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Auditing an unjustified increase of assets

28/11/2017


A great number of taxpayers have been summoned for audit by the tax administration on the basis of data that resulted from the opening of their bank accounts and which are indicative of an increase in assets from an illegal or unjustified or unknown source. 

This increment is taxed as income from a business activity.

Council of State Ruling 2934/2017

The plenary session of the CoS ruled, with the long-awaited decision 2934/2017, that the data on the balances and movements of bank accounts in Greece, regardless of whether they constitute income, do not constitute "supplementary elements", i.e. they cannot justify the extension of the five-year limitation period to ten years. 

The reason is that these items were at the disposal of the tax audit, which could at any time be aware of them by the domestic banking institutions within the original five-year limitation period.

Hence, cases that can be audited on the basis of bank deposit data from domestic banks are those of the last 5 years, i.e. from 2011 onwards.

Furthermore, the decision reiterates the rationale of the recent CoS ruling. 1738/2017, that an extension of the limitation period is possible only by a provision made no later than the year following the year in which the tax liability falls.

Consequently, all laws from 2006 onwards, which prolonged the limitation shortly before the end of the five-year period, were unconstitutional.

Reference is also made to the provision, which provides for the retroactive application of the 20-year limitation period for tax evasion, which was committed before the application of the Tax Procedure Code (i.e. before 1/1/2014) and in particular for cases of 2008 and after.

According to the rationale, the 20-year limitation period can be applied retroactively only for 2013 (henceforth).

Clarifications on the increment

Circular POL. 1175/2017 provided clarifications and further guidance on how to audit the cases of unjustified increase in taxpayer property based on bank account transactions. Specifically:

It was clarified that crediting an account of a sum of money of proven origin is not considered as unjustified increase in the value of the assets. This is true even if this amount has not been included in the relevant income tax returns. In these cases, the tax is charged according to the type of income (e.g. property, capital, etc.).

Failure to present national accounts data due to an objective impossibility to produce the relevant supporting documents (e.g. because of the obligation to keep the relevant records by the bank) has the effect of accepting the taxpayer's claims unless the tax authority has other evidence of rejection of his allegations.

If the acquisition of the investment took place in a period other than the tax years under audit, or the incoming foreign transfer is derived from deposits / income from previous years, the relevant credits are considered justified for the period under review and do not justify an extension of the tax audit to previous years.

The amount of a bank account that produced a remittance and was considered an increase of assets is taxed as income from business activity in the accounting period in which it was first entered into the assets of the account holder. Transferring it by remittance from one bank account of the holder to another (domestically or abroad) does not constitute an increase in assets.

Crediting of accounts that is proven to be the result of individual business activity is taxed as a profit from a business activity and is subject to other taxes (e.g. VAT), if it has not already been taxed.

In the case of the participation of the auditee in any legal entity, the amount credited to an account that proves to be a transaction or income of the legal person does not constitute an increase of assets. In this case, the amount may be considered a loan or cash flow facilitation.

The excess cost of a transfer of property, ascertained as such as a result of the audit, does not constitute an increase of assets.

G. Samothrakis, J. Panou
Posted on Sunday newspaper Kathimerini, 26/11/2017