Supreme courts have a significant role in developing tax authority practice in the Baltic states mainly through two means 's through cassation proceedings and constitutional review.
In June the Estonian Supreme Court again confirmed arguments that affect tax practice. For years in Estonia the main argument for issuing notices of assessments on corporate income tax has been non-business-related expenses and payments uncovered by tax authorities. According to the Income Tax Act, payments for which the taxpayer does not have a source document (e.g., invoice) are considered as expenses not related to business.
With non-business-related expenses, the courts have been of the position that if the transaction parties both confirm that the transaction took place, provide enough evidence of this, payments were made and the invoices are in the required form, no taxation is possible.
The Supreme Court rules that in case there is reasonable doubt tax authorities have the authority to inspect whether the payment was indeed made to cover business expenses. The Estonian Supreme Court also pointed out that it is not important to prove tax fraud in such cases.
The Circuit Court earlier confirmed that 1) the mere finding by tax authorities that no consultation service was necessary does not confirm that the service was not rendered; 2) if authorities conclude that a transaction is not reasonable economically does not mean that the transaction did not take place; 3) the fact that the result of the consultation was not presented in written form does not confirm that it never took place (consultation might have been oral).
If in fact payments were made, invoices issued and both parties confirmed the transaction, the Supreme Court judgment gives tax authorities considerable possibility to interfere in businesses.
The Supreme Court overruled the Circuit Court's position and found that in case the economic content of the transaction is noted incorrectly on the invoice, the invoice does not meet the required form and thus the payment is not related to business. By stating this, the Supreme Court again confirmed that taxation is based on the actual economic content of the transactions.
The main problem is that the economic content is interpreted by the tax authority and the taxpayer must prove otherwise if necessary. Therefore, it is very important to assess possible tax risks in relation to some transactions 's e.g., oral agreements or transactions with unknown or new business partners. It is very important to document your transactions as much as possible to provide proof to the tax authority when necessary.
Although it is again evident that the Estonian Tax and Customs Board has wide discretion in relation to tax assessments, the full effects of the June 20, 2007 judgment are still to be seen.
Mart Angerjarv is an attorney-at-law at Sorainen Law Offices
