Proposal for compensation for long processing time in cases with additional tax
Tax and value added tax cases often have a long processing time. For example, a complaint to the Tax Appeal Committee is often left for more than three years before the taxpayer receives an answer to the complaint. The Ministry of Finance has sent a proposal for consultation for changes to compensation where a decision in cases where an additional tax is imposed has not been made within a reasonable time.
The current scheme with a rate reduction
If a taxpayer provides incorrect or incomplete information to the tax authorities, or fails to provide mandatory information, an additional tax may be imposed (penalty tax). Conditions are also set that the failure to inform may lead to tax benefits, and that the circumstance is not considered excusable. The additional tax is normally set to 20% of the tax that should have been paid. In the most serious cases, the rate is increased to 60%. For third parties not complying with the duty to inform, a penalty for violations may be imposed.
When decisions on additional tax or penalties for violations are not made “within a reasonable time”, there is a breach of the European Convention on Human Rights (ECHR). The limit for what is “within a reasonable time” varied based on, among other things, the complexity of the case and whether the time spent is due to the taxpayer or the authorities. If the case is not settled within a reasonable time, the additional tax shall be annulled or reduced to compensate for the breach of the Convention.
The current practice is that the compensation is measured through a rate reduction. If, for example, an additional tax of 40% was notified, a long processing time may lead to the rate being reduced to 30%. How much the rate is reduced depends on the case processing time’s length and reason, as well as the taxpayer’s individual circumstances.
The Ministry points out that the size of the original additional tax becomes decisive to the level of compensation, while the length of the violation will be less significant. When the shirked amount is small, a low compensation is given, even if the case processing time may have been long. If the case concerns large amounts, however, a shorter violation may result in significant compensation.
The proposal for a new scheme for one and a half legal cost per month
In order for the compensation to a larger extent becoming a result of the length of the case processing time, the Ministry proposes that the compensation is set to one and a half legal cost per month started, calculated from the notice of additional tax or penalty for violation is sent, until the case is settled. Legal costs are a payment unit that are usually changed on 1 January every year. One and a half legal cost currently amounts to NOK 1,834.50.
If a case is left for five years, the compensation is around NOK 100,000, regardless of whether the notified additional tax was originally NOK 200,000 or MNOK 20. In our opinion, this is problematic. ECHR Article 13 sets a requirement for sufficient compensation to be given in the case of a breach of convention. In cases where the notified additional tax is high, the compensation is significantly reduced compared to the current scheme.
In the consultation memo, the Ministry assesses whether the compensation is sufficient pursuant to practice from the ECHR. The Ministry refers to the fact that the amount the case concerns is not explicitly stated as a relevant factor. According to the guidelines in Article 13 of the ECHR, the best solution is still to both give sufficient compensation to the taxpayer and at the same time prevent a long processing time. In our opinion, the compensation should be modelled so that it gives a higher incentive to avoid a long processing time in cases where the additional tax is high.
Furthermore, it is suggested that the compensation is limited to the size of the imposed additional tax/penalty for violation. If the notified additional tax is waived or dismissed, however, there is no additional tax that compensation can be withdrawn from. In such cases, it is suggested that the compensation is paid, upwards limited to 80 legal costs (currently NOK 97,840). In our opinion, this could lead to the threshold for the authorities to waive or dismiss the case becoming higher.
The Ministry aims for the change to enter into force on 1 July 2023. It is suggested that the new rules will be applicable to cases where there is no violation of the ECHR at the time of entry into force, regardless of whether a decision is made later.
The consultation deadline is 17 January 2023. Read more about the consultation here.