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Comprehensive tax audit from an accounting perspective

csaba.baldauf — Mon, 18 Dec 2017 09:00:52 +0000

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A comprehensive tax inspection in Hungary is generally based on all of the business events included in a given accounting system. Thus during the inspection, the primary task of the accounting professionals is to provide data for the inspectors, for example sub-ledgers, contracts, completed tax returns or other documentation. This is why it is important to document all business events appropriately, particularly those that are not part of the daily routine, and which have to be managed differently from the norm. In certain cases, where something can be judged in several ways, it is also important to support not only our decision but also the path that led to our decision.

It can happen of course that the Hungarian tax authority is actually interested in what is not recorded in your systems. Yet apart from providing the necessary documents, statements and information, accountants have nothing else to do in this case, from an accounting perspective, until the comprehensive tax audit is closed.

Familiarising yourself with the decision

Once you have read the findings of the comprehensive tax audit and do not dispute them, or you have used up all the available legal remedies, it is important to interpret the findings and decide what qualifies as a tax shortfall and what will be a legal consequence. The accounting of an error or its impact, essentially a tax shortfall, depends on whether the company qualifies the given error as significant or otherwise based on its accounting policies. In Hungary, however, legal consequences (tax penalty, late payment interest, default penalty) always have to be charged to the profit in the year when the finding was made, so the amount is ignored when the error is qualified.

Significant and non-significant errors

To establish what qualifies as a significant error and what is a non-significant error at a given company, all we have to do is compare the sum of the error detected for the given year and its impact to the significant-error threshold defined in the company’s accounting policies. If the sum of the error and its impact exceeds the given threshold, three-column financial statements must be prepared, but if the amount remains below the threshold, this is not necessary, the errors and the impacts thereof will be included in the data of the financial statements for the reporting year.

In this respect, I would like to draw your attention to two important aspects. On the one hand, although other factors naturally have to be taken into account as well, it is not necessarily worth recording conditions in your accounting policies that are stricter than those defined in Hungarian legal regulations for significant error thresholds. According to the basic assumption of the Accounting Act, an error not exceeding HUF 1 million (approx. EUR 3,200) and its impacts do not qualify as significant. On the other hand, we should not forget that when calculating the error and its impacts, we have to consider the aggregate amount of the sums affecting profit or loss and equity (regardless of their sign). In the majority of cases this means that all errors and their impacts essentially have to be factored in twice. So the set threshold is practically half of what we first thought.

Self-revision – do it, while you can and as soon as you can

After receiving the letter of appointment, no self-revision may be submitted in respect of the period subject to the inspection. So it is crucial to fix the errors that you detect as soon as possible after they come to light. It is also important that if an inspection is closed with a finding, you need to consider whether the given finding can be traced back to a one-off error, or whether your procedures are wrong. In the latter case you should rectify the procedural error, and then for the years not subject to the previous inspection in which the wrong procedure was followed, but which could still be examined by the tax authority in the future, a self-revision should be filed. This way you can significantly mitigate any tax shortfall that could be established during a future tax audit or a comprehensive tax inspection, and the tax consequences thereof.

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What kind of legal remedy tools are available in tax administration procedures?

wplabshu — Wed, 13 Dec 2017 11:00:34 +0000

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A tax authority inspection is usually closed with the handover of the inspection report, or if it is posted, then as of the postage date. Completing the operative phase of a comprehensive inspection unfortunately often means resorting to legal assistance, even when the taxpayer acted as prudently as possible. In our article we discuss what legal remedy tools are available for audited taxpayers if they do not agree with the tax authority’s findings.

Of course, the legislator ensures audited taxpayers have rights even before the inspections are completed, to ensure a balanced hierarchy between the tax authority and the taxpayer. So, for example, taxpayers are entitled to be present during the inspection activity, to request information regarding potential findings as well as to initiate motions for evidence.

Findings

After the completion of a tax inspection, taxpayers have the right to submit comments within 15 days (within 30 days from 2018) of receiving the inspection report. This right enables taxpayers to assert their claims without being subject to any duty payment. If the tax authority accepts the taxpayer’s remarks, it modifies the findings of the inspection report accordingly.

Appeal, as an ordinary legal remedy

If the tax authority does not accept the arguments and adopts its first-instance decision, an appeal can be submitted at the same tax authority within 15 days, or in the case of an ex post tax assessment, within 30 days. One important change from 2018 compared to the previous rules is that no new facts can be brought up, or no new evidence can be presented if the taxpayer was aware of these before the first-instance decision, but chose not to submit them, despite requests from the tax authority. In light of this, it is recommended to proceed very carefully as well as to collect and disclose the most information possible during the first-instance procedure. In contrast to making comments, however, an appeal is subject to a duty payment. The duty is HUF 400 (approx. EUR 1) for every HUF 10,000 (approx. EUR 32) of the disputed amount or part thereof, but no less than HUF 5,000 (approx. EUR 16) and no more than HUF 500,000 (approx. EUR 1,600). An appeal is a legal remedy with a devolutive effect subject to conditions, i.e. if the first-instance tax authority agrees with the content of the appeal, they withdraw the challenged decision or modify, correct or supplement it in line with the appeal. Otherwise, they submit the appeal together with all the documents of the case to the second-instance tax authority within 15 days of receipt of the appeal. The second-instance tax authority reviews the challenged decision and the conducted procedure. They have 30 days for this after the submission of the documents, or 60 days in the case of an ex post tax assessment.

Judicial review, as an extraordinary legal remedy

The taxpayer can initiate a judicial review of the second-instance decision. Here, the case moves from being a public administration matter to the judicial system, where the court makes a decision on the lawfulness of the public administration authority’s decision. The court’s right in this respect is derived directly from Hungary’s Fundamental Law.

As a general rule it is important that this legal remedy may only be used against a second-instance decision since this opportunity is only available for taxpayers if an appeal has already been submitted. The legal action has to be submitted to the body that adopted the first-instance public administration decision, within 30 days of the disclosure of the second-instance decision. The legal action can only be submitted with reference to a violation of the law. Filing the legal action does not suspend the enforcement of the tax authority’s decision, but it is possible to request that the enforcement of such decision be suspended simultaneously.

Supervisory action, as an extraordinary legal remedy

If the decision or ruling (action) of the tax authority acting in the case, which can be challenged with an independent appeal, is in violation of the law, or if any action was not taken and this violates the law, we can request supervisory action as an extraordinary legal remedy. The duty applied for supervisory action is the same as that for an appeal. Such requests can be submitted against both first-instance and second-instance decisions. During supervisory action, no decision can be made that changes the tax liability to the detriment of the taxpayer.

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Strategic aspects of comprehensive tax inspections

wplabshu — Mon, 27 Nov 2017 12:00:00 +0000

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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.

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