Taking legal action against taxes: fear and ratio
You often hear that entrepreneurs are better off not taking legal action against their taxes. This because they have a vested interest in good relations with the Tax Authority and also because taking legal action is a bit of a gamble. But is that actually true? Or is fear a bad adviser in this case?
Obviously there are good reasons for examining whether legal action is desirable or necessary on a case to case basis. Taking matters to court has a significantly emotional impact on those that go that route. Legal action costs time and money. And sometimes publicity and reputational damage have to be taken into account.
It is not without good reason that Article 3.7.1 of the Code of Conduct for European Lawyers prescribes the following:
‘The lawyer should endeavour at all times to find a solution to the client’s dispute that is commensurate to the importance of the matter, and he shall strongly advise the client at the appropriate time regarding the desirability to reach a settlement or to rely on alternative solutions to end the dispute.’
If a lawyer advises his client to take legal action, he must make a thorough evaluation of all aspects that are involved for the client. And there are many.
Despite all efforts to speed up the judicial process, legal action usually goes on for a long time. Two years is considered reasonable for the objection and appeal phase (six months for objection, eighteen months for the court proceedings), two more years for filing an appeal and ultimately two more years for cassation. In the worst case scenario, you are six years further along before a definitive judgement has been made. As a party in the proceedings there is little you can do to influence the duration; it is easier to delay matters than speed them up.
Then there’s the publicity. The risks involved in the publicity should not be exaggerated. Journalists do not pay much attention to tax procedures. On the one hand, that is because the tax proceedings are not open to the public, but also if the law is amended because politics wants more transparency into the tax procedure (‘public, except’), I expect that public interest will remain limited: taxation has a somewhat tedious image and tax law will never gain the same level of attention that criminal law receives.
An important and difficult consideration is that of the costs: does the importance of the procedure outweigh the costs of legal assistance? Does it involve a one-off or an annual recurring correction?
Compared to the justified concern for high costs, the court registry fee is still very low and that (unlike civil proceedings) there is hardly any risk in tax proceedings of having to pay the opposing party’s legal costs.
Naturally, the costs will be considered in the light of the essential question: what are the chances of winning the case? More about this later on.
Staying on friendly terms
On the matter of the frequently heard desire to maintain good relations with the tax authority, I’ll keep it short: that is mostly nonsense.
Whether the tax authority is pleased that legal action is being taken, is of little interest to the client. That may be another story for a legal aid counsellor (the lawyer), but that is also of no relevance for the client.
Never in my long career as a tax lawyer have clients subsequently taken offence to proceedings being conducted. Certainly not when the inspector also feels that the matter may involve differing opinions. If it is a different matter and, for example, the tax authority impose penalties based on intent, the relations have usually already deteriorated so badly that taking legal action no longer makes any difference.
By the way, it is good to think of the tax authority as a big institution. Proceedings are usually conducted by a special team and case managers are swapped around frequently. Consequently, the collective memory of the tax authority always seems particularly short.
It is – and this brings me to the most difficult consideration – extremely difficult for a taxpayer to estimate the chances of winning a proceeding. Taking legal action is a human process. How much time is it going to take to convince the inspector? Is it possible to convince him at all, even if the arguments are very strong? The same applies for the judge. Is he well established, is he open to a different perspective on the matter?
The same standards are not applied during a proceeding. The taxpayer’s case is not the same as that of the tax authority. That follows from the law, but there is also an instinctive side to it: it is perceived that the tax authority has no reason to lie, while it could be in the client’s interest to twist the facts. That makes the inspector credible and what the client or his counsellor introduces is suspect from the onset. A fact that is overlooked is that the inspector can also be wrong. He may well not lie, but may be wrong. This inequality makes taking legal action risky.
And so … thorough consideration
I therefore absolutely agree that it is always worth it to thoroughly consider whether taking legal action is desirable or something that is better avoided. A reasonable settlement is preferable over the risk of going to battle, but the crux of the questions rests in what is reasonable. Bear in mind that settlement can also be reached at a later stage. The pressure of an ongoing procedure may help with negotiations, even if only because a ruling in the taxpayer’s favour can have a far-reaching and long-term impact for the tax authority: this can create a lot of problems for the tax authority in future cases. For the taxpayer, it always concerns an important, but one-off issue.
All of these difficult considerations boil down to expertise. Expertise in proceedings and negotiating. My colleagues and I have vast expertise and will be pleased to apply it the moment you have to come to that decision. The sooner you involve us, the better we can assist you in taking a responsible, reasoned decision that is not motivated by fear.