George Psarakis LL.M. (mult.), PgCert
Summary: It is a common phenomenon that after an extrapolative determination of income (especially under the old law before the 2014 law where books and records were deemed inaccurate in many cases), income tax and VAT determination acts are issued and on the basis of these acts the criminal courts issue convictions for felonious tax evasion offences. The correct approach to the issue and the attitude of the case law are analysed in this article.
According to the provision of Article 30 par. 2 of Law 2238/1994 (old Income Tax Code), for companies that did not keep books and records of the KBA either because they had no obligation or because they did not keep them although they had a relevant obligation, or when the kept were below the appropriate category, or were deemed insufficient or inaccurate, the gross receipts were determined ex post on the basis of the data and information available to the competent tax authority as to the extent of the commercial activity and the operating conditions of the undertaking. In particular, for this determination, account was taken of the purchases, sales and gross profit made by the firm, the gross profit of similar firms operating under similar conditions, the number of employees, the amount of capital invested and working capital, the amount of loans and credits, the amount of production and distribution costs, the amount of management costs and, in general, all business expenses. In order to determine the net income, the gross income, as determined above, shall be multiplied by the unique net profit factor included for each category of enterprise in a special table, which shall be drawn up by decisions of the Minister of Finance published in the Government Gazette, increased by 50%.
However, the concept of "income" requires real income, which has been proven to have flowed into the taxpayer's estate. Therefore, the issuer of, for example, a fictitious invoice cannot be considered to actually receive a price under a fictitious contract of sale. He therefore does not realise income and does not fail to include the value of the fictitious tax document in his declared income. Legislating presumptions of income may work in a tax-administrative court but not in a criminal court, where, inter alia, the presumption of innocence applies in all its aspects. The use of i.e. legislative fictions or even hypothetical rules in determining the taxable amount, whether they are claimed to be cases of application of the method of extrapolation of income or under another name (e.g. presumption of living expenses or acquisition or possession of assets) is tolerable at the level of an administrative trial but not at the level of a criminal proceeding. For this reason, they may not be taken into account when there is a question of proving the element of "concealment of income" within the meaning of the relevant tax evasion offence of the Tax Procedure Code (Article 66 of the Tax Code).
Moreover, as correctly stated, In the same direction already in 2011, it was argued that "... with this method, the determination of the concealment of the actual taxable matter (: concealment of net income) as an element of the objective basis of Article 17 of Law No. 2523/1997 (: result of the omission or positive action of the action) is never causally linked to the standardized in articles 17 of the law. 2523/1997, which must be investigated (: non-submission or submission of an incorrect declaration), but with the subsequent act of third parties, i.e. the audit authorities (: off-balance sheet determination). This method of multiplying the gross income of the company by special profit rates for general categories of companies and surcharges of 40% and 80% may serve administrative sanctions, but it must be pointed out emphatically that: in the field of procedural criminal law, it does not create evidence, but instead creates an (extra)accounting working hypothesis (: evidence), which is not confirmed empirically; and in the field of substantive criminal law, it attributes to the accused an act that is not The prosecutor, Mr.Adamas, states in his relevant text on the non-payment of debts (Adamas, The offence of non-payment of debts to the State, 2018): 'The responsibility is therefore fictitious, not objective. The establishment of corresponding methods of proof seems to disregard the value of man and absolutely annihilates any notion of respect for the principle of necessary proportionality to the wrongfulness of the act and the guilt of the offender. [...] Subsequently, in our view, the court must first of all evaluate its figures by weighing (of course with the assistance of officials of the Tax Administration or experts) comparative economic parameters of the business before, during and after the period in question'.
At the level of case law, in 2016, the decision of the Thessaloniki Trial Court (No. 11249/2016) had ruled as follows: "The accused is declared not guilty of the offence of failure to file an income tax return, because the appointed auditors made an extrapolation of gross income, subsequently, after a theoretical calculation of the income and on the basis of that calculation, they charged the relevant amount of tax; however, in view of the fact that income tax is a tax arising from the actual sales of the trader and not a tax which is determined extrapolatively, and that it is a method provided for by law for the administrative sanction of the relevant offence, but it cannot form the basis for the offence under Article 17 of Law No. 2525/1997 and in this case no evidence can prove with certainty the amount of the tax actually due'. Prior to 2016, other decisions had accepted the impermissible use of the extrapolated amount as a basis for conviction for the offence of tax evasion (See with the same reasoning Efikakio 254/2010, Athens Court of Appeal 3313/2011, Piraeus Single-Member Court of Appeal 487/2014, Piraeus Single-Member Court of Appeal 504/2014).
In this respect, it is evident that in most tax audit cases VAT and Income Tax arise from fictitious income calculated presumptively on the basis of an off-balance sheet determination. No explanation is usually given by the audit as to how that calculation takes place, not even by the State's witnesses during the pre-trial or main proceedings in criminal proceedings. This is particularly the case when there is no corresponding income or expenditure in previous years to allow a specific turnover to be imputed (e.g. the company was also a dummy and therefore never made a profit).
In any case, even accepting that imputed calculation is also possible in the context of criminal proceedings because it is allegedly not a sanction or penalty, but a legal method of determining income, as the Supreme Court has accepted in recent years, this should relate only to the part of the income resulting from the multiplication of the imputed turnover by the Average Net Profit Factor, without, however, the penal multiplication of the net profit factor or the addition of the value of the fictitious invoices.
Α. With regard to income tax, it should be noted that the Average Net Profit Rate (NPC) was multiplied by 80%, instead of 40% (see Article 32 para. 2, as it was after the changes in Article 10(2), instead of 40%, the figure was increased by 40% (see Article 32(2), as it was after the changes in Article 10(2)). 3 of Law 3296/2004) when the issue of fictitious invoices occurred. However, the recital, which provided for the doubling of the MIP due to the existence of fictitious invoices, stated that this increase took place in the context of measures to curb the use of fictitious elements; it therefore takes the form of a sanction. It is therefore clear that the general preventive and punitive nature of the scheme is evident, since the reason for the increase in the MIP is ultimately to curb the use of virtual invoices and not, for example, the presumed higher profitability of the companies concerned, etc. Moreover, the explanatory memorandum, which provided for the reduction of the increase in the MCCA from 50 % to 40 % in the event of rejection of the books, provided for the following: "With par. 3 of this article provides for a reduction of the MCCI surcharge by 10 percentage points in the case of businesses that do not keep the required books or whose books are deemed inaccurate, since the current surcharge rate is considered excessive and international experience has shown that high penalties often lead the taxpayer to the underground economy".
Therefore, the explanatory memorandum itself accepts that the surcharge constitutes a 'penalty' and not a way of calculating income. The imputed income is therefore of a different size from that of the NIC surcharge, which is merely a sanction, a 'penalty' for the cases provided for therein and for curbing tax evasion.
Finally, it is not possible to add the allegedly fictitious invoices to the imputed income, for the simple reason that it is generally accepted that these invoices correspond to non-existent transactions and therefore to non-existent income. This was also stated by the Ministry in a question on the subject as follows: 'In the view of the Department, if no returns have been submitted at all or the amounts relating to the fictitious items have not been included in the returns submitted, then the total net value of the fictitious items issued should not be subject to income tax, but only the amount plus the amount of VAT which, according to the tax authority, constituted remuneration for the supply of the fictitious items to other businesses'.
Therefore, if we deduct from the amounts of the control based on off-budget determination the amounts of the fictitious invoices themselves and calculate the presumed profits on the basis of the "net" NCI, without the "penalty" multiplication and surcharges, a criminal offence may not be established because the threshold of merit is not exceeded.
For example, from a case we recently handled:
We note that based on the correct determination of the extrapolated income, while the taxpayer's conviction for a felony is based on an indictment, in this case he should be acquitted since the amounts for each year are less than 100,000 euros and therefore the act is not punishable.
Β. With regard to the offence of non-payment of VAT, if we deduct respectively from the amounts of the control based on off-budget determination the precision surcharges and the amounts of the virtual invoices themselves, what remains may be below the limits of the merit in the relevant use, resulting in the acquittal of the accused.
C. Finally, in the case of an offence of tax evasion on income or VAT based on an off-balance-sheet determination of income, the individual amounts should be broken down at the criminal hearing so that surcharges and "punitive" additions can be deducted. The resulting balance is ultimately what will form the basis of the criminal audit and as long as it is below €100,000 per year for income and €50,000 per year for VAT, no criminal offence is established.