Taking legal action against taxes: fear and ratio

You often hear that entrepreneurs are better off not taking legal action against their taxes. This because they have a vested interest in good relations with the Tax Authority and also because taking legal action is a bit of a gamble. But is that actually true? Or is fear a bad adviser in this case?

Sparen wetboek weegschaal

Thorough consideration

Obviously there are good reasons for examining whether legal action is desirable or necessary on a case to case basis. Taking matters to court has a significantly emotional impact on those that go that route. Legal action costs time and money. And sometimes publicity and reputational damage have to be taken into account.

It is not without good reason that Article 3.7.1 of the Code of Conduct for European Lawyers prescribes the following:

‘The lawyer should endeavour at all times to find a solution to the client’s dispute that is commensurate to the importance of the matter, and he shall strongly advise the client at the appropriate time regarding the desirability to reach a settlement or to rely on alternative solutions to end the dispute.’

If a lawyer advises his client to take legal action, he must make a thorough evaluation of all aspects that are involved for the client. And there are many.

Time

Despite all efforts to speed up the judicial process, legal action usually goes on for a long time. Two years is considered reasonable for the objection and appeal phase (six months for objection, eighteen months for the court proceedings), two more years for filing an appeal and ultimately two more years for cassation. In the worst case scenario, you are six years further along before a definitive judgement has been made. As a party in the proceedings there is little you can do to influence the duration; it is easier to delay matters than speed them up.

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Then there’s the publicity. The risks involved in the publicity should not be exaggerated. Journalists do not pay much attention to tax procedures. On the one hand, that is because the tax proceedings are not open to the public, but also if the law is amended because politics wants more transparency into the tax procedure (‘public, except’), I expect that public interest will remain limited: taxation has a somewhat tedious image and tax law will never gain the same level of attention that criminal law receives.

Costs

An important and difficult consideration is that of the costs: does the importance of the procedure outweigh the costs of legal assistance? Does it involve a one-off or an annual recurring correction?

Compared to the justified concern for high costs, the court registry fee is still very low and that (unlike civil proceedings) there is hardly any risk in tax proceedings of having to pay the opposing party’s legal costs.

Naturally, the costs will be considered in the light of the essential question: what are the chances of winning the case? More about this later on.

Staying on friendly terms

On the matter of the frequently heard desire to maintain good relations with the tax authority, I’ll keep it short: that is mostly nonsense.

Whether the tax authority is pleased that legal action is being taken, is of little interest to the client. That may be another story for a legal aid counsellor (the lawyer), but that is also of no relevance for the client.

Never in my long career as a tax lawyer have clients subsequently taken offence to proceedings being conducted. Certainly not when the inspector also feels that the matter may involve differing opinions. If it is a different matter and, for example, the tax authority impose penalties based on intent, the relations have usually already deteriorated so badly that taking legal action no longer makes any difference.

By the way, it is good to think of the tax authority as a big institution. Proceedings are usually conducted by a special team and case managers are swapped around frequently. Consequently, the collective memory of the tax authority always seems particularly short.

Success?

It is – and this brings me to the most difficult consideration – extremely difficult for a taxpayer to estimate the chances of winning a proceeding. Taking legal action is a human process. How much time is it going to take to convince the inspector? Is it possible to convince him at all, even if the arguments are very strong? The same applies for the judge. Is he well established, is he open to a different perspective on the matter?

The same standards are not applied during a proceeding. The taxpayer’s case is not the same as that of the tax authority. That follows from the law, but there is also an instinctive side to it: it is perceived that the tax authority has no reason to lie, while it could be in the client’s interest to twist the facts. That makes the inspector credible and what the client or his counsellor introduces is suspect from the onset. A fact that is overlooked is that the inspector can also be wrong. He may well not lie, but may be wrong. This inequality makes taking legal action risky.

And so … thorough consideration

I therefore absolutely agree that it is always worth it to thoroughly consider whether taking legal action is desirable or something that is better avoided. A reasonable settlement is preferable over the risk of going to battle, but the crux of the questions rests in what is reasonable. Bear in mind that settlement can also be reached at a later stage. The pressure of an ongoing procedure may help with negotiations, even if only because a ruling in the taxpayer’s favour can have a far-reaching and long-term impact for the tax authority: this can create a lot of problems for the tax authority in future cases. For the taxpayer, it always concerns an important, but one-off issue.

See help

All of these difficult considerations boil down to expertise. Expertise in proceedings and negotiating. My colleagues and I have vast expertise and will be pleased to apply it the moment you have to come to that decision. The sooner you involve us, the better we can assist you in taking a responsible, reasoned decision that is not motivated by fear.

Would you like to find out more about this topic or do you need help about deciding whether or not to take legal action? Get in touch with Ludwijn Jaeger, LLM.

 

Confiscating and taxing leads to being caught twice!

Since the income from the proceeds of crime are taxed in the year in which it is earned and the deduction of a many years later irrevocable confiscation order is only deductible at the time of payment, the levying of taxes on criminal income (apart from a fine yet to be imposed) and subsequently ‘confiscating’ leads to a debt to two components of the same government; confiscating and taxing leads to being caught twice! In its entirety, both go way beyond the actual income generated from crime. Despite that the intention is that taxation and confiscation do not accumulate. Because losses, so also those resulting from the deductibility of a paid confiscation, are only deductible one year behind and from there on forwards, the deductibility of a slightly hefty confiscation order is the only solace for a criminal with a (continuous) high income. The question is whether the provisions of the new AAFD (Reporting and Processing Tax Offences) protocol for coordination between the tax authority and the Public Prosecutor provide a solution for this problem.

businessman with an orange tie turning his empty pockets inside out. Front view, no head. Isolated. Concept of bankruptcy.

New AAFD protocol

As of 1 July 2015 a new protocol came into effect on the reporting and processing of tax offences. My colleague Vanessa Huygen van Dyck wrote in her blog of 2 July last year that possible criminal alternatives for the confiscation could lead to more than the earnings being creamed off. A problem that has existed somewhat longer is that the Supreme Court does not allow a provision to be implemented for a confiscation order that has not been paid yet, nor enforceable so that based on the (old) policy effective cooperation takes place.[1] I discussed this problem in detail in 2013 in two articles on the policy on this issue, and the ruling in European perspective.

While much of the text is comparable to older decisions the coordination is worded as follows:

‘This protocol primarily provides for the coordination between the Tax Authority and the Public Prosecutor on (the prevention of) concurrence between administrative and criminal settlement. A comparable form of accumulation arises with the confiscation of the proceeds from crime. Article 74 of the AWR provides for a univocal anti-accumulation provision for confiscation with respect to criminal offences under the Tax Act. However, no comparable regulation is stipulated for confiscation in respect of other offences. It is therefore necessary that the Tax Authority and the Public Prosecutor coordinate on those cases with respect to the enforcement efforts.

 Confiscating criminal assets is a valuable means in combatting crime. The Public Prosecutor has established rules for the judicial confiscation of financial profits obtained from criminal activities. One of these rules is that coordination takes place with the Tax Authority. Proceeds obtained in social and economic life are in principle liable to taxation. It is no different when the proceeds are obtained by criminal activities. It should be prevented that the taxation of proceeds from crime and the judicial confiscation of those proceeds do not interfere with each other in an undesirable way. That is why the Public Prosecutor has agreed that the Tax Authority cause as little interference as possible to the criminal sanctioning and confiscation of proceeds from crime.

 To prevent the suspected/convicted person from being confronted with a tax levy on the proceeds of crime, after a confiscation measure has been imposed, or a settlement or transaction with a confiscation component is agreed, the Public Prosecutor coordinates with the Tax Authority on the intention to confiscate when the estimated proceeds are at least € 5,000.’

Will it work?

Coordination was already prescribed. Experience shows, however, that the coordination either never took place, or seemed to focus on informing one another so that not only one or the other occurred. Therefore not focused on preventing accumulation, but on bringing it about.

Opinions on not interfering with each other in an undesirable way with regard to taxation and confiscation may vary. I understand from the text that more creaming off than earned with crime is an undesirable action, which should be avoided by means of coordination. After all, the aim of confiscation is to restore the criminal to the income and assets position that he held before his crime. It is not intended as additional punishment. Income that is not ultimately enjoyed (on account of confiscation, or repayment to the victim) does not have to be taxed, unless you would only confiscate the result after tax (which is not the point of departure at present, confiscation pertains to the gross amount). However, I know many public prosecutors, inspectors and tax collectors, not to mention politicians and even the odd colleague, that are of the opinion that action is only undesirable if there is a risk that the tax levy or the confiscation will not be fully effected. From that point of view, coordination is informing each other!

Possible obstacles

Honestly speaking, I cannot imagine the tax authority obstructing the confiscation. The instruction that the tax authority is not to obstruct confiscation was also included in the previous regulations. Should the tax collector wait to collect an assessment that is based on criminal earnings, so that the payment thereof does not interfere with the payment of a confiscation order? That would be great, certainly if the tax collector would wait until after the confiscation is paid before going after his claim. In practice, I have not experienced any implementation of this instruction.

As was the case in the previous regulations, the new ones also state that it should be avoided that the suspect is confronted with a tax levy on the confiscated proceeds, after a confiscation measure has been imposed. In the past, similar wording always resulted in the coordination being interpreted such that nothing had to be done before the confiscation measure was in place. The problem, however, lies in the fact that coordination after is no longer relevant, by then the ‘harm’ has already been done.

The tax authority has in and around 5 years the time, from the year in which the criminal income is earned, to impose an assessment pertaining to that income. Even if the offence would be discovered soon after it was committed, the time that is – apparently – needed for completing a criminal investigation, going to trial and the completion of the financial investigation, is, in fact, always too long for establishing coordination afterwards.

Comparison with Section 74 of the Criminal Code

The clear parallel with Section 74 of the Criminal Code offers hope. The section is, after all, a clear ban on confiscation in tax cases. So, no retrospective coordination, no ineffective ‘obligation to undo,’ just a transparent provision that aims to prevent getting caught twice. Based on that parallel it can be made clear that the income taxes in combination with a confiscation do not go hand in hand. It is one or the other, not both!

Conclusion

While it is still unclear whether the court will alter its course based on this amended instruction, the current text in any case (again) offers more points of departure to advocate that ‘advance’ concurrence by way of coordination should have been avoided. The fight against ‘double confiscation’ can even be picked up with renewed energy in ongoing cases. That is a small ray of hope in an otherwise barely renewed, but assuring, new protocol.

[1] The hyperlink leads to AG IJzerman’s conclusion. The Supreme Court dismissed the relevant means based on Ground for Decision, Article 81.

Mr. B.J.G.L. Jaeger