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    The Protection of Taxpayers’ Rights

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    photo of Christiana HJI Panayi

    In the past, the application of human rights provisions in the field of taxation was scarce. The European Court of Human Rights had in the past considered tax matters as falling within the protection of the European Convention of Human Rights, but only in so far as they were classified as criminal charges.

    Today, there is a major shift of attitudes. In the European Union, as of 1 December 2009, with the entry into force of the Lisbon Treaty, the Charter of Fundamental Rights constitutes primary EU law. As such, the restrictive application of the European Convention of Human Rights as regards taxation is no longer an issue as there is a provision in the Charter which limits the scope of the rights to criminal tax charges.

    It should first be pointed out that the provisions of the Charter are addressed primarily to Union institutions and bodies. They are also binding on Member States but only when and in so far as they are implementing Union law. Therefore, the Charter applies when the Member State authorities apply an EU regulation directly as this involves the implementation of EU law. It also applies when national authorities adopt or apply a domestic law transposing an EU directive. Furthermore, it applies to national rules imposing penalties for non-compliance with a directive, even if the directive itself does not make an express reference to penalties.

    There are several articles of the Charter that provide for procedural guarantees and are applicable to tax procedures. These articles include:

    • Article 7, which provides for the right of respect for private and family life
    • Article 8, which provides for the right of protection of personal data
    • Article 11, which provides for the right of protection of the freedom of expression and information
    • Article 17, which provides for the right to good administration
    • Article 47, which provides for the right to an effective remedy and a fair trial
    • Article 48, which provides for the right of presumption of innocence and the right of defence
    • Article 49, which provides for the principles of legality and proportionality of criminal offences and penalties
    • Article 50, which provides for the right not to be tried or punished twice in criminal proceedings for the same criminal offence.

    There have been some interesting cases at the CJEU where some of these rights were invoked. In this newsletter, we look at some of the areas in which the EU’s Charter has afforded protection to taxpayers which may be relevant to the audit process, investigations, information orders and penalties.

    Tax Investigations/Searches/Seizures – The right of respect for private and family life

    In the WebMindLicenses case, the CJEU dealt with the question whether in a situation where a taxpayer was being investigated for tax abuse concerning VAT, the tax authorities could use evidence obtained without the taxpayer’s knowledge in the context of a parallel criminal procedure that had not been concluded, when such evidence was obtained through interception of telecommunications and seizure of emails.

    Here, the CJEU found that the interception of telecommunications and the seizure of emails in the course of searches at the professional or business premises of a natural person or the premises of a commercial company, could constitute an interference with the exercise of the right to privacy under Article 7 of the Charter.

    Whilst the tax authorities were allowed, in order to establish the existence of an abusive practice concerning VAT, to use evidence obtained without the investigated taxpayer’s knowledge, this had to be done in a manner compatible with Article 7. The authorities had to show that the interception of telecommunications and the seizure of emails were means of investigation provided for by law and were necessary in the context of the criminal procedure. The authorities also had to show that the right of defence was respected and the investigated taxpayer had the opportunity, in the context of the administrative procedure, to gain access to the evidence seized and to be heard. National courts must also have a power to review whether the evidence obtained by the authorities was in accordance with EU law.

    If these safeguards were not met, then the evidence obtained had to be disregarded, being fruits of a poisonous tree. It appears that irrespective of what the national law stipulates on the use of illegally obtained evidence, the CJEU demands that a separate and autonomous assessment should be made, based on the guarantees protected by the EU Charter. However, this is not settled yet and there is conflicting precedent by the European Court of Human Rights in a subsequent case (K.S. and M.S. v Germany), whereby information obtained by the tax authorities under questionable circumstances was still admissible.

    It should not be forgotten that the EU’s Charter rights are only applicable as regards the implementation of EU law. Therefore, if the investigation is for abuse of a non-EU tax, arguably, the evidence illegally obtained might be admissible. This would depend on local law.

    Reporting Obligations & the Legal Professional privilege – The right of respect for private and family life

    Due to the increasing reporting obligations of tax intermediaries under EU law following DAC 6, there was concern that the legal professional privilege may in some cases be eroded, especially as regards the provision which had the effect of requiring a lawyer acting as an intermediary, where they were exempt from the reporting obligation on account of the legal professional privilege, to notify any other intermediary who was not their client of that intermediary’s reporting obligations (Art 8ab(5)). In a recent important judgment in the Vlaamse case, the CJEU found that this provision was invalid as it infringed Article 7 of the Charter.

    The obligation of the lawyer acting as an intermediary (otherwise exempt from reporting due to the legal professional privilege) to notify other intermediaries, in so far as these other intermediaries did not necessarily have knowledge of the identity of the lawyer-intermediary, interfered with the right to respect communications between lawyers and their client, as guaranteed in Article 7 of the Charter. Furthermore, as the third-party intermediaries notified were not themselves bound by legal professional privilege, they had to inform the competent tax authorities of the disclosure under the provisions of the Directive – another interference with Article 7.

    Therefore, any reporting obligations on tax intermediaries covered by the legal professional privilege which indirectly affect this privilege, to the extent that they are derived from EU laws, may be struck off.

    Naming and Shaming/Beneficial Ownership Registers – The right of protection of personal data

    The right of protection of personal data under Article 8 of the Charter of Fundamental Rights is also a very important right which, in theory, can curb the extensive power of tax authorities in relation to the use and exchange of personal data of taxpayers.

    In Puškár, the CJEU considered a case where the Slovakian tax authorities published a list of names of individuals, referring to them as white horses – i.e. persons acting as fronts in company director roles. It was questioned whether this was compatible with Article 8 of the Charter. The CJEU found that the processing of personal data by the authorities for the purpose of collecting tax and combating tax fraud was allowed, subject to strict conditions. Firstly, the relevant authorities had to be invested by the national legislation with tasks carried out in the public interest. Secondly, the drawing-up of that list and the inclusion on it of the names of the data subjects had to be adequate and necessary for the attainment of the objectives pursued. Thirdly, there were sufficient indications to assume that the data subjects were rightly included in that list.

    In a landmark case decided recently, the Luxembourg Business Register case, it was held that Luxembourg’s requirement that beneficial ownership registry information be displayed online and remain accessible for all members of the public violated the right of protection of personal data. The Luxembourg rules were implementing the rules of the Anti-Money Laundering Directive (Directive (EU) 2018/843) and as such, fell within the scope of the Charter of Fundamental Rights. The rules of the Directive were found to be invalid by the CJEU, as they constituted a serious interference with the fundamental rights enshrined in Articles 7 and 8 of the Charter.

    Personal tax data, including tax information exchanged between a Member State and a third country, may also be protected under the General Data Protection Regulation. It could be problematic if the level of protection of the information by the recipient third country is not adequate, as per the EU standards.  

    Information Orders and Requests for Recovery – The right to effective remedy and fair trial

    In recent times, tax authorities have acquired extensive powers for information requests and recovery orders. Some of these powers have been given to tax authorities as a result of EU legislation, for example, the Directive on Administrative Cooperation (and all its amendments), the Mutual Assistance Directive for the Recovery of Claims, the Anti-Money Laundering Legislation etc. The enhanced powers of tax authorities are a common feature of the post-BEPS era. The exercise of some of these powers can, however, affect the rights of taxpayers to a fair trial, or the right to effective remedy.

    In the Berlioz case,  the Spanish tax authorities sent requests for exchange of information to the Luxembourg tax authorities in the context of an investigation of a Spanish taxpayer. The Luxembourg tax authorities did not possess the requested information and made an information order pursuant to the Directive on Administrative Cooperation, to a Luxembourg company and a Luxembourg bank with a possible fine of 250.000 euros in the case of non-compliance. This was irrespective of the fact that the Directive did not contain any provisions as regards penalties.

    Under Luxembourg law, the information holder could challenge the amount of the fine but not the information request. The addressees of the information order (i.e. the Luxembourg company and bank) and the taxpayer challenged the legality of the order under Article 47 of the Charter.

    The CJEU found that the addressees of the information order had the right to challenge the legality of the information orders, as well as the penalties. The foreseeable relevance of the requested information was also a condition of the validity of an information order.

    Here, the addresses of the order had challenged its legality also on the basis that the information requested was not foreseeably relevant. They argued that they should have the right of access to Spain’s request for information to the Luxembourg authorities. Here, the CJEU, taking into account the secrecy provisions of the Directive, found that the request for information must remain confidential, including to interested parties in the course of the administrative and judicial proceedings. This provision did not infringe the rights of the defence and the right to a fair hearing, as long as the relevant person (here, the addressees of the order) could access the minimum information set out in the Directive (Article 20(2)), to assess the lawfulness of the information order: namely, the identity of the taxpayer concerned and the tax purpose for which the information is sought.

    Issues regarding the legality of proceedings when there is a breach of the right to an effective remedy have also been raised in relation to the Mutual Assistance Directive for the Recovery of Claims.

    In the Donellan case, the CJEU found that an authority of a Member State may refuse to enforce a request for recovery on the ground that the decision imposing that fine was not properly notified to the person concerned before the request for recovery was made to that authority by the authorities of another Member State. In order to comply with Article 47 of the Charter it was important not only to ensure that the addressee of a document actually receives the document in question but also that he was able to understand effectively and completely the meaning and scope of the action brought against him abroad, so as to be able to assert his rights in the Member State of transmission.

    Simultaneous application of sanctions – Ne bis in idem

    The principle of ne bis in idem, i.e. the right not to be tried or punished twice for the same offence, comes into play when administrative and criminal sanctions are imposed on the same person for the same offence.

    In the case of Åkerberg Fransson, the CJEU held that under the ne bis in idem principle, a Member State is not allowed to impose, successively, for the same acts of non-compliance with VAT declaration obligations, a tax penalty and a criminal penalty, in so far as the first penalty (the administrative one) was criminal in nature. This was a matter which was for the national court to determine.

    In a later case, the Luca Menci case, the CJEU examined a situation where criminal proceedings were initiated against a taxpayer who had previously been subject to a final administrative penalty for non-payment of VAT. It was found that for the national legislation to be compatible with Article 50 of the Charter it had to pursue an objective of general interest which justified such a duplication of proceedings and penalties. Furthermore, the national legislation had to limit the duplication, including the penalties imposed, to what was strictly necessary.

    Know your taxpayer rights

    It is very important to know your rights as a taxpayer. This newsletter provided a very limited overview of some important rights and protections offered mainly under EU law. There are many more rights affecting taxpayers’ dealings with tax authorities and principles derived from case law, not only under the Charter but also under the European Convention of Human Rights, which Cyprus follows.

    We can help you navigate this area and ensure your rights and interests are protected in your dealings with the Cyprus tax authorities. This is especially important if some of the proposals that the European Commission has been working on, which we discussed in our previous newsletter (e.g. the UNSHELL proposal and the Anti-Facilitation proposal), are eventually adopted.

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