6 years (!).

The court, after a comprehensive assessment of the circumstances surrounding the commencement of the penal-fiscal proceedings, as well as the case files of these proceedings, came to the conclusion that the commencement of these proceedings was instrumental, and therefore could not have the effect of suspending the running of the limitation period for tax liabilities. As a consequence of the above, the WSA in Warsaw repealed the decision of the Director of the Warsaw Tax Administration Chamber and the preceding decision of the Head of the Warsaw-Bemowo Tax Office and discontinued the administrative proceedings.

Below we quote the key theses of the judgment of the Voivodship Administrative Court in Warsaw of 30 June 2022, III SA/Wa 1020/22.

"(…) the idea of suspending the running of the limitation period due to the commencement of penal-fiscal proceedings is not to enable the authority to issue and serve a tax assessment decision. Indeed, the chargeability of the tax liability is in this case subservient to the criminal fiscal proceedings and not the other way around. In other words, the purpose of suspending the running of the limitation period of the tax liability is to enable the prosecuting authority to identify and bring about the punishment of the perpetrators of the offence and, more specifically, to postpone the statute of limitations on the punishability of the act (vide Article 44 § 1 Kks). However, the reverse situation, in which criminal proceedings are treated as a tool to eliminate the risk of the statute of limitations for a tax liability prior to the issuance and delivery of a tax assessment decision, is unacceptable."

The WSA in Warsaw, referring to the resolution of the NSA of 24 June 2021. I FPS 1/21, indicated that "the tax authority, referring to the existence of the prerequisites of Article 70 § 6(1) of the Tax Ordinance, must each time indicate to the taxpayer that the criminal proceedings have been initiated in order to conduct them and to direct a criminal response to the persons responsible for the acts committed by them. Thus, it is not sufficient to refer to the formal prerequisites contained in this provision, but it is also necessary to demonstrate, in cases of doubt, that the initiation of criminal proceedings was aimed at the application of an appropriate criminal law response to the events that occurred, and not simply and exclusively at suspending the running of the limitation period of the tax liability."

The court emphasised that "the body conducting the tax proceedings becomes, in a sense, the 'beneficiary' of the criminal proceedings, as the limitation period of the liability does not run until the conclusion of these proceedings. That authority cannot, however, in this case play the role of the entity for whose benefit the criminal proceedings are initiated. The extension of the time allowed for the verification and amendment of the taxpayer's accounts can therefore only be the result of real efforts to detect and punish the offender'.

In this particular case, this was not the case. On the date of the order to initiate criminal proceedings, i.e. 4 December 2017. (i.e. less than a month before the expiry of the statute of limitations), the authorities had no real possibility to conclude the tax proceedings with a final decision; the tax audit had only just started and the tax authority did not even have the source documents, and the decision of the first-instance authority was issued more than 1.5 years later (5 August 2019). According to the WSA, "the authority already at the starting point did not have any information about the occurrence of possible impairments or even the risk of their occurrence. The allegations made were not verified in any way, although, as already mentioned, the emergence of the risk of depletion was simple to verify based solely on an analysis of the party's tax returns and its counterparty. The above circumstance, in conjunction with the date of initiation of the criminal fiscal proceedings, the lack of significant findings in these proceedings (acceptance of the suspect's rather vague explanations) makes the complaint's allegation of the instrumentality of the initiation of the criminal fiscal proceedings fully legitimate."

Moreover, as the WSA in Warsaw rightly pointed out, no other actions were taken in the criminal-fiscal proceedings apart from the questioning of the party as a suspect. These proceedings were subsequently suspended due to the ongoing tax inspection, and were subsequently taken up only to be merged with the pre-trial proceedings in relation to a different period. In reality, therefore, as the court rightly noted, the authority was merely monitoring the course of the tax proceedings.

As to the substantive issue, it should be pointed out that the WSA shared the position expressed in an earlier judgment issued for our client (III SA/Wa 266/20) regarding the correct settlement of activities performed under a consortium agreement. It was indicated that "there were mutual performances between the partner and the leader who issued sales invoices to the ordering party for the performance of the entire order, irrespective of the division of tasks under the consortium agreement agreed for internal purposes of the consortium – contrary to the claims of the authorities. In view of the above, it should be recognised that in the circumstances of the case presented there was a supply of goods within the meaning of Article 7(1) of the VAT Act, i.e. a supply of goods is understood as a transfer of the right to dispose of goods as owner, which – due to its chargeable nature – is subject – pursuant to Article 5(1)(1) of the VAT Act – to tax on goods and services. As a result, these activities – pursuant to Article 106b(1)(1) of the VAT Act – could be documented with invoices. Therefore, it is not justified to refer, as the authority did, to Article 88(3a)(2) of the VAT Act and to conclude that in the case there were non-taxable transactions and, as a consequence, there arose an obligation on the part of the applicant to pay tax in accordance with the wording of the standard contained in Article 108 of the VAT Act in respect of the invoices issued in favour of the partner with regard to the supply of fabrics."

The judgment also noted the need to respect the principle of the protection of legitimate expectations. Indeed, in the course of the proceedings, the client's attorneys referred to the applicable tax interpretations concerning the principles of settlements made under consortium agreements: the referenced acts confirmed the admissibility of settlements between consortium members by means of VAT invoices precisely and not other accounting documents. In addition, the tax inspection at the consortium partner did not reveal any irregularities and the adopted settlement system was not questioned.

Finally, the WSA in Warsaw stated that 'demanding payment of this tax from the applicant neither serves to avoid fraud nor to prevent an attempted fraud. It is therefore at odds with the principles of neutrality as well as proportionality and, what is more, it infringes the principle of legitimate expectations, particularly in view of the way in which the applicant's case was dealt with, which led to a negative decision being issued after the expiry of the legal limitation period of more than five years for tax liabilities for the periods covered by the decision."

The judgment is final, the Director of the IAS has not lodged a cassation appeal.

The case was handled by tax advisor Małgorzata Militz and lawyer Piotr Świstak.