In the first week of December, the Supreme Court of Cassation (SCC) issued a particularly important interpretative resolution № 11/03.12.2021 on the dispute whether in the course of a tax audit of an individual, where the revenue authorities establish an excess of expenses over the declared income, they assess a tax on the difference of this excess or must proceed to an audit under the special procedure of Article 122 of the Tax Insurance Procedure Code (TIPC) and then determine the tax due.
The full text of the interpretative decision can be found here.
The short answer is – “No”, the revenue authorities are not allowed to automatically raise the tax base of the individual, instead a special audit under Article 122 of the TIPC must be carried out (so called analogue audits) and only if the excess is obvious and substantial.
In the reasoning of the decision, we also read that the auditing authorities are not allowed to choose whether to conduct an audit under the general procedure or under Article 122 TIPC, if they find such an excess.
The resolution of the Supreme Court judges is dictated by the understanding that “The discrepancy found between the expenses incurred and the income received, constitutes an expenditure for which the individual does not have enough financial assets, i.e., a shortfall of funds is found and not income. In such cases, the expenses of the taxable individual are taxed, which is contrary to the statutory principles of personal income taxation”.
The operative part of the decision states that “When carrying out a tax audit of an individual under the general procedure, the person cannot be assessed tax liabilities on the basis of Article 35, point 6 of the Personal Income Tax Act on a tax base equal to the excess of unknown expenses over income for the annual tax period, instead the audit shall be carried out in accordance with Article 122 et seq. TIPC”.