Unannounced tax audits: does the Constitutional Court leave the door ajar?

The Constitutional Court was recently questioned as to whether the current legal framework with respect to unannounced tax audits provides sufficient guarantees to safeguard the right of the taxpayer to respect his private life and protect his home from potential abuses by the tax authorities during an unannounced visit (Constitutional Court, 12 October 2017, n° 116/2017 – role number 6503).

It is important to note that the request for a preliminary ruling by the Court of First Instance of East-Flanders, department Ghent (Court of Ghent 27 June 2016) only concerns the duty of the taxpayer to cooperate and grant the tax authorities free access to the professional premises to investigate the books and documents available at those premises.

Sufficient legal safeguards against potential abuses by the tax authorities during a raid

After an elaborate analysis of the legal framework with respect to unannounced tax audits (i.e. the article 319 ITC and the article 63 VAT Code) the Court, within the boundaries of the request for a preliminary ruling, comes to the conclusion that the aforementioned articles, in the light of the right to privacy and the right to protect one’s home, offer sufficient guarantees against an arbitrary act of the tax authorities during an unexpected tax audit.

The Court continues that during a sudden visit of the tax authorities, the taxpayer has the obligation to grant free access to the professionally used premises and must provide his co-operation to the visit. After all, a meaningful interpretation of the co-operation obligation requires that the tax authorities, during a tax audit, are not dependent of the choice of the taxpayer to determine to which documents he provides access.

Objection by the taxpayer

Does this mean that the tax authorities receive a free ticket and, as is the case during a raid, may enter the premises of the taxpayer even in case the latter (or his proxy-holder) objects thereto? No, the Court stresses that the tax authorities are not allowed to force a right of entry. In case the taxpayer refuses access, no tax audit can take place.

In its decision the Court, however, uses the taxpayers’ duty to cooperate as a starting point, but quickly clarifies that an objection by the taxpayer to grant access to the tax authorities or provide access to books and documents is a key moment for the assessment of the legal validity of an unannounced tax audit and even for the further course thereof (see below). The court ruling even clarifies that during a tax audit, the tax authorities do not avail of a general, unconditional and unlimited right of free access to the professional premises.

In case the taxpayer refuses to respect his duty to cooperate, the tax authorities are left at the front door.

No active right of search?

Also in case when, during a tax audit, the taxpayer objects to the inspection of books and documents, the tax authorities may not own-handedly force this inspection. The Constitutional Courts does stress that the tax payer must provide his cooperation during an unannounced visit to, e.g., open closets or safes for the tax authorities.

With the above statement, the Court implies that the tax authorities do, under no conditions, avail of an active right of search, even in case the tax payer refuses to cooperate. Some unclarity remains, however, as to where exactly the line between the investigative powers of the tax authorities and an active right of search is situated.

Line of defense of the tax authorities upon objection of the tax payer to grant access to the premises and/or books or documents

The weapon’s arsenal currently at the disposal of the tax authorities to sanction a non-cooperative taxpayer is limited to a rather moderate administrative fine or – in case of an infraction with intent to defraud or cause loss – a criminal sanction. The latter sanction implies a heavy burden of proof for the tax authorities and in practice often remains dead letter.

It is further to be noted that the tax authorities, according to the Constitutional Court, may assess an ex officio taxation, resulting in a shift of the burden of proof with respect to the correctness of the taxation. In our opinion, this is not correct, as a violation of article 319 ITC does not (yet) qualify as a circumstance on the basis of which the tax authorities may justify an ex officio taxation through article 351 ITC.

Finally the tax authorities may, on the basis of article 29, paragraph 2 of the Code of Criminal Procedure, notify to the Public Prosecutor, the facts that are, on the basis of tax laws and implementing decrees , punishable by criminal law and which came to their knowledge in the framework of a tax audit. It is true that such notification may result in establishing an criminal investigation, but it has as a big disadvantage for the tax authorities that, upon the start of a criminal investigation, they must fully transfer the file and thus no longer have authority to instruct the judicial authorities on how and which information to gather. It should also be mentioned that in the latter case the criminal authorities (contrary to the tax authorities during a tax audit) may enforce access manu militari and may also conduct a general and active search, even in case the taxpayer / suspect objects hereto.

The saga continues

As regards the importance of the court ruling, it needs to be stressed that case law of the Constitutional Court is not a binding precedent, but other courts will likely consider the decision as a general guideline. Furthermore, in this decision the Court has limited its ruling to what was asked in the request for a preliminary ruling. As already stated, the Court does not take a position with respect to, amongst other things, seizing or copying (electronic) data during a tax audit. Consequently, uncertainty remains with respect to the question whether or not the authorities have a right to seize a full (electronic) copy. If such would be the case, the question also remains whether the Belgian legal framework with respect to unannounced tax audits provides sufficient safeguards to the taxpayer regarding his right of privacy and against a potential arbitrary act of the tax authorities.

Finally, the decision of the Constitutional will undoubtedly result in new legislative initiatives which should enable the tax authorities to sanction the obstruction of a tax investigation more heavily and especially more easily. This way the tax authorities develop more clout so that the taxpayer will think twice before he refuses access to the tax authorities.

It is clear that the discussion with respect to the scope of the unannounced tax audits has not yet come to an end. The saga continues and it is clear that during an unannounced tax audit the taxpayer, to safeguard his rights, has every interest to timely call upon the assistance of a tax lawyer specialized in tax proceedings.