Infringement of privacy or defence rights: exclusion of evidence in tax proceedings based on European law (WebMindLicenses)

Supreme Court directly overstepped by webcam girls? 

The European Court issued the seemingly ground-breaking WebMindLicenses ruling on exclusion of evidence in tax proceedings as the result of an infringement of European law (Union Law). While this case ‘only’ concerns the infringement of privacy and the use of evidence from an ongoing criminal proceeding, the consequences extend beyond the defence rights. For example, the provision of evidence in a tax proceeding obtained by force, which is subsequently used for evidence for a fine or punishment – despite the right to remain silent and the related right to not have to cooperate in your own conviction. Moreover, the Court is of the opinion that infringement not only has consequences for imposing fines, but also for determining the tax levy. 

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Lifejasmin.com’s privacy

The WebMindLicenses ruling of 17 December 2015 concerns the webcam girls from the website Livejasmin.com. The case essentially concerns the question whether, for the turnover tax, the ‘erotic interactive visual services’ were transferred to Portugal as the result of a license that was issued, or whether this had still been granted from within Hungary. Intercepted telephone conversations and seized emails from an ongoing case were used as evidence in the tax case. The question has been raised in the criminal proceedings whether this information was obtained illegally. The question at hand for the European Court: if the evidence was obtained illegally in the criminal proceedings and this had not yet been established, can that evidence be used in tax a proceeding?

European fundamental rights

Before the European Court deals with the question as to whether evidence for the tax proceedings should be excluded from this case, the broader context of the guaranteed rights will be defined within the broader context of the Union Law. In particular, reference is made to the Charter of Fundamental Rights of the European Union (the Charter), for which the EU has also published Explanatory Notes. Many of the human rights from the ECHR, such as the right to privacy and the right to a fair hearing, are incorporated into European law. Restrictions or infringements on these rights may only be made by law and must be necessary for recognised objectives of general interest, such as the prevention of fraud. That means that the restriction (of privacy, etc.) should be able to have the desired effect and not extend beyond that which is strictly necessary.

Exclusion of evidence

The European Court tests in three steps:

  1. Has the evidence in the criminal proceedings been illegally (without judicial authorisation) obtained
  2. Does the use of same by the tax authority constitute an inadmissible restriction on the defence rights because a less serious infringement could have sufficed
  3. In the case of infringement, will an ‘effective remedy’ be offered, either
    1. because testing may establish whether the Charter rights have been safeguarded;
    2. or the evidence will be excluded from use in the tax proceedings.

By doing this, the European Court is once more setting down markers in the area of privacy, after the method of exchanging information between countries had already been denounced in the Smaranda Bara ruling in October 2015.

Supreme Court directly overstepped by webcam girls?

Last year, the highest court of the Netherlands ruled that ‘illegal (criminal) evidence’ should not only be excluded in tax proceedings, but not even as evidence for the fine. The Supreme Court holds firm to its line set out in 1992 on the use of illegally obtained criminal evidence in a tax proceeding:

“The use of such evidence by the inspector is only prohibited if it is obtained in a manner that is so contrary to that which can be expected of a reasonably acting government, that this use has to be deemed inadmissible under all circumstances.”

Due to this strict rule from the Supreme Court, it boils down in practice that in many cases illegally obtained criminal evidence may be used in a tax proceeding. Advocate General Wattel also pleaded in favour last year for the tax penalty law to comply with the more flexible manner in which illegally obtained evidence is dealt with in criminal law. The Supreme Court rejected this advice, and ruled in its judgement of 20 March 2015 that the “such contradictory criterion” cited above still applies.

The European Court has since thwarted that and declared exclusion of evidence in the new standard, in each case where a matter of illegally obtained criminal evidence exists through infringement of the right to privacy. The Court does not limit this ruling to any fine, be also declares it applicable to determining the tax liability. The consequence when (the court determines that) the requirement laid down is not satisfied, is that the evidence will have to be excluded for the tax levy which, without sufficient other evidence, will have to result in the tax assessment being rendered void.

Other defence rights 

This judgement forms, in the first instance, a powerful argument for respecting privacy. Of course, any criminal investigation may infringe on the privacy of suspects and that does not automatically lead to exclusion of evidence. However, if a boundary is reached, as is the case here because no advance permission was granted by any court before telephones and emails were intercepted, unless, and this is subsequently what the national court concerns, it can be verified later on whether the confiscation was legal, necessary and did not extend beyond ‘effective’.

But there is more. The European Court does not only refer to the Charter for the right to privacy, but emphasises that all rights included therein weigh just as heavily as their counterparts in the Human Rights Treaty of 1950 (ECHR). For the question ‘and then?’: what is the sanction if an unreasonable infringement on the (privacy) right is determined in one of the preceding steps, the Court refers to the ‘rights of defence’ in article 47 of the Charter, which refers to the right to a fair hearing as (also) guaranteed in ECHR, Article 6.1.

Evidence provided by force

The right to a fair hearing includes, among other things, the right to remain silent and the right to not have to cooperate in your own conviction. In some respects, there is a large area of tension between these guaranteed rights and in other respects the tax obligations to acquire information. The ruling of the Supreme Court on the issue as to when forced information may be used for a fine, does not yet seem to be fully ECHR-proof.

The portal to the European Court, through which Tribunals, Courts and the Supreme Court submit (preliminary) questions on the interpretation of Union Law, is perhaps more interesting in these cases than filing an appeal with the ECHR. The latter Court may only become involved in the final stage when, after years, the Supreme Court has ruled – and, moreover, only for the fine. The European Court can come into the picture much faster and, moreover, also rule on the usability of evidence for the tax levy.

Restriction to ‘European’ cases

An observation that has to be made is that the European Court only deals with European cases, which means that there has to be a link to Union Law. That link can be made in various ways. For example, the turnover tax is regarded as a ‘European tax’ and an appeal can be made to, for instance, the Charter in cases concerning VAT. It is justifiable that the rights from the Charter are so fundamental and generally applicable that they should apply in any proceeding. However, according to the Supreme Court, this does not apply for a purely Dutch case concerning VAT. Each (EU) country still has its own income tax legislation, so that there is no link with Union Law – unless. Such an ‘unless’ crops up, for example, in discussions on tax evaders. Because the European freedom to save money in another country is utilised, the legal protection that the European Court offers in such matters comes into play.

The fact that guarantees for one type of tax may well not apply for the other types, does not, however, show a comprehensible distinction. This creates a strange situation in that for some taxes there is more legal protection than for others.

 

 

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?

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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.