Investigation period for direct taxes soon prolonged without distinction between an ordinary investigation and a fraud investigation?

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A legislative proposal has been submitted to the Belgian Parliament with a view to harmonising the investigation and assessment periods for income tax and VAT. The proposal primarily looks to amend the legal provisions relating to the investigation period for direct tax matters.

Currently, the normal investigation period for income tax is 3 years. This period runs from 1 January of the assessment year (in the event that the accounting period is not the same as the calendar year, this period is prolonged by a period equal to the period between 1 January of the assessment year and the closing date of that accounting period).

This 3-year period may be extended by 4 years, on the condition that the tax authorities notify taxpayers upfront, in writing, of any indications of fraud in which they may be involved for the period in question. Therefore, insofar as the tax authorities respect the condition of notifying taxpayers upfront, they can investigate beyond the 3-year period in the event of indications of fraud. However, it is not yet required to provide proof of the existence of fraud.

Taxpayers often come before the Court (in so-called ‘pretaxation’ disputes) to challenge the tax authorities’ right to carry out investigations within the prolonged period. Some of these disputes have been judged in favour of the taxpayers, and some of them in favour of the tax authorities (see also : V. De Brabanter, G. Vael & S. Pierrée, ‘Litige de prétaxation et extrapolation d’indice(s) de fraude’, Act. fisc., n° 2021/09).

When referring to case law on this subject, the authors of the legislative proposal justify the proposed amendment by arguing that the current legal requirements are experienced as an impediment on the investigative powers of the tax authorities in fraud investigations. Moreover, they reference the need to harmonise the direct tax and VAT procedures. For VAT purposes, the law only requires the tax authorities to notify taxpayers of the existence of indications of fraud before they adjust the taxpayer’s VAT position which they can do within the extended 7-year statute of limitations.

In this context, a proposal has now been submitted to Parliament to amend the legal provisions for the direct tax procedure so that the tax authorities would only need to notify taxpayers of indications of fraud before issuing the actual tax adjustment, instead of before the start of an investigation outside the normal 3-year period. The consequence of this legislative amendment, if it were adopted, would be that the tax authorities would be allowed to investigate within a 7-year period whether or not there are indications of fraud before starting their investigation.

The statutes of limitations concerning the assessment of income tax, would remain the same under the proposal. A distinction would continue to be made between cases where fraud exists and cases where it does not. The ordinary assessment period remains 3 years, while in cases where there is proof of fraudulent intent, the assessment period is prolonged to 7 years.

Besides the extended investigation period in the event that there are indications of fraud, the legislator recently introduced a number of other extensions to the ordinary investigation period. For example, in the event that the tax authorities receive information from abroad indicating that income has not been reported in Belgium, they may carry out an investigation for a period of 24 months as from the date the information was received and may look back over the 5 assessment years preceding the year in which the information was received. Taking into account the increasing range and amount of information exchanged in practice (automatic exchange of rulings, Country-by-Country reporting, DAC 6, DAC 7, …), it is likely that the ordinary 3-year investigation period will become more the exception than the rule.

Given the fundamental critical comments from the State Council on the current text of the proposal, it is not yet certain whether the proposal will be adopted. Taxpayers’ rights may be eroded, in particular where there is no fraudulent intent. We expect the debate on the extension of the investigation/assessment periods for direct tax procedures to continue. Regardless of whether fraud has been demonstrated or is suspected, individual and corporate taxpayers should increasingly be prepared to be audited by the Belgian tax authorities for a period beyond the typical 3-year statute of limitations.

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