On the 12/03/2021, the application of the Law on Determining the Origin of Property and the Special Tax began, which is directed to tax individuals who lead a life and own property that exceeds their officially reported income.
This is the first law in the legal system of the Republic of Serbia, which comprehensively regulates the issue of property taxation for which the taxpayers cannot prove their origin in their officially reported income.
Historical background and reasons for adoption of the Law
Historically, the need to pass laws of this kind existed for a long period of time. The Law on Tax Procedure and Tax Administration in its Article 59 (in particular) foresees the manner and provides a tool for determining the origin of property, i.e. taxation of property for which the source cannot be determined (precisely because of the existence of awareness that a certain property, for which the source cannot be determined, exists). However, the application of this legal tool prescribed by the Law on Tax Procedure and Tax Administration experienced a negative outcome in practice and the goal (taxation of property for which the taxpayers cannot prove the source in their officially reported income) was not achieved.
Therefore, it can be said that it is completely justified and that we should welcome the adoption of the first law of this kind – the Law on Determining the Origin of Property and Special Tax, regulating this issue, which will be actually applied in practice and which will finally tax the assets whose owners cannot prove its source in their officially reported income.
Important legal solutions foreseen by the Law
The solutions provided by this Law essentially stipulate that a person, who cannot prove that he has legally acquired the property he owns, is taxed with the tax rate of 75% (revalued) of value of that property (i.e. that three quarters of the value of such property shall be expropriated). Also, if the court finds that the property was acquired by committing a criminal offense, the owner could be deprived of all such illegally acquired property.
According to the solutions foreseen by the Law, the control of citizens’ property shall be performed by a Special unit of the Tax Administration and if it determines that there is property which cannot be justified with officially reported income, it will issue a resolution on determining a special tax of 75% on the tax base, which is the sum of revalued value of such property for each calendar year which was subject to control.
Taxpayers will have the opportunity to appeal this decision to the Ministry of Finance, whose decision will be final in the administrative procedure, but will still be able to initiate an administrative dispute – by filing a lawsuit before the Administrative Court.
The burden of proof in the procedure of determining the origin of property is distributed by law, so the burden of proof of the increase of property of a natural person is on the side of the Tax Administration, whereas the burden of proof of the origin of that property is on the taxpayer in the part where the increase of his property is not in accordance with officially reported income.
It is evident that the new Law relies on already existing legal solutions because this Law also envisages cross-checking of assets provided by the Law on Tax Procedure and Tax Administration. After all, Article 18 stipulates that “The procedure governing the tax procedure and tax administration shall apply to the procedure prescribed by this Law, unless otherwise provided by this Law, except for the provisions on the statute of limitations for determining and taxes collection.”
According to the legal provisions, the procedure of auditing the property can be initiated upon an application of the citizens or certain competent institutions.
The law specified that during the control, the entire property of the natural person under control is taken into account, especially immovable property, such as an apartment, a house, an office building and premises, a garage, land and other.
Financial instruments, shares in a legal entity, equipment for performing independent business activity, motor vehicles, boats, ships and other vessels and aircraft, savings deposits and cash, as well as other property rights are also audited.
It is important to note that the audit procedure is initiated if in the preliminary procedure it seems probable that, in a controlled period of maximum three consecutive calendar years, the natural person has an increase in assets, where there is a difference between the increase in assets and reported income of the natural person which exceeds EUR150,000.00 in RSD countervalue at the median exchange rate of the National Bank of Serbia on the last day of the calendar year of the controlled period. Such a time frame for controlling the revenues against the increase of property – in terms of the controlled period and the prescribed property census is, from a practical point of view, an objectively good solution. This is because it enables the controlled subject to prove the connection between income and acquired property in one period, which is objectively sufficient to justify all possible deviations between income and property (which are realistically possible in practice). Namely, if the control was legally limited to one calendar year, there would be a real possibility of justified deviation between income and increase of property in the observed period, while deviations exceeding three years are unusual and indicate that deviations are not justified.
Also, the property census in terms of the difference between the increase in property and reported income – which must exceed EUR150,000.00, is an objectively well-balanced limit, so that the Tax Administration would not spend resources and time on disproportionately smaller deviations in property and thus taxes which can be imposed on said property.
In order to create conditions for the practical application of this law, cooperation between state bodies through so-called “liaison officers” is envisaged, in such a way that one or more liaison officers will be appointed with a Special Unit of the Tax Administration from the Ministry of Interior, National Bank of Serbia, the Administration for the Prevention of Money Laundering, the Agency for the Prevention of Corruption, the Republic Geodetic Authority, the Agency for Business Registers and the Central Securities, Depository and Clearing House. This is a legal solution “loaned” from the rules on combatting organized crime and corruption, in order to help the Tax Administration in performing the tasks defined by law.
In addition, special training is planned for employees of the Unit, employees in the Ministry in charge of finance who deliberates in the second instance on appeals, as well as judges of the Administrative Court who will preside in proceedings initiated by lawsuits against final resolutions on special taxes.
The Law stipulates that if by final and binding verdict is determined that the property increase was obtained by committing a criminal offense, but the special tax under this Law is also paid, in that case the court will include the amount of special tax paid under this Law in the proceeds of crime. This rule will also be applied in proceedings for confiscation of property derived from a criminal offense. Therefore, the Law on Determining the Origin of Property and Special Tax does not aim to determine illegally acquired income, although it is quite certain that determining the existence of property for which the source cannot be determined in officially reported income indicates the existence of a criminal offense.
The law stipulates that all persons participating in this procedure are obliged to keep the data from the procedure as a professional secret.
The law also provided penalties for non-cooperation with the Tax Administration.
Legal entities that, at the request of a Special Unit of the Tax Administration, do not submit the required data within the deadline determined by it, will be fined in the amounts spanning from RSD500.000,00 to RSD2.000.000,00.
For the same offense, for the entrepreneurs prescribed a fine spanning from RSD100.000,00 to RSD500.000,00, whereas for natural persons and a responsible person in a legal entity, state bodies and organizations, as well as an autonomous province and local self-government bodies and the holder of public authority (such as notary public or enforcement officers for example) is prescribed a fine spanning from RSD50.000,00 to RSD150.000,00.
In addition, a fine spanning from RSD50.000,00 to RSD150.000,00 is foreseen for a natural person who does not keep as a professional secret the data obtained in the procedure of determining property and special tax.
Potential problems in the practical application of the Law
Without entering in potential political implications in the application of this Law, but exclusively from the aspect of its practical application, we point out the following.
- If the Law can cover any three related calendar years and if the application of the provisions on statute of limitations is excluded, whereas keeping in mind the legal deadlines for storing documents are taken into account, a serious question arises as to how the controlled person will be able to prove that the increase in property is based on legally acquired income, if the documentation has been extracted / destroyed in accordance with the law? This will significantly complicate the position of the controlled person and the possibility of fulfilling the rule on burden of proof prescribed by law.
- According to the author of this article, the issue of treatment of money laundering was not sufficiently considered in the drafting of this law. The legislator should have introduced the automatism (obligation) in filing a criminal complaint for the criminal offense of money laundering in the sense that, as soon as the disproportion between the obtained income and the acquired property of the controlled person in the observed period is determined, the Special Unit of Tax Administration must file a criminal complaint against the controlled person, due to suspicion of the criminal offense of money laundering. This is because of the following – if there is determined disproportion between (legally obtained) income (which can be proven) on one hand and the property of the controlled person on the other hand, it means that the income by which this difference of property was acquired is (most likely) illegal and as such, first of all, remained untaxed, and then instead of paying the tax on those (illegal) income, that person used that amount of illegal income to obtain that difference in property and thus introduced illegal income into legal channels and thus “legalized” those illegally acquired income (usually through the purchase of real estate, for example), which constitutes a criminal offense of money laundering pursuant to Article 245 of the Criminal Code of the Republic of Serbia.
- A potential source of serious problems in the practical application of the Law is the fact that the Law prescribes that the Law on Tax Procedure and Tax Administration is applied in everything that is not regulated differently by this Law, except for the provisions on statute of limitations of determining and collection of taxes. On the other hand, Article 114 of the Law on Tax Procedure and Tax Administration stipulates that “the right of the Tax Administration to determine and collect taxes and secondary taxes shall become statute-barred after five years from the day the statute of limitations began to lapse” and that “the statute of limitations and secondary taxes shall begin to lapse on the first day of the year following the year in which the tax, or secondary tax, was to be determined”. Also, “the statute of limitations for the right to collect taxes and secondary taxes begins to lapse on the first day of the following year from the year in which the obligation of the tax debtor becomes due for payment.” Here is a justified (practically very important) question – is it possible to make a kind of novation of the taxpayer’s obligation, which is already statute-barred?
- The question of constitutionality and legality of re-taxation of property and income, which have already been taxed once by final decisions of the Tax Administration, is raised. The hypothetical situation is as follows – the taxpayer filed a tax application for property tax, in that tax application he presented the acquired property, the Tax Administration accepted that application, rendered its resolution and made a tax assessment against that tax application. In this way, it is considered that the state, by its official act – resolution (which has already become final), accepted as a valid and lawful the submitted tax application and that it accepted and recognized the property covered by that tax application as legally acquired, and that the taxpayer relied on the decision of the Tax Administration as an official act of the competent state body.
- The question is what happens in a situation when in the process of controlling the origin of property (due to disproportion with officially reported income) that property (which was previously taxed with property tax) is re-included? Will that property then be double taxed – the first time through the property tax, and the second time through the tax under this Law? The second question (and issue) is that the State has already (formally de iure) audited the property during the audit of the submitted tax application, and it could be argued that the State by its act (resolution of the tax administration) recognized the property as legal through a previously conducted audit procedure. In that situation, the question of the legal fate and status of such resolutions (on property tax) of the Tax Administration arises. The Tax Administration would have to repeal these resolutions, which would open the way for the application and taxation of property under this Law.
In conclusion, it can be said that there was an unequivocal need for the Law on Determining the Origin of Property, that the solutions contained in the law are generally positive and practical, and that this is the first time that the issue of the origin of property is approached in a comprehensive manner. On the other hand, there are certain problems that can potentially arise in the practical application of the law, which we have tried to present in this text.