During their operations, companies have to comply with their obligations set forth in various tax and procedural laws, and operating lawfully requires that these are observed on a continuous and timely basis. Finance staff at companies identify and fulfil the obligations prescribed in the laws. The meeting of these obligations is continually monitored by the tax authority in certain cases, and occasionally it conducts tax inspections to examine them.
Preparing for tax inspections
Ideally, preparing for tax authority inspections at a company takes place parallel to the occurrence of business events, on a continuous basis. Contracts already concluded have to be examined in advance from a tax and accounting perspective, and it has to be defined whether or not they entail any risk. If the contract does not formulate certain provisions clearly, then to remedy this supplementary agreements can be concluded.
If we have a significant contract we can turn to the Ministry for National Economy for an official opinion. These opinions can take several months, so if we choose this option we have to launch the process on time. We can ask the tax authority any questions we have, and within a short period we receive their non-official response. It can happen that opinions or court cases have already been disclosed in respect of similar transactions in the past. With this knowledge we can define the transaction’s appropriate treatment under tax law for our business too. We should note here that the new Act on Rules of Taxation includes a very favourable rule, according to which no legal consequence can be established to the detriment of a taxpayer if the latter acted according to information disclosed on a page of the tax authority’s website created for this purpose. (However, this does not exempt the taxpayer from paying the tax shortfall.)
Obligations examined most frequently
In addition to the proper treatment of business events it is particularly important that businesses have to comply with the requirements included in the relevant tax laws since the tax authority pays special attention to compliance with these rules during tax inspections. We cannot provide a full list of them here, but during an inspection the following topics are highly likely to be discussed:
- Businesses have to prepare their internal policies in good time and they have to make these available during tax inspections.
- They have to carry out their statutory reporting because failure to do so will be sanctioned by the tax authority.
- They have to have the potentially necessary statements available in respect of individual transactions.
- Their books have to be kept according to requirements, while they have to issue their invoices according to legal regulations too.
- Companies must file their tax returns according to the rules relevant for them, and pay their taxes.
Comprehensive tax inspections: why and how
Comprehensive tax inspections in particular, i.e. those making retrospective checks of tax returns, are very important since during such an inspection the tax authority may review all the company’s tax liabilities, it may find tax shortfalls and levy penalties, or it can even expand the inspection. The tax authority may conduct such an investigation in respect of a few or even several tax types. There can be various reasons for ordering tax inspections. The tax authority may conduct an inspection based on predefined principles at companies which perform certain activities. In this case, the comprehensive tax inspections cover several years, and the tax types applied at the business are generally reviewed extensively. So after the tax authority’s inspection of the given years and tax types ends, this period is considered closed from an inspection perspective.
It may also happen that another type of inspection is performed at the company, but during the procedure the type of inspection changes, and we find out about this by receiving a new letter of appointment. Once in possession of letters of appointment regarding comprehensive tax inspections it is no longer possible to amend tax returns, and these letters may also be delivered electronically through the government portal. It is worthwhile being a reliable taxpayer since the period of a NAV inspection cannot exceed 180 days if the taxpayer continually qualifies as a reliable taxpayer during this period. The law regulates the conducting of inspections as well as the rights and obligations of the taxpayer and the tax authority, and we need to be aware of these during the procedure.
Inspection report
Tax inspections are closed with the handover of the inspection report, which summarises the procedural principles applied during the inspection as well as the relevant legal references and a list of any findings. The inspection report refers to the taxpayer’s right to make comments, and the taxpayer may do so if necessary. As for the tax types and periods reviewed, apart from a few special cases the tax authority will conduct no more inspections on these in the future, so the period is deemed closed in this regard.
Representing taxpayers at a comprehensive tax inspection requires significant expertise. In the following three articles on this topic my colleagues will draw attention to the most important tasks from tax, legal and accounting angles.
