Tax proceedings and trust in public authorities
Issuing a permit to demolish a building, then blocking the demolition and demanding payment of tax on the undemolished building, while ignoring a request for an individual interpretation on the matter, hardly fosters citizens’ trust in the public authorities. It is also unlawful.
Filing a request for an individual interpretation of tax provisions is not only a good way to obtain information on how to properly account for taxes, but is also an effective instrument for safeguarding compliance in the future. The application should describe the factual state or future event and indicate the proposed method of tax settlement. The tax authority is required to issue an individual interpretation without undue delay, but no later than three months from receipt of the application. Under Art. 14o §1 of the Tax Ordinance, if an interpretation is not issued within this period, then, on the day following expiration of the deadline for issuing the interpretation, an interpretation upholding the correctness of the applicant’s position in full is deemed to be issued. There is a possibility for later correction of this tacit interpretation by the tax authority, but the legal fiction of issuing an interpretation has a positive effect on the taxpayer. Complying with it must not harm the applicant, and subsequent initiation of tax proceedings may be considered an action violating the principle of trust in public authorities.
This issue was taken up by the Province Administrative Court in Wrocław, examining a case where the applicant had filed a complaint against the decision of the local government appeal board (the tax authority of second instance) modifying the amount of property tax for 2015. According to the justification for the contested decision, the applicant listed the buildings in her tax declaration as exempt from property tax pursuant to Art. 7(1)(4)(b) of the Act on Local Taxes and Fees. The first-instance tax authority (mayor of the commune) held that the disputed buildings could not enjoy a tax exemption as land part of an agricultural holding, as they were erected on land classified as other developed land in the land and building register. Sharing the argumentation of the authority of first instance, the appeal board found that the tax authority was bound by the subjective and objective scope of the records contained in the land and building register and was not entitled to make its own determinations in this regard.
The province administrative court upheld the complaint and overturned the decision of the local appeal board and the mayor’s decision preceding it, at the same time holding that the decisions taken by the tax authorities violated the law. As stated by the court, on 30 May 2019, the applicant applied for an individual interpretation to correct the declaration regarding the 2014–2019 real estate tax. The applicant’s position was that the buildings should not be taxed for two reasons. First, she argued that the property did not meet the definition of a building. If that position was not accepted, she argued that the buildings were occupied for agricultural activity, and therefore enjoyed a subjective exemption. The tax authority of first instance disregarded the applicant’s request and, in an order dated 29 August 2019, initiated tax proceedings to determine the amount of property tax. The order was served on 3 September 2019. But as of 1 September 2019, the applicant was protected by the tacit interpretation. Under Art. 165 §4 of the Tax Ordinance, ex officio proceedings are deemed to be initiated on the date of delivery of the decision initiating the proceedings to the party. Expiry of the time limit produced the procedural effects specified by law. The applicant’s position that the buildings could not be taxed, as they did not meet the definition of a building, was adopted. As stressed by the court, issuance by the tax authority of first instance of a decision to initiate tax proceedings did not relieve it of the obligation to issue an individual interpretation. Only the filing of an application during pending tax proceedings would deprive such a tacit interpretation of legal effect.
In this case, one more point should have been noted. In 2012, the county executive (starosta) had issued a decision approving a construction design and granting the applicant permission to erect a residential building, with demolition of existing storage and utility structures. The construction log records show that steps were undertaken to demolish those structures. Subsequently, after considering the application of the investor—the local commune (gmina)— the county executive approved the construction design and division of the property, allowing the commune to implement a road project that included the applicant’s land. In 2022, the amount of compensation due to the applicant was finally determined by the province governor.
Three conclusions emerge from the justification for the judgment. First, during the course of the applicant’s project, the public administrative authorities took a decision to build a road, which undoubtedly affected the applicant’s legal situation and contributed to suspension of the construction and demolition activities. It took the authorities seven years to determine the amount of compensation.
Second, it was purposeful on the part of the commune to undertake the road construction project. Had that project not been undertaken, the buildings in question would have been demolished in accordance with the authority’s decision as early as 2014. By blocking the demolition works, the commune hoped to be able to collect tax on the still existing storage and utility buildings.
The tax proceedings were initiated in a situation where there was no real possibility of conducting a visual inspection of the buildings to determine their usable area. But it is the usable area that determines the base for taxing a building (Art. 4(1)(2) of the Act on Local Taxes and Fees). In determining the tax base, the tax authorities of first and second instance used the data contained in the tax declaration filed by the taxpayer. According to the province administrative court, the absence of one of the key structural elements of the tax prevents taxation of buildings.
Third, in this case there was a violation of the principle of trust in tax authorities expressed in Art. 121§1 of the Tax Ordinance. As the court rightly pointed out, “Confidence in public authorities is the belief that tax proceedings are conducted in accordance with the principles of law, that the rights of participants are respected, that the authority fulfils its obligations and strives for an efficient and effective conclusion of the case. In turn, conduct that manifests an element of retaliation against the taxpayer does not qualify as such.” Also, in its thorough reasoning, the court explained the importance of the right to sound administration, derived from the principle of the rule of law (Constitution Art. 2), the principle of efficiency and reliability in the activities of public institutions (Preamble to the Constitution) and the principle of the common good (Constitution Art. 1), and emphasised the public authorities’ role as servants to citizens.
This case is not only interesting for its discussion of the mechanisms of tax law, but also essential for strengthening the authority of the state and building citizens’ trust in public administrative bodies, especially in the field of tax proceedings. The ruling touches on the essence of fundamental principles of the rule of law, and is therefore worth perusing in its entirety.
The judgment was handed down on 20 June 2022 by the Province Administrative Court in Wroclaw (case no. I SA/Wr 723/20), and is not legally final.
Dominika Plewa, Dispute Resolution & Arbitration practice, Wardyński & Partners
