Péter Barta

Recently, the tax authority’s audit practices have changed appreciably. While until recently, tax audits were mostly launched as fully standalone procedures, today the tax authority (NAV) is increasingly initiating criminal proceedings alongside its tax audits. This is particularly the case in bogus-invoice deals affecting VAT, as well as in excise-duty and certain customs matters. But what’s behind this?

Tax affairs and criminal justice

According to the latest statistics, in 2020 NAV launched some 9,000 tax audits, in which it determined a total tax difference of HUF 213 billion and imposed HUF 221 billion in fines. That in itself would be a respectable number. However, alongside its almost 10,000 tax audits, the tax office initiated criminal proceedings on suspicion of tax fraud in 1,823 cases, uncovering fraudulent offences – essentially, a tax shortfall – amounting to HUF 75 billion. It’s clear that the tax difference determined during such criminal investigation procedures now accounts for considerable weight in the fight to “purify” the tax environment.

Why are parallel criminal proceedings launched?

The tax inspector has an obligation to report a suspicion of a criminal offence, which has long allowed NAV to launch criminal proceedings alongside the tax audit. However, while in the past this opportunity has always been somewhat of a hollow threat for NAV, in more recent years it has become a tool with some serious teeth. 

The reason for this is partly that NAV can use a much wider range of tools in criminal proceedings than it can in the case of a “plain vanilla” tax audit. Thus, for example, during the criminal investigation, the use of so-called covert means such as wiretapping, concealed surveillance or undercover detectives become possible. In such cases, the tax inspectors conducting the tax audit also have the right to use the evidence obtained from these covert methods in their own, administrative, procedure. The only condition for doing so is that the tax inspector must fully assure the taxpayer that the relevant procedural guarantees are in place (e.g. the taxpayer will have full knowledge of the evidence, will be able to comment on it, etc.).

A final but no less important consideration is that when criminal proceedings are launched, the inspection (audit) opportunities of the tax authority also expand. While the limitation period for tax debts is five years (which, due to the special method of calculating the tax limitation period, is in effect six years), the limitation period for tax fraud, as a criminal offence, can be up to ten years depending on the amount involved. However, if a criminal offence is found to have occurred, the limitation period under the tax laws is extended to the maximum sentence that can be imposed for the offence, and thus the tax authority is free to investigate a longer period retrospectively.

What’s changed in the way things happen?

The course of the inspection, too, is different in many respects if NAV initiates criminal proceedings alongside its tax audit. For a start, the investigation is not conducted by the tax auditors but by financial investigators, who can show up at the doorstep with a gun in their belts during the criminal proceedings. 

And in principle, NAV’s burden of proof in criminal proceedings is also different. While in the course of criminal proceedings one of the fundamental principles of criminal law, the presumption of innocence applies, the tax system does not recognise such a rule. In practice, however, this rarely means any actual difference. On the one hand, as is the case for the criminal authorities, in tax proceedings, it falls upon NAV to prove the facts. On the other hand, the presumption of innocence does not mean that the taxpayer can comfortably sit back and wait to see if NAV can prove the infringement. Although the accused company does have the option of remaining silent, from a tactical point of view it may be wise to make a statement at the start of the proceedings. Thus e.g. in a bogus-invoice case where someone has illegally pocketed the VAT at the end of the chain, it’s a good idea, if you’re the taxpayer under investigation, to distance yourself from the direct fraudsters from the outset – to emphasise that you don’t know them, that you’ve never had any direct business dealings with them, etc. 

Double or triple penalty?

Due to the parallel proceedings, it’s quite possible that the tax authority finds a tax shortfall against the business while the criminal court orders a confiscation of assets against the taxpayer through the deduction of the sum of the unlawful enrichment (i.e. the tax benefit to which the taxpayer was not entitled). Does it follow from this that the same penalty must be paid twice?

The tax shortfall only has to be paid once, even in parallel proceedings: the courts take each other’s decisions into account. However, this is not the case in all respects with regard to the related fines. In addition to the tax shortfall that must be made up, the tax laws allow for the imposition of a tax fine of 50% (and in exceptional cases, 200%). However, if criminal proceedings are also instituted, the criminal court may impose a fine of three times the tax shortfall on the company concerned. In addition, in the criminal proceedings, simultaneously with the imposition of sanctions on the company involved in the indictment, a monetary fine may also be imposed on the senior official of the company found guilty of the offence. Not to mention, of course, the fact that the same executive may even be sentenced to a term of imprisonment for the crime – a sanction that does not exist in the case of a simple tax audit.