High Court of Justice compels Romanian tax authorities to observe the statute of limitation period
Emanuel Băncilă of EY Romania discusses the business implications of the ruling which bars Romanian tax authorities the power to audit taxpayers outside the five-year statute of limitation period.
The statute of limitation period under which the Romanian tax authority can proceed with the inspection of a tax period is five years, a much longer period than the one applying to private law matters. This derogation from the generally applicable law is justified by the necessity to protect the general interest of the state to assess and collect additional taxes when they are either not declared, or declared in an inadequate manner. As the Romanian tax authority benefits from a longer statute of limitation than the general rule, the computation method of this limited period needs to be an effective and equitable one.
However, starting from 2003, the Romanian taxpayers ended up being checked by the tax authorities for a retrospective tax period of six years, one year outside the statute of limitation period provided by the law. This practice continued until 2020 when, after being noticed about the high number of contradictory rulings on the matter, the High Court of Justice issued a relevant mandatory decision for all courts of law and authorities in Romania.
According to the rule established in 2003 by the Romanian Fiscal Procedure Code regarding the maximum period that could be subject to a tax inspection, the five-year statute of limitation period starts on January 1 of the following year when the tax base was generated.
According to the interpretation favoured by the Romanian tax authorities, the tax base generation coincides with the moment when the taxpayer files its tax return, which in the case of corporate income tax takes place in the second quarter of the year, following the one when the transactions actually took place.
To illustrate the view of the fiscal authorities, consider a tax inspection that started in December 2009: the authorities could check the entire year 2003 in regard to the taxable income, as it is considered that the tax base was generated in 2004 by filing the annual income statement. Consequently, the five-year limited statute would be calculated starting from January 1 2005 and would only expire on December 31 2009. It is not accidental that over 50% of tax inspections in Romania start in the month of December.
Thus, in practice the statute of limitation period in which the tax authorities have the right to carry out an inspection without being barred is extended artificially and illegally from five years to six years. The tax authorities’ interpretation entails an artificial distinction between the moment when the elements included in the tax base (i.e. income and expenses) are generated and the moment when the taxable base itself has to be declared, seen here as the operation used to determine the annual taxable income through the filing of the tax return. In order to clarify this interpretation, the tax authorities underlined that, as the corporate income tax is determined through self-taxation, the right of the tax authority to determine tax liabilities cannot originate prior to the deadline when the taxpayer must file its tax return.
By way of contrast, the alternative interpretation is grounded on the premise that the taxable base is generated at the date when the transactions occurs, when the statute of limitation period should also start. From an economic point of view, the generating factor does not depend on the filing of the tax returns, therefore in the case of corporate income tax, the taxable base is generated at the time of occurrence of the generating event, respectively, of the circumstances that create the elements included in the tax base, meaning income and expenses.
Accordingly, the statute of limitation period of the right to assess additional corporate tax liabilities expires in five years starting from January 1 of the year following the one when the revenue-generating operation took place.
The High Court of Justice ruling was issued in the context of special procedure (called ‘appeal in the interest of law’), which aims at a uniform interpretation and application of the law. For this reason, the judgment rendered by the High Court of Justice will become mandatory for all Romanian courts from the date of publication in the Official Gazette.
As some of the solutions cited by the High Court of Justice were rendered with the help of Radu si Asociatii ǀ EY Law, the restrictive interpretation was upheld before the High Court of Justice by way of an amicus curiae memorandum (a document elaborated by someone who is not part of the litigation, but who has the necessary expertise to assist the court in reaching an equitable solution). Finally, the High Court of Justice has ruled in favour of barring the Romanian tax authorities to audit the taxpayers outside the five-year statute of limitation period.
This correction of the tax authorities’ misinterpretation will have a boomerang effect, as all inspections finalised with tax assessment deeds, respectively those in progress or those that are due to start in 2020 or 2021, and that are targeting taxable bases for which the maximum term of five years has been reached, must be cancelled. Practically, the taxpayers will benefit from the annulment of the inspection for a tax period of one year. This elimination or exclusion from the tax inspection of the respective fiscal period is made due to the intervention of the statute of limitations rules, without analysing whether the taxpayer owes any additional obligations from a fiscal perspective.
In this context, the bill for the Romanian State will be an exceptionally high one. According to the National Agency for Fiscal Administration Performance Report, the additional tax liabilities imposed in 2019 to legal persons as a result of tax inspections amount to €1 billion ($1.18 million).
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