State Revenue Service seeks collection from tax debtor’s business partners
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Adopted by the State Revenue Service (SRS) in 2018, a new approach to collecting overdue taxes violates the principles laid down by the Administrative Procedure Act, infringes the rights of traders, and is out of line with the general legal framework. This article explores the SRS’s new approach and the taxpayer’s potential actions.
B Ltd has an overdue tax debt, and the SRS starts collection against them. As their cash and other assets are not enough to pay the tax debt in full, the SRS sends C Ltd, a counterparty of B’s, a warning about suspension of B’s business and an order stating that all of B’s monies held by C are seized and requiring that C transfer any monies owing to B into accounts designated by the SRS up to the amount subject to collection.
The SRS also threatens C with VAT deregistration and business suspension if C fails to comply with the SRS’s demands because such non-compliance will be treated as tax evasion.
The SRS’s actions
Despite the threats made in the SRS’s warning and order, C paid B for services.
Having found that C paid B after receiving the warning and order, the SRS treated C’s action as tax evasion and decided to suspend C’s business.
In this situation, the only way of quickly restoring C’s business suspended by the SRS is to pay the amount specified by the SRS’s order to the government because the time it takes to challenge the decision and litigate is unreasonably long compared to the trader’s business being terminated and deregistered within three months after its suspension.
Analysis of the legal framework
Firstly, although in their warning the SRS invokes section 599 of the Civil Procedure Act, claiming that the SRS has all the powers of a bailiff, the SRS has in fact failed to observe the procedure for carrying out orders in line with the Civil Procedure Act.
Section 551(1–2) of the Civil Procedure Act, which is commonly invoked by the SRS, provides that a bailiff’s demands and orders issued in enforcing court rulings and other decisions are compulsory for entities. If a bailiff’s demands or orders are not carried out, the bailiff will draw up and file a statement with the court to rule on the question of liability.
This implies that the question of whether C has carried out the demands and orders issued by the SRS as enforcement agency is within the competence of courts having general jurisdiction, not the SRS. In making such decisions, the SRS in fact exceeds their powers by deciding, instead of the courts, on whether C has violated any requests and orders issued in the course of enforcement.
Accordingly, there are no legal grounds for claiming that C has violated the SRS’s demands and orders.
Secondly, in their warning the SRS invokes section 34.1(1) the Taxes and Duties Act, which provides that the SRS has the power to suspend the business of a taxpayer that has evaded taxation.
This rule deals with tax evasion. Since the parties are objectively disputing enforcement, not C’s obligation to pay taxes, this rule is not applicable to C.
The content of those orders implies that the monies subject to collection are B’s tax debt payable by B, not C. And C is not liable to pay another trader’s overdue tax payments.
For C, the money specified by the order is the amount seized by the SRS, not a tax that C would be required to transfer to the government. Failure to transfer seized monies to the government cannot be treated as tax evasion.
The SRS is ignoring statutory collection procedures by evaluating traders’ actions arbitrarily and using a misguided finding about a trader’s tax evasion as a basis for taking subsequent unlawful steps, i.e. suspending the trader’s business.
These circumstances imply that the SRS is taking an unlawful action and in fact forcing traders like C to make payments to the government they are not required to make, thus causing them a financial loss.
It is important to note that in such cases, even if the trader incorrectly pays to the government any amounts subject to collection from their counterparties, the trader may sue the SRS for damages under Chapter 8 of the Administrative Procedure Act and file a petition for cancelling the administrative instrument issued by the SRS.
As the SRS has only recently taken this approach to debt collection, there is no case law on this, but the courts have received petitions and will hopefully throw new light on tax collection matters.
If your company has had similar experience, please reach out to PwC by calling Olegs Spundins on +371 67094400 or emailing firstname.lastname@example.org