In a decision dated February 2023 the Administrative Court-City of Sofia (ACCS) proclaims a tax assessment null and void. SAC considers the ground for assignment of the particular tax audit contradictory to the Constitution and suggests to the Supreme Administrative Court (SAC) to decide whether to attack the provision before the Constitutional Court (CC). The decision of the ACCS is appealed with the SAC.
If the SAC confirms the considerations of the ACCS, numerous recently issued tax assessments may be found null and void. How the system will react and whether the supreme judges will allow such a development remains to be seen. But one thing is for sure, judges show with this decision that an administration cannot work undisturbed on the basis of their own internal orders without taking into account their legal compliance.
What does the decision read?
The tax assessment appealed is issued by the revenue authorities in Varna to a company with seat and headquarters’ address in Sofia. The assignment of the tax audit was made through a range of orders on the ground of Art. 10, para. 9 of the National Revenue Agency Act (NRAA).
The provision (effective as from 01.01.2021) allows to the executive director of the National Revenue Agency (NRA) or a person empowered by him to order employees from a tax department (TD) to execute their duties regarding individuals or companies where pursuant to Art. 8 of the Tax Insurance Procedural Code (TIPC) authorities from another TD are competent. That order may be related also to part of the work time, but without change of the workplace.
Generally, according to the ACCS the tax assessment is null and void because it is issued by an incompetent authority. Article 10, para. 9 of the NARA contradicts Art. 112, Para. 2, p. 2 of the TIPC, where according to the latter provision the tax audit may be assigned by the executive director of the NRA or a deputy executive director determined by him – regarding every person or company and all types obligations and responsibilities for payment of taxes and compulsory social security contributions.
Further to the decision, contradiction with the Constitution is at hand, where the Republic of Bulgaria shall be governed through rule of law.
What are the main considerations of the ACCS?
The judge, who has issued the decision, clarifies the two types of competence for assignment of a tax audit through an order under TIPC:
- Territorial – under Art. 8 of the TIPC – the tax authority under the seat of the company shall be the competent one (p. 3);
- Universal – under Art. 112, para. 2, p. 2 of the TIPC – comprises the entire territory of the country, all persons or companies and all types obligations and responsibilities for payment of taxes and compulsory social security contributions.
Derogations are possible under the TIPC in case of territorial competence. The universal competence is absolute. The rules related to it cannot be supplemented, amended, canceled. The derogation of the territorial competence does not lead to automatic rise of universal competence. The universal competence rises only when validly established.
The provision of Art. 112, para. 2, p. 2 of the TIPC is adopted with the purpose effective distribution of the employees in the different TDs in the NRA to be achieved. Only the executive director of the NRA or a deputy executive director determined by him has the above mentioned universal competence.
Article 10, para. 8 of the NRAA provides for the possibility employees from one TD to be posted to another. It means that employees are transferred through an order of the executive director of the NRA or a person empowered by him.
The respective territorial director posts employees from his TD in execution of the order of the executive director and under terms and conditions specified in the Labour Code.
The existence of Art. 10, para.9 of the NRAA is not necessary (because of Art. 10, para. 8 of the NRAA) and the provision evidently disregards the rule of Art. 112, para. 2, p. 2 of the TIPC.
In the particular case:
- The order for assignment of the tax audit is issued by a head of Tax Audits Office of TD of NRA Varna regarding a company with seat and headquarters’ address in Sofia – the authority was not competent because of Art. 112, para. 2, p. 2 of the TIPC. The rule cannot be amended, thus by an administrative act.
- The proceedings were initiated through an order for assignment by a head of Tax Audits Office to TD of NRA Varna, empowered through an order by a deputy executive director of the NRA, the latter empowered by the executive director of the NRA. Article 112, para. 2, p. 2 of the TIPC however does not permit such a re-empowerment.
An administrative act issued by an authority without legally provided competence is null and void. Therefore, ACCS proclaims the particular tax assessment null and void.
The NRAA is an organizational law. According to the ACCS powers are given in this case to an authority through an organizational law which contradicts the procedural law. Such an approach violates legal stability. The disregard of Art. 112, para. 2, p. 2 of the TIPC contradicts the constitutional principle of the rule of law and a number of provisions of the Law on Regulatory Acts (LRA).
Art. 10, para. 9 of the NRAA regulates the order under the TIPC for carrying out of a tax audit. In general, it is possible that a law provides for a different procedural order for carrying out of certain actions in view of the purposes and specifics of this law. But it is not admissible legal relations valid for the entire branch of taxation to be regulated in this way and thus, the application of other laws to be affected: the Value Added Tax Act, Incomes of Individuals Taxes Act, Corporate Income Tax Act, etc.
According to the ACCS, Art. 10, para. 9 of the NRAA:
- contradicts Art.112, para.2, p. 2 of the TIPC;
- allows the competence for assignment of a tax audit to be regulated in an organizational law instead of a procedural one;
- creates an unclear and controversial regulatory framework;
- violates the systematic place of the legal regulation of public relations;
- introduces an unclear, contradictory and confusing rule of conduct for individuals and companies;
- violates a number of provisions of the LRA.
ACCS’s decision raises significant issues of importance to lawful taxation. From now on, everything depends on the SAC.
