Who is Offside? The Taxpayers or the Authorities
Not long ago, a client came to me because the Dutch tax office was threatening to hold him personally liable for value added taxes payable by a company of which he had been a director. In many countries individuals who are directors, or even those who act as though they are directors, can be held personally liable for the debts of a company either where it goes bankrupt or where it fails to pay certain taxes, in particular payroll taxes and value added taxes. The liability for these taxes arises because the companies are effectively considered to be collecting agents and in that regard, they are deemed to already hold some of the government’s funds. However, in the Netherlands there are various other instances where an individual can be held personally liable for taxes, for instance where a company containing only cash, transfers its residence to another country but still has an unpaid corporate income tax liability.
Recently, the Dutch tax office has entered into agreements, called covenants, with taxpayers and other organisations. A covenant is a sort of self-policing agreement, in return for which the tax office promises a better service. Both parties agree to trust the other. Where the taxpayer has questions, they will be dealt with speedily and in good faith and the taxpayer agrees not to attempt to stretch the limits of what is permitted. In spite of this, the tax office retains all rights to carry out tax audits and to demand information etc. (although some politicians have requested that they are circumspect about using these powers too much in this case).
There is a natural tension between the two parties, which in my view, prevents complete trust. Nobody is certain what happens if one party does not comply with the agreement or if one party thinks the other does not comply with the agreement. The tax office can simply issue an assessment with penalties where it deems appropriate, therefore it is not, in effect, giving up much. On the other hand, if a taxpayer considers the tax office is in breach of the agreement, it is rather unclear what he can do. In reality, it seems as if only one party is actually giving anything up; the taxpayer.
Part of the intention of these new arrangements is to provide companies with certainty in a more expeditious manner so that the directors can confirm to their auditors that there are no possible major tax liabilities hanging over the company.
However, it is not all an improvement (if it is at all), because from this year, the Dutch rules for issuing assessments have been changed. In the past, an assessment for corporate taxes in the Netherlands had to be issued within three years after the end of the year concerned, with extensions in certain specific situations. An extra assessment could be issued up to five years after the end of the year concerned (or for income from foreign sources up to twelve years), but only if there was new evidence or the taxpayer had acted in bad faith. In certain cases, where the tax inspector had made a mistake which was patently obvious (for instance there was one zero too many in a tax refund), then he would still be entitled to make an adjustment.
These rules have been amended from 2010. If the inspector issues an assessment and the taxpayer (or if he is an advisor, then his advisor) could reasonably be aware of the fact that it is not correct, then the inspector can issue a new assessment. If you have an advisor you are likely to be deemed to have more knowledge and therefore more likely to get a new assessment. So what happens to the idea of early certainty? And why is it, that in this case, a mistake by the tax office can be corrected with impunity? It is interesting to note that the maximum penalty for an incorrect tax return has just been increased from 100% to 300% of the tax!
Going back to my client who was being held personally liable (you may have forgotten him). The tax office based his liability on the fact that the books of the company, of which he had once been a director, were incomplete. However, they never actually went to the company's office to check the books of account. Instead, they went to a management company which had once acted for the company but no longer did so. It was therefore not surprising that they did not find complete books of account.
Nevertheless, the fact that the tax office had issued an assessment for a notional sum of EUR2.5 million and had expressed to the former director that they planned to hold him liable, meant that he had to weigh up his options. Going through the courts would have involved many years of uncertainty and a significant cost in lawyers fees. On top of that, even a cast iron case is never certain. As a result, the former director did a deal with the tax office to pay them EUR50,000 to drop the case. If he had proceeded and won, any costs granted would have been minimal and far from sufficient to cover even a small proportion of his costs.
Why should it be that an individual in this situation still ends up having to pay, while if a tax inspector issues an incorrect assessment, there is very little we can do (there are currently limited options for claiming some damages)? And now, the tax office has even more opportunity to correct any mistake they make and with impunity!
If the taxpayer does something that is in contravention of the law, he can be liable for criminal penalties. This is the case even if the contravention was by the company.
Once again, we see frequent examples where the “other side” can act with total impunity. Consider the number of cases where EU member states have implemented domestic legislation which is patently non-compliant with EU legislation. And in some cases, even after a decision of non-compliance from the European Court of Justice (ECJ), these countries fail to act or introduce legislation which is in contravention of the decision.
For example in 2005, an infringement procedure was commenced against the Netherlands in respect of withholding taxes on outbound dividends to companies in the EU and the European Economic Area (EEA). A dividend paid by a Dutch company to a 5% corporate shareholder, within the Netherlands, was exempt from withholding tax. The same rules should have applied to dividends paid to a 5% corporate shareholder in the EU or the EEA. Whilst the Netherlands extended the rule to EU shareholders, they did not extend it to EEA shareholders, on the basis that there were no mutual assistance arrangements with EEA countries. However, with the higher shareholding, which applied under the parent subsidiary directive as extended to the EEA, no withholding tax had to be deducted on a payment to a 10% corporate shareholder. The court threw out the Netherlands' defence on the basis that if you can pay a dividend to a 10% shareholder, then you can pay a dividend to 5% shareholder.
So why, if there is no reasonable defence, does no one suffer a penalty for breaking EU law (or in this case EEA law)?
There are many other examples. Dutch legislation on the European Company or SE states that a European Company which is subject to Dutch law on incorporation is considered to be incorporated under Dutch law and therefore is always automatically considered a resident of the Netherlands. This means that it is deemed to be a resident of the Netherlands even if it transfers its residence to another EU country. This was pointed out by the Council of State which advises on legislation and various professional bodies. The Ministry of Finance takes the view that the situation is adequately covered by tax treaties although I am puzzled as to how the treaties can cover this properly. Not many people would consider that this argument would stand up in court. So even though the issue has been clearly raised and effectively ignored (or justified with arguments which are not at all relevant), the individuals responsible for introducing what is in effect illegal legislation, are not liable for anything. It is quite clear that they are breaking the law and with financial consequences that stretch much further than those caused by any company director. In many cases, company directors may not even be aware that they are breaking the law. On the other hand, in the situation above, those breaking the law were made aware that they were doing so in advance and still continued to do so. Some personal liability or personal penalties would surely result in better legislation and fewer cases in front of the ECJ.
There are many other similar instances, and the Netherlands is far from the worst offender. But why should there be no sanction against individuals working for tax offices and ministries who blatantly fail to do their job properly when there is for directors of companies (sometimes even where no blame attaches to them)?
Perhaps we should also look at some of the organisations such as the Organisation for Economic Co-operation and Development (OECD) that complain about “tax havens” and profess to promote level playing fields. If we look at the way in which the OECD and its staff are taxed and the privileges and immunites of the organisation, we see the following:
“The property and the assets of the organisation wherever located and by whom so ever held shall be immune from search, requisition, confiscation, expropriation and any other form of interference whether by executive, administrative, judicial or legislative action.”
“The organisation, its assets, income and other property shall be exempt from all direct taxes…exempt from customs duties and prohibitions and restrictions on imports and exports. Officials of the organisation shall…enjoy the same exemption from taxation in respect of the salaries and emoluments paid to them as is enjoyed by officials of the principal international organisations and on the same conditions.”
For the secretary general, this exemption even extends to his spouse and children under the age of 21.
Basically, this means that employees of the OECD are exempt from tax. If they do end up paying any local tax, it is reimbursed by the OECD (except in the case of US citizens). And in addition to their base salary, employees may be entitled to a number of of allowances.
Therefore, in the middle of Paris we have a large organisation, funded by a number of governments, whose staff are untaxed. The organisation is not required to provide information to third parties on this and no one can carry out a tax audit. And that organisation is complaining about individual countries which do not levy taxes!
Why should the staff at this sort of organisation be untaxed? Commercial organisations have to take local taxation into account when deciding where to locate. So why not the OECD (other than because the treaty which set it up states that it should be based in Paris)? And is it fair that they can compete for staff by offering untaxed salaries while businesses are subject to local rules? Even other non-profit bodies performing some of the same functions as that of the OECD (reports, seminars) are subject to tax and are therefore at a competitive disadvantage. I would personally find it embarrassing to demand changes in countries which levy no taxes if I were receiving a ring fenced, untaxed salary (and allowances).
Perhaps it is time for a new referee! |
