With the Act of 20 November 2022, the legislator is giving the tax authorities a procedural boost.
The Act creates an additional means of pressure in the field of income tax and VAT, which should allow the tax authorities to force the taxpayer and third parties to cooperate in tax investigations with the help of court-imposed penalty payments. The Act also aims at weakening the prior duty of the tax administration to justify suspicions of fraud before being allowed to extend the ordinary three-year investigation period for income tax to (what has now become) ten years in cases of suspected fraud. These changes will mainly affect taxpayers who obstruct investigations and/or are suspected of tax fraud.
However, the Act also strongly expands the investigation and taxation possibilities of the tax administration with regard to all taxpayers. We will briefly discuss these extensions.
The Act introduces a drastic extension of the investigation and assessment periods for income tax. These changes apply as from assessment year 2023 and therefore already apply, for companies with calendar-year accounting and for all individuals, to the corporate and personal income tax returns relating to the income for 2022. For companies with a non-calendar accounting year, the new periods will only apply to the income year ending in 2023. These new periods also apply to the withholding taxes, but only to allocations or payments taking place in 2023 (as the taxable period coincides with the assessment year). Without any link to a suspicion of fraud, the investigation and assessment periods are extended from three to six or ten years, depending only on the presence of certain international aspects in the tax returns of companies or individuals.
For VAT, the statutes of limitations for tax recovery have also been extended (applicable to VAT that became due as from 1 January 2023).
The standard three-year investigation and assessment period continues to apply if the tax return was filed on time but the tax authorities consider that the taxpayer has (possibly) not declared enough income. Thus, for the income for 2022, that period runs until the end of 2025. However, if the taxpayer does not file a return or is late in filing a return, a four-year period now applies. Thus, for the income for 2022, this period would run until the end of 2026.
The first controversial modification concerns the creation of a six-year period for investigation and taxation even of tax returns filed on time in all of the following cases:
- when the tax return concerns a company subject to transfer pricing reporting (either as a group entity required to submit a local file or as a parent entity required to comply with the country-by-country reporting obligation);
- when the withholding tax return includes exemptions, waivers or deductions granted on the basis of a double tax treaty, the Parent-Subsidiary Directive or the Interest-Royalty Directive;
- when the tax return contains a claim for imputation of a foreign tax credit (i.e. for interest income, royalties or dividends received from investment companies);
- when information on the tax return was received from abroad on the basis of DAC6 or DAC7 (“cross-border arrangements” subject to notification or information from platform operators of at least EUR 25,000 per taxpayer concerned);
- when the tax return must include a form documenting payments of at least EUR 100,000 per year to so-called “tax havens”.
For companies with calendar-year accounts and for individuals, this means that their income for 2022 can be investigated and corrected until the end of 2028.
In addition, there is now a period of as much as ten years for investigation and taxation for so-called “complex returns”. It should be emphasised that “complex” in no way requires any fraudulent element (the Act also introduces a ten-year investigation and assessment period in cases of fraud, replacing the prior extended seven-year period). A tax return is “complex”:
- when it involves a “hybrid mismatch” (this is a tax advantage for companies that can arise when qualification differences exist in cross-border situations between the tax systems involved);
- when it concerns a CFC case, i.e. when the undistributed profits of certain controlled foreign corporations (so-called CFCs) arise from an artificial arrangement or a series of arrangements designed to obtain a tax advantage; or
- regarding personal income tax (e.g. of an entrepreneur-individual) when it must disclose the existence of “legal arrangements abroad”.
For companies with calendar-year accounts and for individuals, this means that their income for 2022 can be verified and corrected until the end of 2032.
The aforementioned extensions of the investigation and assessment periods for income tax relate to the entire tax return of the taxpayer concerned, except for a number of deductions for which the normal three-year or (in the case of a late tax return or no tax return) four-year period continues to apply (i.e. for non-deductible car expenses, regional taxes, fines, restaurant expenses, professional clothing, and social benefits including meal vouchers).
In addition to these extensions of the “standard” periods, the special periods (which allow an assessment to be established for income relating to five years prior to the year of the establishing of an offence) continue to apply and are now explicitly made applicable to the withholding taxes. This involves an additional period of twelve or twenty-four months in certain cases, such as when the tax authorities learn of an offence through probative data, information from abroad, consultation of a court file or as a result of an inspection of the taxpayer or a third party.
The Act provides that when VAT returns are not submitted or are submitted late, the standard three-year limitation period is extended to four years. In addition, for offences committed with fraudulent intent or intent to harm, the prior seven-year limitation period is increased to ten years. The existing seven-year limitation period in case of probative data, information from abroad or information from a court case is maintained. Thus, with regard to VAT, there will now be four rather than two statutes of limitations: three, four, seven and ten years. So much for the intention of administrative simplification...
Extension of retention periods for tax-relevant documents
The retention period for books and records is aligned with the new investigation and assessment periods and is thus extended from seven to ten years. Also with regard to VAT, (copies of) invoices and books must now be kept for ten years instead of seven.
In practice, the extension of the investigation and assessment periods means not only an additional layer of administrative complexity, but also implies that in the aforementioned cases, taxpayers who may be acting entirely in good faith will nevertheless sometimes spend up to six or even ten years in uncertainty about their tax situation. Moreover, a six-year investigation and assessment period will often be the new standard for companies with even a minor international aspect – even in cases where the taxpayer has already been fully transparent in the tax return. In the case of a late tax return (both for income tax and for VAT), the tax authorities now automatically have a four-year period, even if the return was filed only one day late. With regard to VAT, this legal uncertainty is exacerbated by the absence of any specific provision regulating and limiting the investigation periods.
Consequently, one can seriously ask whether these extensions do not violate the principle of equality and/or legal certainty and whether they can stand the test of the Constitutional Court. In that respect, the deadline for filing a petition seeking annulment of the Act is 31 May 2023. Taxpayers wishing to pursue these proceedings before the Constitutional Court therefore only have a short time left to take action.
Please do not hesitate to contact us if you have any questions on this subject.