#13: Taxes and the upcoming elections
Tax evasion and tax fraud are two different things even though the media tries to make you believe otherwise. Tax fraud is deliberately not filing a complete tax return due to which the public treasury is harmed. Classic tax fraud usually is committed in a non-transparent way, so the authorities have a hard time to discover it. Tax evasion however is no more than avoiding to have to pay (certain) taxes. Even though the difference between the two is quite clear, the two get generalized because tax evasion has become an unpopular phenomenon. The Dutch authorities in their ‘fight against fraud’ make grateful use of this situation, especially with the upcoming elections in March 2017.
Political statements have been made in which politicians act out on tax evasion and/or fraud. One of these statements is the letter of 17 January 2017 of the state secretary of finance and is addressed to the government in which the state secretary announces further action against tax fraud. The timing of the letter cannot be a coincidence. However, election time or not; the fight against fraud is harsher than ever. The proposals made in the letter of the state secretary is that the position of the tax authorities should be strengthened in their fight against tax fraud. The proposals are focused on creating more transparency, a more strict voluntary disclosure procedure and abolishing formal issues when it comes to fighting constructions. The state secretary more specifically announces to i) abolish the voluntary disclosure procedure, ii) to make bearer shares more transparent with respect to the ultimate beneficial owners, iii) to decrease the legal privilege for lawyers and notaries if it comes to tax investigations, iv) to publish administrative penalties imposed to tax advisors and v) to increase the possibilities for the tax collector.
The letter comes across as frightening, especially as it attacks advisors and legal professionals. Nevertheless a legal professional should have the opportunity to make an analysis of the facts and the law and act in good faith. It is also our duty to not get carried away by the public opinion on this issue or feel intimidated, but to feel free to take standpoints based on the law with decent argumentation. Even if this means that this will result in a discussion with tax authorities.
There is a lot to say about the letter of the state secretary and it raises a lot of questions. The scope of this article however is too limited to discuss all aspects of the letter, therefore we will go into the announced changes with respect to subjects Lawlunch.com addressed in the past year: the voluntary disclosure procedure and the administrative penalties for advisors as co-perpetrator of tax fraud.
In Lawlunch #04 we gave an overview of the voluntary disclosure procedure in the Netherlands of article 67n and 69 (3) of the General Law on Government Taxes (GLGT). In a voluntary disclosure the tax payer has to file a complete and correct tax return before he knows or reasonably has to suspect that the tax inspector is aware of the fact that his tax return is incorrect. Not only tax assessments will finalize the voluntary disclosure procedure, also administrative penalties can be imposed. Administrative penalties based on the first section of article 67n GLGT cannot be imposed if the voluntary disclosure was done successfully within two years after the false tax return was filed. The second sections states that if the voluntary disclosure was done after those two years, this applies as a mitigating circumstance for the administrative penalty. Article 69 (3) GLGT further prevents a criminal charge for tax fraud if voluntary disclosure was done before the knows or reasonably has to suspect that the authorities are on to him.
In article #04 we also explained the extent of the administrative penalty as of 2009. Over the years the administrative penalty became higher and higher. As of 1 July 2016 the penalty was raised up until 120% of the taxes on foreign assets which were deliberately not filed (this is 40% of the legal maximum fine of 300%).
Due to recent developments such as the automatic exchange of information the tax authorities have more instruments at their disposal in order to detect tax fraud. According to the state secretary a more strict policy on voluntary disclosure matches this development. Therefore in his letter he announces to abolish the voluntary disclosure procedure. According to the letter this means that if someone who files the correct tax return within two years after the false tax return was filed – who under the current law will not be fined – can get an administrative penalty. This penalty can then be imposed to the same extent – 120% – as when the voluntary disclosure is done after two years. This implies that voluntary disclosure is still considered a mitigating circumstance for administrative penalties.
The state secretary writes in his letter that a case under circumstances can still be handed over to the public prosecution service in order to prosecute the tax payer. However in this letter the state secretary does not say anything about abolishing article 69 (3) GLGT. According to this provision voluntary disclosure prevents a criminal charge for tax fraud. In our opinion this provision is also a ‘trigger’ to use the voluntary disclosure procedure. Abolishing this provision in our opinion would have a contrarily effect.
The state secretary announces to propose a motion for abolishing the voluntary disclosure ‘privilege’ this spring for consultation. We will follow these developments closely.
Administrative penalties (tax) advisors
In Lawlunch #06 we elaborated on the hunt for professional facilitators being part of the fight against fraud. One of the legal weapons the authorities in this respect have is to penalize the co-perpetrator with respect to all tax violations for which an administrative penalty can be imposed. Since January 2014 there is a tax specific provision in the GLGT. This provision provides the possibility to penalize everyone involved in a tax offence as a co-perpetrator, aider and abettor, inciter or solicitor. This provision integrates the more classic participating forms as we are familiar with in criminal law info administrative sanctions law. It is important to keep in mind that – in order to prove such a participation in tax fraud – also intent on the tax fraud needs to be proven.
The state secretary in his letter emphasizes that everyone including the tax authorities has to be able to rely on tax professionals acting in compliance with the law. In that respect the state secretary finds that it is important the public therefore is informed that a profession received a penalty with respect to his profession. The state secretary proposes to publish such penalties when they are irrevocable. He underlines the purpose of this proposal, namely to make clear to everyone including the legal professionals that advising on and implementing unacceptable tax constructions will not be accepted.
The state secretary – so it seems – bases this proposal on other legal areas in which penalties are published (under circumstances), such as penalties imposed by the authority on financial markets. The state secretary writes that he is aware that this measure is very radical. Nevertheless he finds that the interest of society is of more importance. The state secretary in his letter later on reduces his harsh statements by suggesting to discuss the situations in which the penalty will not be publish, an as of which amounts penalties will be published. It is important to emphasize that the proposal in this letter is to publish irrevocable penalties. Therefore the damage will not be done the moment a penalty is imposed.
The state secretary announces an internet consultation about this proposal later on this year. Also this subject will have our special attention.