Deputy-Ombudsman issues reprimand
27.6.2008
Deputy-Ombudsman Petri Jääskeläinen has issued a reprimand to the Tax Administration for having acted unlawfully in determining tax liability. As a consequence of its action, employers' contributions have regularly and on several occasions each year been collected, through the distraint process, from parties that had no obligation to pay them.
The Deputy-Ombudsman also criticised the Tax Administration for undue delay in redressing its unlawful action. He urges the Tax Administration to consider how it can recompense the complainants for the damage and inconvenience it has caused them.
The Deputy-Ombudsman's investigation of the Tax Administration's action arose from two complaints
The complainants were engaged in establishing so-called shelf companies for the purpose of sales. In the stage where the joint-stock companies were being established, one of the complainants had been registered as a member of their management board. Once the companies had been entered in the Trade Register, they were sold as inactive entities.
However, the companies that had been sold did not always take care of their payments to the taxman. The distraint office sent the complainants a demand to pay the taxes that the companies had withheld and their employers' contributions. The applicants had applied for and obtained decisions from the tax office absolving them of the obligation to pay tax that had been ordered payable in debiting decisions.
Despite the Tax Office's decisions absolving them of liability for tax, the same receivables had been sought through the distraint process several times a year. In addition, the same procedure was repeated in the following year's tax supervision. On one occasion, information that the tax liability had been erroneously determined and that the Tax Office had granted relief from responsibility did not reach the distraint office and the complainant's bank accounts and shareholdings were distrained and the shares sold. The funds were paid to the account of the Tax Office, at the request of which the distraint office subsequently returned the funds less distraint fees.
Tax office's annual supervision of employers' contributions has been done by computer
According to the explanations given by the Tax Office and the National Board of Taxes, the Tax Administration's annual supervision of employers' contributions is done with the aid of a purpose-designed computer application. When these contributions are debited, the data that the Tax Administration's client register contains with respect to the party liable for tax are used, and also data on others liable for tax.
The debiting process is fully automated. In conjunction with it, the parties entered in the debiting decision as liable for tax are not given the opportunity to state their case concerning the veracity of the entry in the client register regarding liability. Nor is the party indicated as being liable for tax sent a separate debiting decision containing information on the tax liability; instead, the party indicated as liable for tax receives a copy of the decision for information only if he or she neglects to pay the tax and steps are initiated to collect the tax also from the party listed as liable for it. It has been found that some number of groundless indications of tax liability occur in the tax administration each year.
The Tax Administration's procedure was not founded on an Act
Deputy-Ombudsman Jääskeläinen emphasises that the procedure followed by the Tax Administration has been unlawful in that a shareholder who has been the founder of a joint-stock company or a member of the board has been held responsible for tax liabilities that have arisen from activities that took place only after the registration of the joint-stock company. The procedure has contravened one of the most central principles enshrined in the legislation regulating joint-stock companies, namely that a joint-stock company is a legal entity, separate from its shareholders, which comes into being upon registration.
Under this legislation, shareholders are not personally liable for the company's obligations. A person who establishes a joint-stock company and a board member have a right to be able to place their trust in the currently valid legal order and in this principle, which is central in legislation on joint-stock companies and specifically provided for in the Joint-Stock Companies Act.
The Deputy-Ombudsman points out that a ground for the Tax Administration's action can not be found in tax legislation, the Joint-Stock Companies Act or the Administrative Procedure Act. Since the Tax Administration had not in its supervision of payment liability verified the correctness of the tax liability nor consulted the party who had established the joint-stock company or members of its board, it had through this negligence significantly jeopardised the legal security to which these parties are entitled as a constitutionally guaranteed right.
The procedure is also clearly contrary to the obligation which the Administrative Procedure Act imposes on authorities to explain matters and hear the opinion of an interested party. What the procedure has led to in practice is that the party registered as liable for tax has been informed of an unlawfully assessed tax liability incurred after the company's registration only in the form of a demand for payment sent by the distraint authorities.
In addition, the procedure has been repeated insofar as the same receivables have been sought through the distraint process several times a year. In an extreme case, the person registered as liable for tax has not had time to have the distraint process blocked and has suffered sequestration of funds and other unfair consequences.
According to a report received in relation to the matter, a number of erroneous entries concerning liability have occurred each year. In spite of this, according to a report received from the National Board of Taxes, the Tax Administration is only now trying to bring the determination of tax liability, which is done in conjunction with debiting of employers' contributions during the annual supervision, into compliance with the law. The National Board of Taxes has informed the Deputy-Ombudsman that the Tax Administration intends to change its registration procedures. The general rule under the new procedures will be that a joint-stock company will be entered in the Tax Administration's register only after it has been entered in the Trade Register. In the cases of joint-stock companies that have already been registered, persons who have established companies will no longer be automatically specified in decisions as the tax-liable parties.
The Deputy-Ombudsman gave the Tax Administration a reprimand for having followed an unlawful procedure in determining tax liability and undue delay in bringing the procedure into compliance with the law. In the same conjunction, he urged the Tax Administration to consider how it could recompense the complainants for the damage and inconvenience that this unlawful procedure has caused.
The Deputy-Ombudsman has asked the Tax Administration to inform him, by 1.11.2008, of the measures it has taken.
Additional information will be provided by Legal Adviser Ulla-Maija Lindström, tel. +358 (0)9 432 3355.
