The traditional methods of tax audits and tax litigation in Hungary will soon be a matter of the past, as three new codes have recently been adopted by Parliament and will come into force on January 1, 2018. Naturally, they are a hot topic in the industry.
While the government says the “tax package” simplifies and makes tax law business friendly, these changes to procedural rules are expected to make the positions of taxpayers defending themselves in tax disputes more difficult.
Currently, taxpayers have several options in disputing a decision by the Tax Authority. First, they can submit observations on the minutes summarizing the findings of the tax audit. Given the relatively short deadline to do so, observations are not always submitted – and when they are, they are not necessarily meant to be a comprehensive document, containing facts, circumstances, and arguments. Once the Tax Authority issues a resolution, taxpayers may appeal even if they submitted observations beforehand. Should the Tax Authority maintain its position despite the appeal, this second decision may be challenged before the Administrative and Labor Court. Although there is no appeal of the ruling of this court, the Supreme Court (the “Curia”) can be asked to review its decision, effectively acting as an appellate court. Until the Administrative and Labor Court hears the case, a taxpayer may come forward with new facts, evidence, or legal arguments to support his position.
It is believed that in the future the observations due once the audit is formally finished will become a key document in the procedure. According to the new Tax Procedures Code, taxpayers may not refer to any facts or evidence in their appeal against the first instance decision of the Tax Authority, if such facts or evidence were known to them prior to the Tax Authority formally passing its resolution, provided that the Tax Authority gave warning to come forward with them. It may be safe to predict that all Tax Authority minutes will include boilerplate sentences announcing that this is the last chance for facts and evidence. It follows that the only opportunity for taxpayers to gather and present their full arsenal will be in the observations. While the deadline to make observations will be extended to 30 days from the currently applicable 15 days, this is still a tight deadline for formulating a defense strategy, especially when translation is required with non-Hungarian speaking clients. In addition, new litigation rules state that taxpayers are not allowed to present new facts and circumstances to the court that were not presented in the underlying administrative phase, unless this evidence was not available at the time or was rejected by the Tax Authority. These two restrictions effectively mean that whatever is not brought up in observations should remain buried forever.
In light of the above, involving tax lawyers once a court case is pending may be too late to affect the outcome. Rather, you should be alerting your lawyers as soon as the Tax Authority starts an audit and hints at any issues. This will allow you and your legal team time to create a defense strategy and position papers before the minutes are issued. In this way, you will have a fully comprehensive defense mechanism in place from the deadline to submit observations until – if necessary – the Supreme Court.
By Eszter Kalman, Head of Tax, CMS Budapest
This Article was originally published in Issue 4.11 of the CEE Legal Matters Magazine. If you would like to receive a hard copy of the magazine, you can subscribe here.