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Tax advisor Maret Hallikma successfully represented Estonian Post Ltd in Supreme Court in dispute with Tax Board

Maret Hallikma, tax advisor of the Law Office Lepik & Luhaäär LAWIN, successfully represented Estonian Post Ltd upon preparation of an appeal in cassation and further proceeding in the Supreme Court with regard to a notice of assessment of the Tax and Customs Board, whereby a tax authority demanded from the company additional taxes in amount exceeding 7 million kroons.

In September 2006 Northern tax and customs centre of the Tax and Customs Board conducted a tax audit in order to check the calculation, declaration and correctness of payment of value added tax, income tax and social tax by Estonian Post in 2005. Based on the tax audit results, the Tax and Customs Board came to a conclusion that the postmen acting as self-employed persons actually work for the company under the terms the characteristics whereof correspond to the ones of an employment relationship, and Estonian Post should have paid all taxes related to the employment -relationship, i.e. Estonian Post should have withheld income tax, unemployment insurance and pension contributions and paid social tax on the wages as well. On 10 October 2007 the tax authority made a decision, pursuant to which Estonian Post was ordered to pay additional taxes in amount exceeding 7 million kroons, and against which the company filed a claim in the court.

This week the Supreme Court fully satisfied the appeal in cassation of Estonian Post in this tax matter, and the decision of the Administrative Court, which annulled the respective notice of assessment of the Northern tax and customs centre, remained in force. Therefore, Estonian Post is not obliged to pay the tax amount exceeding 7 million kroons and can further hire postmen as self-employed persons instead of entering into employment agreements with them. Under the notice of assessment, AS Estonian Post is entitled to claim the paid amount, and the Tax Board, in addition to the paid amount of 7 million kroons, shall calculate and pay the interest to Estonian Post.

According to Maret Hallikma, tax advisor of the Law Office Lepik & Luhaäär LAWIN, which represented Estonian Post, this dispute concerns among other things a principle issue, which is also essential in many other tax issues - are there any restrictions with regard to a right of the Tax Board to evaluate transactions executed between parties (so-called principle of economic interpretation), and if so, to which extent? The Supreme Court explicitly expressed an opinion in its decision, according to which a right of a tax authority to interfere in transactions executed between persons is restricted, and the intervention is exceptionally possible only if a persons’ intent to obtain tax advantage shall be determined within the course of a tax audit. This opinion represents a step forward concerning current taxation practice with regard to implementation of the principle of economic interpretation. In this matter the Tax Board tried to ignore current court practice and infamous section 84 of the Taxation Act, while stating that a tax authority, also on the other basis, is entitled to interfere in transactions executed between persons, and it is not important to determine objectives of execution of transactions and intent of parties. The Supreme Court did not agree with that point of view.

In addition to restriction of the right of interpretation of the Tax Board, the Supreme Court also reviewed in this decision the issue, whether the tax authority should have involved the postmen acting as self-employed persons in this tax proceeding, while within the course of the tax audit the issues, which significantly influenced rights and obligations of a self-employed person, were actually decided upon. The Supreme Court also stated that in case of a tax proceeding, the Tax Board shall be guided by the principal of proportionality and deliberate, whether such tax proceeding, which shall in the end bring the alteration of the accounting for taxation purposes of Estonian Post and approximately 340 self-employed persons, is reasonable and necessary according to the principle of proportionality. In this case the Supreme Court found that the tax authority ’’took a large bite’’ without any prior analysis, whether the tax income, which the state shall get in the end, shall outweigh the violation of rights of such a big number of persons.

The Tallinn Administrative Court previously found in this case that such right is restricted and the tax authority "infringed the freedom of agreement and business of Estonian Post in a disproportional and unfounded manner", intervening without any basis in the civil law relations entered into between Estonian Post and self-employed persons.

The decision of the Administrative Law Chamber of the Supreme Court is available at:
http://www.nc.ee/?id=11&tekst=RK/3-3-1-67-09

Additional information: Maret Hallikma +372 6 306 460 maret.hallikma@lawin.ee