Effective regret, tax criminal offence and international automatic exchange of information on financial accounts in the Czech Republic
The issue of tax crimes in the Czech Republic, especially the offense of tax cuts, is gaining with an expanded exchange of information between financial authorities and states of an international dimension. The crime of tax cuts is also linked to the institute of effective regret. In the Czech Republic, this crime has been regulated in general, regardless of the specifics of its application in the field of tax criminal law. The Institute of Effective Regret can in some cases get rid of criminal offenders, its application has many interpretative problems, and it is not certain whether it can be relied upon in all cases.
We deal with foreign colleagues with different approaches to the application of effective pity in individual countries, notably following the Multilateral Agreement on automatic exchange of information on financial accounts, which has already been signed by more than 120 countries around the world, and which has fundamentally extended the tools and capabilities of national financial reporting in the fight against international tax evasion.
The offense of reducing the tax is regulated in Section 240 of Act No. 40/2008 Coll., Criminal Code, as amended (the Criminal Code), in Title VI. As an economic crime. The purpose of this offense is deliberate behavior when the entity deliberately reduces taxes, duties, social security contributions, state employment policy contributions, accident insurance, health insurance premiums, fees or other similar payments. In practice, we most often encounter fraud in accounting, taking into account fictitious invoices, overvaluation of invoices, and so on. Frequently, there is a situation where the taxable person does not intentionally enter foreign assets or income in his tax return.
Criminal responsibility can be any natural person who has consciously contributed to the tax reduction, that is to say the taxpayer directly to his tax liability, or the responsible person in the case of a corporation tax reduction.
In order to be a criminal offense, the amount of damages must reach at least CZK 50,000. The amount of the damage is based mainly on criminal sanctions, but also on the period for which the criminal offense may be time-barred. If damage of less than CZK 500,000 is caused, the prison sentence is between 6 months and 3 years. The Penal Code also permits alternative sanctions - a ban on activity. In the case of damages in excess of CZK 500,000, the offender is liable to a penalty of imprisonment of 2 years to 8 years, without any alternatives. Finally, if the offender causes large-scale damage, ie damage exceeding CZK 5,000,000, the perpetrator is liable to imprisonment for up to 10 years. The limitation period for the tax cut is then according to the amount of damage caused and the amount of penalty imposed 5, 10 and finally 15 years.
In a situation where a taxpayer will tax the tax in more tax periods, the signs of a continuing crime may be fulfilled. It should be noted that in these cases, the limitation period will only begin to run after the last reduction (the moment when the continuing crime is over) or it does not begin to run at all.
Given that since January 1, 2012, the Czech legal system also has the Institute of Criminal Liability of Legal Entities, it should be mentioned that the offense of reducing the tax is possible according to Act No. 418/2011 Coll., On Criminal Liability of Legal Entities and proceedings against them as amended, impose a criminal sanction on a legal person. Criminal sanctions for a legal person may include, inter alia, the cancellation of a legal person, the forfeiture of its assets, the imposition of a financial penalty, the prohibition of activity, etc. It is therefore possible to envisage a situation in which a criminal offense may be punishable by both legal and natural person, such as a corporation, and its executive.
Effective regrets in general and in relation to the crime of tax cuts
Effective regret is generally defined as a criminal law institute in Section 33 of the Criminal Code, which provides that for certain offenses, the offender shall be liable for criminal liability if (i) he or she has prevented or corrected the harmful outcome of the offense, or (ii) at a time when the harmful consequences of the offense could still be avoided, either by the prosecutor or the police.
The Institute of Effective Regret has two variants in the field of tax crime, so-called general and special pity. Section 33 of the Criminal Code regulates the so-called general effective regret applicable to the criminal offense of tax reduction, whereas in § 242 of the Criminal Code the so-called extraordinary pity is adjusted for the offense of non-tax evasion. While general effective regret requires that the taxpayer additionally admit the tax on a voluntary basis, not only under the threat of criminal or administrative sanction, it is in most cases necessary to show regret before submitting a specific audit to the Financial Administration of the Czech Republic Financial management). On the other hand, the conditions of special pity may also be fulfilled by paying the tax payer until the court of first instance starts pronouncing the judgment. The issue of volunteering is missing in this case.
General tribunals have progressed for many years according to the clear text of the Penal Code, and consistent case law has applied general pity in cases of tax cuts, and a special effective regret solely in cases of non-payment of the tax. Even the Grand Senate of the Criminal Court of the Supreme Court of the Czech Republic, on 8 June 2006, has argued in an authoritative manner that the additional payment of the tax after commencement of criminal prosecution in the case of a criminal offense is not a reason for the analogous application of a special provision of effective regret relating to the offense of non- 644/2006).
The situation changed in 2009 when the Constitutional Court of the Czech Republic in IV. ÚS 3093/08 for the first time questioned the application of general effective regret for the offense of tax reduction. In the above-mentioned judgment, the Constitutional Court of the Czech Republic considers it unacceptable that the time limits for the application of general pity and special regret are so different when it is essentially a similar criminal offense. The Constitutional Court of the Czech Republic has therefore inferred that in the case of a criminal offense, the reduction of the tax can not be limited to general regret, but the provisions of § 242 of the Penal Code can also be used in a similar way. Although the wording of § 33 of the Criminal Code is completely unambiguous and the Constitutional Court of the Czech Republic, in its argumentation, has completely gone beyond the text of the law. The said finding therefore resulted in the division of the professional public, who, even after several years, did not agree on the issue. The primary argument of the Constitutional Court of the Czech Republic was that the notion of non-payment of tax is much broader than the notion of tax reduction.
However, the argument of the Constitutional Court of the Czech Republic did not stand in the subsequent jurisprudence of the Supreme Court of the Czech Republic and the general interpretation was not taken up. The Supreme Court of the Czech Republic responded by the 2012 jurisprudence (Ref: 8 Tdo 272/2012), in which it reaffirmed the steady interpretation until 2009 "... the offender will additionally fulfill his tax liability only on the basis of the results of the tax audit, even before the criminal prosecution , it does not act voluntarily on its own will, but already under the threat of an imminently imminent criminal prosecution. Already at the time of the start of the tax audit, specific actions are taken to prove the evidence of possible tax cuts ... ".
More detailed reasoning was followed by the resolution of the Supreme Court of the Czech Republic sp. No. 549/1414, in which the Supreme Court of the Czech Republic dealt with the above-mentioned argument of the Constitutional Court of the Czech Republic more precisely that "... the notion of tax reduction (other compulsory payments) within the meaning of § 240 (1) tr. of the Code expresses a more significant interference with the protected interest of the state than the non-payment of the tax (other compulsory payments), because in the reduction of the tax it is in essence a fraudulent act (the taxpayer misleads the deceiver, conceals the material facts, etc.) non-tax evasion without any distortion or concealment of the tax, which the legislator correctly expressed in the Penal Code also with different penalties especially in the higher paragraphs of § 240 and 241 of the Criminal Code. of the Code, which express the mutual type of harmfulness of both crimes ... ".
In the case of tax cuts, there is no exception to the administrative and criminal proceedings. The Tax Office is authorized to charge a reduced rate of tax and to impose a considerable penalty. At the same time, however, it has a reporting duty on law enforcement authorities, if it finds out during the inspection that the fact of the tax offense can be fulfilled. Can the payment of a targeted tax, including a penalty, lead to the suspension of criminal prosecution? Is it an effective pity?
Although the Czech case law is not even uniform on this issue, the Grand Senate of the Supreme Court of the Czech Republic in early 2017 in the decision sp.zn. 15 Tdo 832/2016 expressed its attitude quite clearly and allowed the possibility of a criminal sanction for the perpetrator who had been penalized by the tax office for the purpose of the tax cut. At the same time, it stresses that it is "necessary for the courts to take account of the decision of the tax office (additional payment assessment) on the obligation to pay a penalty payment and, in the justification of the decision, explain how that factor has been taken into account in the determination of the type of penalty and its assessment "The decision thus reflects the decision of the European Court of Human Rights, which in 2016 did not find a breach of the ne bis in idem principle in the course of administrative and criminal sanction for a tax offense, especially since the administrative penalty (penalty) has a preventive and coercive function , while the criminal penalty prevails in its repressive functions. The Supreme Court of the Czech Republic therefore in this case did not accept the argument of the applicant that the payment of the tax and the payment of the penalty was a manifestation of effective regret because the obligations were fulfilled only under threat and pressure of prosecution. To date, it is one of the most important recent decisions in the field of tax offenses and the application of effective regret in handling them. The Supreme Court of the Czech Republic reaffirmed its position that general effective regret is very limited in relation to the tax reduction, and it can certainly not be confused with the special effective regret provided for the offense of non-payment. The social harminess of these two crimes is totally incomparable. The Supreme Court of the Czech Republic therefore continues its settled case law, despite the fact that the Constitutional Court has not yet come up with the opinion it expressed in the 2009 finding.
Multilateral agreement on the exchange of information on financial accounts
The Multilateral Agreement on the Automatic Exchange of Financial Account Information, published in the Czech Republic under No. 2/2014 Coll. ("the Agreement") effective January 1, 2016, establishes a new global standard for reporting common reporting standards ("CRS"). The CRS was introduced by a group of G20 states and an international OECD organization to combat international tax evasion. The CRS introduces an annual automatic exchange of sensitive financial information regarding non-tax residents who hold financial products with intermediaries based in countries that have signed the Agreement. The automatic exchange of information enables taxpayer information to be passed on to the tax authorities of the Member States. This is an administrative procedure that does not require special permission from the court.
129 countries have joined the CRS (current figure in 2018). The agreement, along with the CRS, comes to a worldwide level, including several countries that have so far been known as tax havens. In the Czech legal order, the Agreement was incorporated by amendments to Act No. 164/2013 Coll., On International Tax Cooperation in 2016 and 2017 (Lex GATCA). This law was followed by an agreement on cooperation in the tax area with the USA, called Lex FATCA, and the whole area of international cooperation and exchange of information in the area of tax administration was included in one legal regulation. The Act is implemented by two decrees, namely Decree No. 74/2014 Coll., Which defines the types of income and assets for the purposes of automatic exchange of information and Decree No. 108/2016 Coll., Which are exempted from the automatic exchange of information on pension savings, supplementary pension insurance with state-sponsored state support and supplementary pension savings.
The first amendment, Lex GATCA 2017, transposes Council Directive 2015/2376 of 8 December 2015 and introduces, as part of the automatic exchange of information, the exchange of pre-tax tax decisions and preliminary assessments of transfer pricing between Member States of the European Union. The exchange concerns only provisional decisions related to cross-border transactions.
The second, the latest amendment to Lex GATCA in 2017, was adopted in response to the OECD project - "Prevention of Tax Evasion and Transfer of Profits" ("BEPS") and as a transposition of EU Council Directive No. 2016/881 of 25 May 2016. The amendment, effective as of 17 September 2017, introduces a new type of automatic exchange of information, namely automatic country-by-country reporting for multinational enterprise groups with a consolidated annual yield of over € 750 million. It is the fulfillment - in a directive emphasized several times - of the requirement to apply the look through principle, which is necessary to identify the persons actually controlling passive non-financial entities. The first fulfillment of the reporting and notification obligations under this Act was set for most cases until 31.12.2017. The Czech legal order has thus been able to respond in a timely manner to both the requirements of the Agreement and the changes in the European Union legislation.
Automatic exchange is not only subject to the data of direct participants in financial relationships but also to data by end-owners, trusts, or other legal entities owning accounts, which can be a very effective tool to cover and clarify relationships where non-transparent accounts are present. Account numbers, tax ID numbers, capital income data, income from financial activities, account balance, and, of course, personal information of participants in financial relationships such as name, surname and date of birth will be collected. Even those who have invested their untaxed income in life insurance or otherwise invested do not remain safe. Automatic exchange also affects information about certain types of insurance contracts and other investment contracts. In the light of the CRS, these taxpayers will therefore be forced to clarify the origin of the invested resources to the tax office in the state in which they are resident.
The above information will be compulsorily collected by the financial institutions of the participating countries, in particular, but not exclusively, banks, trusts, investment funds, insurance companies and investment firms. These entities will then be required to send information to the tax administration of the country where they are housed each year, and they will then automatically inform the partner tax administrations of the CRS systém.
From 1 January 2016, therefore, the Financial Administration is entitled to require the taxable person to document the income or property the existence of which has been determined on the basis of information provided by the financial administration of a participating State and has shown that such income has been duly taxed. In the event that the taxpayer is not able to do so, the Financial Administration may apply a special method of reversing the tax, including a penalty in such cases up to 100% of the domiciled tax. The taxpayer's ability to tax the tax for the taxable period is normally expired by the lapse of three years. However, the new legislation may in certain cases extend this three-year period to a period of 10 years, and the Financial Administration is then entitled to tax the tax even for a period which is not yet covered.
Effortless regret in the light of new automatic co-operation between financial authorities
The Czech tax entity (Czech tax resident) is obliged to include in the Czech tax return all its worldwide income, including all its foreign earnings. In practice, however, in the case of income from real estate abroad or, in particular, in the case of income from capital assets, the reporting of such income in the Czech tax return often does not occur. On the other hand, untaxed income is still hidden from financial institutions by investing abroad. However, the risk of disclosure is rising significantly, and by 2017, by virtue of the automatic exchange of information in the tax area, it would be virtually impossible to hide any such income in the country party to the Agreement.
According to the methodological guidance on the cooperation between the Financial Administration and the law enforcement authorities issued by the CFC on 11 August 2017, the issue of effective regret with the effectiveness of the Agreement and the start of automatic exchange of information is not very different. The methodology stipulates that the assessment of effective regret is always determined by the specific circumstances of the case and can be based on the existing practice of the Czech criminal courts. The perpetrator can therefore take advantage of the effective pity mechanism if, immediately after receiving the challenge of eliminating the doubts, he / she reacts to, eliminates or rectifies the harmful outcome immediately upon receipt of the request, and provides synergy for correct tax assessment. Effective regret, on the other hand, will not be the case, for example, when criminal prosecution has not yet commenced, but the crime has already been detected by public authorities.
In the event that the Financial Administration obtains in the automatic exchange information about the unauthorized income of any of the taxpayers under its jurisdiction, the first step should be the invitation to the person concerned to provide an explanation, proof of the origin of the income or property, has proven that the unrecorded income (property) has already been duly taxed.
If the taxed entity so promptly receives the unencumbered income immediately upon receipt of the call, it will allow the Financial Administration to properly determine its amount, submit an additional tax return and pay the tax together with the sanctioned penalty, it can be reasonably expected, under legal certainty according to settled Czech case law, the offending offender acting voluntarily, who effectively remedied the harmful consequences of his criminal activity. His criminal liability would be extinguished, and the administrative penalty in the form of a sanctioned penalty would be the only sanction. In Czech law, there is no effective ex-post pity. This is analogous to a situation where irregularities have been detected in a local investigation, and an incentive to initiate financial control. In practice, the application of general effective regrets is usually accepted if the entity immediately acknowledges that the tax has been reduced. Financial administration may not even suspect a criminal offense when sending a call to explain an unrecognized foreign income. If, instead of explaining, the entity admits a tax-abatement procedure and rectifies the harmful effect of such conduct, the mere primary information underlying the Financial Administration of the inquiry is not generally considered to be a reason for not resorting to effective regret.
In practice, there are no specific cases on which to confirm the above-mentioned method of applying the Institute of Effective Regret in case of information exchange within the framework of the automatic cooperation of the financial authorities. This exchange took place officially only once, on September 30, 2017, without getting into the subconscious of the Czech public. As of 30 September 2018, there will be another exchange and may lead not only to foreign colleagues but also to Czech tax subjects to consider the possibility of using the institute of effective regret and thus removing possible criminal liability in case of tax reduction. Our colleagues in Germany, Austria and Switzerland will be informing you of our colleagues when they are published.
For more information, please contact:
JUDr. Mojmír Ježek, Ph.D.
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