Since the entry into force of the Act of 21 December 2013, the tax authorities of the income tax department are now also allowed to take books and records to their offices in order to facilitate the conducting of tax audits. Regarding VAT, the existing "right to retain documents" has been further refined. The tax authorities published a new circular letter to clarify the scope of the possibility of taking and keeping books and records (Circ. AAFisc 26/2014, Ci.RH.831/633.817 and E.T. 126.407, 27 June 2014) .
Scope of the right to "retain" documents
For some time, the VAT authorities have already had the right to take and keep certain books, invoices and other records (or copies thereof). They are entitled to "retain" them whenever they are of the opinion that such books and records demonstrate that VAT or a fine is due. Regarding income taxes, this possibility has only applied since January 2014, pursuant to the new article 315ter of the Income Tax Code (ITC).
According to the new article 315ter ITC, the direct tax authorities may take all books and records that are deemed necessary to assess and levy income taxes. In that respect, the right to retain books and records can be broadly interpreted. Indeed, all books and records in relation to the professional activities of the taxpayer could be taken by the tax authorities and kept at their offices, insofar as the tax inspectors are of the opinion that these documents prove that income taxes are due. However, items for private use (e.g. handbags and briefcases) do not fall within the scope of the tax authorities' right to retain documents.
The tax authorities may only take and keep books and records that have been closed, to prevent the taxpayer from being hindered in operating his business.
Conditions
The law does not require that the tax authorities give prior and specific justification for taking and keeping certain books and records. Therefore, the tax authorities have quite some manoeuvring power. Nevertheless, this does not preclude courts from exercising their judicial power to ensure the correct and reasonable use of such power.
Based on the foregoing, we are of the opinion that closed or locked (suit)cases, bags, briefcases, drawer units, etc. may neither be taken nor kept by the tax authorities if the tax inspector has no knowledge of the contents thereof. Indeed, in such situations it would be hard to accept that the tax inspector is able to assume that they contain books and records demonstrating the existence of tax liabilities. From a literal reading of the act, the tax authorities do not have the power to actively search through such closed/locked (suit)cases, bags, briefcases, drawer units, etc. by opening them. However, practice has shown that the tax authorities often claim to have such active searching powers, and certain courts even agree with them.
The circular letter does, however, confirm that the tax authorities can only make use of their right to take and keep documents in exceptional situations. The general rule that the taxpayer must make certain books and records available at his own premises at the request of the tax authorities remains applicable.
The wording "right to retain documents" can be confusing, because it is more of a possibility than a right. The tax inspector must therefore always address a request to the taxpayer prior to taking and keeping any books or records. The taxpayer can always refuse to hand over the requested documents, but in many cases this would qualify as non-compliance with the taxpayer's duty to collaborate in the conducting of an audit. Based on the foregoing, the tax authorities could impose a fine. Caution is therefore essential.
The circular letter explains that the tax authorities should not keep the books and records any longer than "the usual time that is needed for the tax audit". However, the circular letter does not clarify what is to be understood by "the usual time". We are of the opinion that this wording means – at least – that as soon as the tax authorities send a notice to the taxpayer (e.g. a notice of re-assessment) based on the books and records which were taken, the latter must be returned to the taxpayer.
Conclusion
The circular letter of 27 June 2014 brings useful clarification regarding the application of the right to retain documents. It confirms that the powers of the tax authorities are limited by the purpose of this right, not only with respect to the types of documents that fall within the scope of this right, but also with respect to the circumstances under which the tax authorities can make use of the right to retain documents, as well as the length of time for which these documents can be kept.