Tax evasion and Imputed Income Determination based on the old and the new Tax Code - Law Firm Psarakis & Kefalas

indirect-control-techniques-and-tax-evasion

Legal Insight

September 2022

Γιώργος Ψαράκης, ΜΔΕ, LL.M., PgCert

(republished from taxheaven.gr)

Summary: It was a common phenomenon that after an extrapolated determination of income (based on the old law before the current 2013 Tax Code), income tax and VAT determination acts were issued and on the basis of these acts the criminal courts issued convictions for felony tax evasion offences. Now, and after 1.1.2014, the indirect control techniques of Article 28 of the Tax Code have taken the place of off-balance sheet determination. We analyse the correct approach to the issue and the attitude of the criminal jurisprudence in both cases of fictitious income determination in this article, which is a supplement to a recent article in which, however, we only dealt with the issues of the old CCC (see here).

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 where they were considered insufficient or inaccurate, the gross receipts were determined ex post on the basis of the data and information available to the competent tax authority concerning the extent of the commercial activity and the operating conditions of the undertaking. In particular, this determination took into account the purchases, sales and gross profit of the undertaking, the gross profit of similar undertakings 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, was multiplied by the unique net profit factor contained for each category of enterprise in a special table drawn up by decisions of the Minister of Finance published in the Government Gazette, increased by 50%.

However, the concept of "income" presupposes real income, which has been proven to have accrued to the taxpayer's property. 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. That is, the use of legislative fictions or even hypothetical rules in determining the taxable amount is tolerable at the level of an administrative assessment but not at the level of a criminal proceeding.

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 (: failure to submit or submission of an incorrect declaration), but with the subsequent act of third parties, namely the audit authorities (: off-balance sheet determination). This method of multiplying the gross income of the enterprise by special, by general categories of enterprises, profit factors and surcharges of 40% and 80% may serve the administrative sanctions, however, it must be emphatically pointed out that: in the field of procedural criminal law does not create evidence, but, on the contrary, creates (extra)accounting working hypothesis (: evidence), which is not confirmed empirically;" (Dimitranas, Crimes of Tax Evasion, 2011). And the prosecutor, Mr. Adampas, states in his relevant text on non-payment of debts (Adampas, The Offence of Non-Payment of Debts to the State, 2018): 'Liability 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 Court of Appeal of Ioannina 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.

In particular:

Α. As regards income tax, it should be noted that the Average Net Profit Rate (NPC) was multiplied by 80%, instead of 40% (see article 32 par. 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 there was a case of issuing fictitious invoices. 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 was therefore in 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 was ultimately to curb the use of dummy 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 on the basis of an off-balance-sheet determination the amounts of the virtual invoices themselves and calculate the imputed profits on the basis of the 'net' NIC, without the 'penalty' multiplication and surcharges, a criminal offence may not be established because the threshold of merit is not exceeded.

B. 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 merit in the relevant use (=50.000 €) resulting in the exemption of the accused.

C. For the solidarity contribution, which is now charged against the taxpayer and is included as an income tax evaded, the following should be noted: based on the opinion of the NCC No. 130/2017 in response to the question "Whether the special solidarity contribution of article 43A of the Income Tax Code (Law No. 4172/2014", it was held that "this levy is a tax, but it does not have as its object the above-mentioned incomes on which it was imposed, i.e. it is not a tax on income, but simply, these incomes were considered in the assessment of the legislator, as the most reliable data for determining the taxable capacity, on which he relied, that is, they constituted the criterion and, consequently, the basis for imposing the extraordinary levy, so that the taxpayers are charged with the levy according to the income category to which they belong (CoE 2653/2015, cf. The same is also stated in the NCC opinion no. 13/2018. 1.14.16. Therefore, any amount corresponding to the special solidarity contribution charged cannot be included in the income tax charged for the purposes of the tax evasion offence. Unfortunately, however, the tax authorities include this in their statements of claim, and the public prosecutor's office prosecutes on the basis of amounts calculated in an incorrect manner. For the solidarity contribution, which is now charged against the taxpayer and is included as an income tax evaded, the following should be noted: based on the opinion of the NCC No. 130/2017 in response to the question "Whether the special solidarity contribution of article 43A of the Income Tax Code (Law No. 4172/2014", it was held that "this levy is a tax, but it does not have as its object the above-mentioned incomes on which it was imposed, i.e. it is not a tax on income, but simply, these incomes were considered in the assessment of the legislator, as the most reliable data for determining the taxable capacity, on which he relied, that is, they constituted the criterion and, consequently, the basis for imposing the extraordinary levy, so that the taxpayers are charged with the levy according to the income category to which they belong (CoE 2653/2015, cf. The same is also stated in the NCC opinion no. 13/2018. 1.14.16. Therefore, any amount corresponding to the special solidarity contribution charged cannot be included in the income tax charged for the purposes of the tax evasion offence. Unfortunately, however, the tax authorities include this in their statements of claim, and the public prosecutor's office prosecutes on the basis of amounts calculated in an incorrect manner.

D.As regards the issues arising under the current Article 27 of the IRC and the indirect control techniques, the following should be noted:

i) The Tax Administration may make an estimated, corrective or preventive determination of the taxable amount and by applying one or more of the indirect control techniques provided for.

ii) Depending on the case and the findings, a different control technique shall be used. According to, for example, case 2.3. of article 2 of POL 1050/2014, it is stated that "This technique determines taxable material by monitoring the movement of (disposable) funds of the taxpayer, his/her spouse and their dependent members, either by depositing them in financial accounts or by consuming them in various transactions using cash".

It follows from the above provision that that method is more appropriately applied in cases where the taxable amount of individuals is determined but where there is no control of any income derived from business activity, since in such a case the indirect methods of the principle of proportionality or the method of the ratio of the selling price to the total volume of turnover should be applied, as they are specifically used to determine income derived from business activity.

iii) Furthermore, in accordance with Commission Decision No. E2016/2020, clarifications and instructions are provided for the uniform application, inter alia, of the proportionality principle method, whereby income from business activities is determined on the basis of rates and ratios (and in particular the actual gross profit margin) which are considered reliable, based on generally accepted auditing principles and techniques, and which are derived either from the undertaking itself or from third party sources. Quite simply, management usually obtains knowledge of a firm's purchases (through the firm's own books and those of its suppliers) and then, having knowledge of its price list, makes an extrapolated estimate of the expected turnover. It then deducts the declared costs and, on the basis of a gross profit margin (which can be determined by comparing purchase invoices with sales invoices or by analysing price lists, etc.), calculates the net profit which should have been declared. However, in many cases the audit a) does not take into account the correct gross profit rate (the net profit rates of the old law based on POL No. 1004/2006 may also be indicators), b) does not take into account the correct percentage of physical depreciation (germination) on raw materials (e.g. it is a fact that in catering businesses, there is a high percentage of germination during the preparation of meals of around 35%-40%), but also the losses per day in raw materials that are not consumed during the day and (c) does not take into account as the time of realisation of income the time when the expenditure-purchase is made, which in most cases differs from the time of resale (e.g. several of the purchases made in December of one year in a catering establishment probably generate income in the following year, and therefore should be calculated at the time of the purchase of the raw material).

iv) As it is understood in the case of the application of indirect control techniques, each method of calculating imputed income may produce a different result. Of course, this is not compatible with the above mentioned principles of criminal procedure and the latter cannot accept uncritical presumptions of the administrative procedure. Therefore, even if the contested acts have not been challenged administratively, the criminal judge has the obligation to examine the defendant's claims and to check the correctness of the calculations when the latter take place on the basis of hypothetical scenarios and presumptive rates.

Ε. Finally, in the case of an offence of tax evasion in income or VAT based on extrapolated income determination or indirect control techniques, the individual amounts should be analysed in the criminal hearing, so that on the one hand the surcharges and "penalty" additions are deducted, and on the other hand the hypothetical scenarios and presumed profit rates are checked. The resulting balance, after the defendant's reasonable doubts, is ultimately what will form the basis of the criminal audit and as long as it is below EUR 100,000 per use for income and EUR 50,000 per use for VAT, no criminal offence is established.