During a tax inspection there is a good chance that the tax authority will request the company or taxpayer under review to make a customer statement. A customer statement is one of the most important means of proof for both the tax authority and customers or taxpayers. One possible format is the letter of representation that appeared in the Act on Rules of Taxation from 2017, and it is advisable to take care with this.
Customer statement: option or obligation?
During a NAV inspection, taxpayers are obliged to be present and cooperate. Among other things, this means that if summoned by the tax authority the taxpayer has to appear and make a customer statement, along with handing over the requested documents on tax liabilities to the inspectors. The tax authority may not request records, calculations or summaries that are not prescribed by law. After appearing, however, customers can decide at their discretion whether or not to make the statement. This is because the customer statement is a just an option, a right, it is by no means an obligation. This is explicitly underlined in the law, as it states customers not only have the right to make statements, but also the right to refuse such statements. Of course it does not really make sense to shy away completely from answering the questions posed by the inspectors, for the simple reason that an inspection can be closed even without a customer statement, based just on the information available (possibly with very negative consequences for the customer).
Letter of representation
In relation to investigations on wealth gains, the tax authority often experiences difficulties because the individuals under investigation come up with theory after theory and new evidence to prove the sources of their enrichment in face of the inspectors’ findings. Since the general rule states that the tax authority has to clarify the facts of the matter, and justify its decisions, in principle the tax authority has to look into every such theory. Such conduct from taxpayers can naturally result in procedures being unjustifiably delayed, which is why the so-called letter of representation has been applied in the past to avoid this. The letter of representation essentially means that the inspectors ask the given taxpayer to make a statement on a certain point of the procedure, to the effect that they have disclosed all of the material circumstances surrounding the matter to the tax authority. However, it is easy to see that such a statement can come back to haunt the taxpayer because someone subject to a NAV inspection often only realises much later on what exactly they have to prove to the tax inspectors. The legislators in Hungary were conscious of this contradictory situation too, and included guarantee rules governing letters of representation when amending the Act on Rules of Taxation. Accordingly, within 15 days of launching a tax inspection, the NAV asks the taxpayer to send a letter of representation regarding the financial, income and other circumstances that are material in terms of assessing its tax base, within 15 days. This deadline may be extended once on request, by no more than 15 days (this period is not counted as part of the inspection). However, what is also true about the letter of representation is that taxpayers can refuse to make the statement, either in whole or in part. If the taxpayer refuses to make a statement or only makes a partial statement, the NAV continues the proceedings based on the data available.
Significance of representation for a customer statement
What is important is that you can enlist the help of a company well-versed in communicating with the tax authority – such as WTS Klient Hungary. The advantages of professional company representation are briefly summarised below:
- Professional representatives are well aware of which questions can be asked in connection with an inspection on a given tax type, which documents the inspectors can ask for and the ones they cannot.
- They have in-depth knowledge of customers’ rights and the means to enforce them (they know and monitor related deadlines).
- These experts have the necessary know-how to facilitate professional dialogue with the tax authority. This can be particularly helpful during cooperative procedures for example
- As professionals they make sure that the statements made during the proceedings are accurate and coherent. (Customers sometimes interpret tax concepts incorrectly, which can lead tax inspectors to draw the wrong conclusions – engaging a professional can prevent this too.)
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