Attorney explains: how to avoid tax control
For even a highly exemplary taxpayer company, a Tax and Customs Board (ETCB) control is an unpleasant and time-consuming process. It is much more pleasant to invest time and energy into business development. Since taxes are a relatively complex area, the perspectives of the company and ETCB may differ even with the best intentions regarding fulfilling tax liability. Therefore, it is advisable to avoid coming into the tax authority's focus from the outset. What should be considered then?
Be critical of your own actions
This may seem self-evident, but tax liability must be fulfilled impeccably, meaning that the company must not incur tax arrears. The Tax and Customs Board has created a convenient e-service called "tax behavior ratings" for entrepreneurs to assess their activities. Through the application, the entrepreneur can see how their company appears to the Tax and Customs Board and whether there are any deficiencies in the data they have provided, according to the authority's assessment. The service also provides specific instructions for correcting any deficiencies.
If necessary, feel free to contact the Tax and Customs Board or an attorney who can explain the situation and obligations and provide advice. It's worth creating written summaries for each situation so that you can later provide evidence of your actions if needed. It's also important to keep the employment register up to date. Registration of employment is most frequently checked for seasonal workers. Human errors or forgetfulness can result in quite uncomfortable procedures.
Choose your partners wisely
Sometimes, simply collaborating with the wrong business partner is enough to attract the attention of the Tax and Customs Board.If your company collaborates with a business partner that the ETCB has repeatedly monitored, then the Board is relatively aware of who the business partner's collaborators are, including your company. For example, the Board regularly sees invoices that include your company's details. If the other collaborators of your business partner have issues, the tax authority may assume that your company is also problematic. Sooner or later, the Board may deem it necessary to inspect your company's activities as well.
It is possible to check the tax behavior of your company's business partners, among other things, through public inquiries on ETCB’s website. General information is also provided on the website teatmik.ee. In case of doubt, it is advisable to ask the business partner for proof of tax data. Background checks on significant business partners can also be commissioned from a law firm.
Certain regions are associated with different risks for the ETCB. For instance, the risk of under-the-table wage payments is highest in Ida-Viru County. If a larger company pays a monthly fee to a one-man company located in Ida-Viru County based on an authorization agreement, both companies have a higher risk of undergoing tax control. The seasonality of work also increases the risk. During summertime, the ETCB conducts more checks on companies engaged in the construction of private houses. There is also a high risk of under-the-table wages for waiters or field workers hired for the summer.
The activities of the company must be logically understandable
The Tax and Customs Board may inspect companies if their economic activities do not appear logical. This could be a situation where a company has many employees, but essentially no turnover, or vice versa. A situation also raises suspicions when the salaries of the company's employees do not match the market average or when most employees work part-time. This does not mean that employees' salaries must not be lower than the market average or that employees should not work part-time. In such situation, it is advisable to first consult with an attorney who can provide advice and explanations regarding the situation. Companies that have been granted permission to employ foreign workers may also come under the scrutiny of the ETCB if payments to these workers are not declared in the income tax and social tax, mandatory funded pension, and unemployment insurance premium declaration (TSD). Foreign workers are in a vulnerable position, making it easier to pay them under the table. The Tax and Customs Board actively monitors such companies.
Tax control
The Tax and Customs Board may also reach out to companies outside of tax control, providing advice and guiding their tax behavior. Such intervention is less intensive and does not result in sanctions. However, the fact that the Tax and Customs Board intervenes means that the company has already come under the authority's scrutiny. Therefore, the next step could be an official tax inspection or even a criminal investigation. Tax inspection is stressful, requires a significant amount of resources from the company, and can also result in sanctions. The most unpleasant outcome is a criminal proceeding. During the proceedings, authorities may exercise the right to detain individuals for up to 48 hours, take them into custody, conduct searches, and employ other intensive measures to ensure the progress of the investigation. Additionally, the Tax and Customs Board may seize assets to secure their claim. In the event of a conviction in criminal proceedings, fines or imprisonment may follow.
Behavioral guidelines
If you try to ignore a problem when dealing with the Tax and Customs Board, your behavior will only exacerbate the problem. If the tax authority contacts the entrepreneur outside of tax control or criminal proceedings, it is advisable to cooperate and make the necessary improvements according to the recommendations of the ETCB officials and the attorney. The law firm can guide you on how to prevent a recurrence of the situation in the future. In the event that the tax authority initiates a tax control or criminal proceedings, it is advisable to immediately contact an attorney. Both fines and other sanctions can be quite significant, and in the worst-case scenario, the situation may result in criminal liability.
Attorneys at Lepmets & Nõges Attorneys-at-law have a wide variety of experience in preventive proceedings, as well as in tax related administrative and criminal proceedings. Depending on the specifics of the situation, the attorney can advise on the best course of action. Collaborating with the ETCB may be advisable for one entrepreneur, but for another, it could worsen their procedural position. Timely legal advice and representation reduces the impact of potential later negative consequences. However, even emerging as the winner from a legal dispute involves significant time and stress. Therefore, it is wise to prevent coming under the scrutiny of the ETCB and undergoing tax control.
This article was published on 20.02.2024 in the Finance and legal journal RUP.