Compensation Claims Against Unlawful Acts of the Tax Administration

Acts and Actions of the Tax Administration

Tax systems today are founded on the declarations of taxpayers; in other words, taxation is carried out on the basis of the tax base declared by the taxpayer. The accuracy of such declarations is therefore important in preventing the State from suffering a loss of tax. For this reason, in order to minimise tax loss, various inspections and investigations are carried out within the State apparatus by tax audit officers.

There should be no objection to describing the acts carried out by tax audit officers as the acts and actions of the tax administration. Tax Procedure Law No. 213[1], in Article 135, lists the persons authorised to conduct tax inspections:

“(1) Tax inspections shall be conducted by Tax Inspectors, Assistant Tax Inspectors, the chief finance officer of the province or heads of tax offices.

(2) Those serving in director positions within the central and provincial organisation of the Revenue Administration shall in all cases have the authority to conduct tax inspections.”.

Tax Procedure Law No. 213, Art. 135

Means of Tax Audit

Although the methods of tax audit, which may be regarded as acts and actions of the Tax Administration, are regulated under the provisions of the Tax Procedure Law (VUK), the method of audit that gives rise to the most disputes in relation to our subject is the tax inspection.

• Spot Check (Yoklama)
• Vergi incelemesi
• Search
• Bilgi toplama

Spot Check (Yoklama)

Under the Tax Procedure Law yoklama, is a method of investigation and audit provided for the purpose of investigating and establishing taxpayers and the material facts, records and matters relating to tax liability.

As a means of obtaining information that enables the taxable event and taxable sources and matters to be identified and audited at the outset, at the moment and place at which they occur, the spot check differs in this respect from the inspection, which provides in-depth and detailed findings and information.[2]

Tax Inspection

The purpose of a tax inspection is to investigate, establish and secure the accuracy of the tax payable. Arising from the principle of legal certainty, it is directly connected with fundamental rights, above all the right not to pay more than the correct amount of tax, as well as the rights to equality, privacy, confidentiality and representation. This makes the tax inspection a subject to which importance must be attached in terms of how taxpayer rights are reflected in practice, and distinguishes it from other procedures.[3]

The provisions on tax inspection are set out in Article 134 et seq. of the VUK. Article 134 concerns the purpose of the tax inspection and provides that its purpose is to investigate, establish and secure the accuracy of the taxes payable. The provisions in the subsequent articles concerning the time and place of the inspection and the rules to be observed during the inspection will be examined in the context of the disputes that arise, and will not be discussed at this point.

Search

The search, an important institution in tax auditing, is regulated in Article 142 et seq. of the VUK.

A tax inspection involving a search is a type of inspection that may be carried out in respect of a taxpayer against whom there is strong suspicion and evidence of tax evasion, arising from reports received or from a tax inspection conducted, and may also be carried out on the premises of third parties connected with such taxpayers. In such a case, all methods and investigative techniques used within the scope of a tax inspection are employed to examine whether the State has suffered a loss of tax or whether the offence of tax evasion has been committed. It is thus shown to be an important institution.[4]

The matters to be observed by tax audit officers in this regard will also be examined in the next section.

Collection of Information

The institution of information collection, which enables effective auditing for taxation purposes, is regulated in Article 148 et seq. of the VUK.

Article 148 VUK:

“(1) Public administrations and institutions, taxpayers or other natural and legal persons dealing with taxpayers are obliged to provide the information requested by the Ministry of Finance or by those authorised to conduct tax inspections.

(2) Information is requested in writing or orally. Those who fail to provide information requested orally are reminded of the matter in writing and given a reasonable period to respond. The persons concerned may not be brought to the tax office by force in order to be asked for information.” it provides.

Tax Procedure Law No. 213, Art. 148

Disputes Arising from the Actions

The principal aim of a tax inspection is “to establish the accuracy of the taxes payable” .[5]

Failure to Attach the Documents on Which the Assessment Is Based to the Notice

Article 35 of the Tax Procedure Law requires that the assessment decision, the inspection report and the minutes establishing the event giving rise to the penalty be attached to the tax notice, and Article 366 requires the same for the penalty notice. This requirement was introduced so that taxpayers are informed of the grounds for the taxation and/or penalty proceedings brought against them, and are thus able to decide whether or not to pursue legal remedies and properly exercise their rights of defence, which are guaranteed by Article 6 of the ECHR and Article 36 of the Constitution.

The proper exercise of taxpayer rights (and in particular) the right of defence depends on those subject to administration being informed of the allegations against them, having the right of access to the file and the opportunity to express their views, and being given a reasonable time to do so. If the person concerned is not informed in detail of the event on which the assessment or penalty is based, or is informed but given incomplete information, or if certain information and/or documents are withheld from them, or, although properly informed, they are given no time, or insufficient time, for evaluation, the right of defence cannot be properly exercised.[6]

Failure to Apply the Ex Officio Assessment Procedure

According to Article 30 of the Tax Procedure Law, ex officio tax assessment is defined as

“the assessment of tax on the tax base, or part thereof, determined by assessment commissions, or specified in tax inspection reports prepared by those authorised to conduct tax inspections, in cases where it is not possible to determine the tax base wholly or partly on the basis of books, records and documents or statutory measures”.

Tax Procedure Law No. 213, Art. 30

By this definition, the provision places on the administration the burden of setting out its reasons in concrete terms when resorting to ex officio assessment and, in this sense, grants the taxpayer the right to demand that the ex officio assessment procedure be applied with due regard to the legislation and judicial decisions.

Disputes That May Arise during a Tax Audit

We stated in the previous section that the tax inspection is regulated in Article 134 et seq. of the VUK, and set out its purpose. The situations in which disputes arise must likewise be examined in the light of the statutory provisions.

Timing of the audit. The timing of the inspection is regulated in Article 138 VUK[7] ; the dispute that may arise here is the situation in which an insufficient inspection is carried out close to the end of the five-year limitation period for assessment and a tax inspection report is prepared and submitted to the commission. An inspection carried out on a date close to the expiry of the limitation period for assessment in this way clearly infringes the taxpayer’s right of defence.

Place where the audit is to be carried out. This matter, regulated in Article 139 VUK[8] , also leads to errors in practice and gives rise to situations in which penalties imposed on the basis of the report submitted to the commission following a tax inspection are annulled and become the subject of full remedy actions.

The VUK and the Regulation on the Procedures and Principles to Be Observed in Tax Inspections[9] require the inspection to be carried out primarily at the taxpayer’s place of business.

Conducting a tax inspection at the place of business has numerous benefits:

First, in an inspection carried out at the place of business, the nature of the books and documents can be ascertained more reliably from those keeping the accounts and from the business owner, and the margin of error is greatly reduced. Secondly, in an inspection carried out at the place of business, the taxpayer feels more at ease and is relieved of moral pressure. Finally, an inspection carried out at the place of business makes it possible to follow closely the nature of ongoing taxable events.[10]

• The nature of the books and documents is established more reliably and the margin of error is reduced
• The taxpayer feels more at ease and is relieved of psychological pressure
• It is possible to follow closely the nature of ongoing taxable events

Liability of the Administration and the Full Remedy Action

Holding the administration liable for damage arising from its administrative acts and actions is both a constitutional and a universal rule of law. The legal liability of the administration is regulated in Articles 125 and 40 of the Constitution. The statement in Article 125 that “the administration shall be liable to compensate for damage arising from its own acts and actions” and the statement in Article 40 that “damage suffered by a person as a result of unlawful acts by public officials shall also be compensated by the State in accordance with the law” constitute the constitutional guarantee of the administration’s liability in our legal system.

Where the administration causes pecuniary or non-pecuniary damage to individuals while carrying out any activity, the question under administrative law of whether that damage must be compensated by the administration and, if so, on what basis, is referred to as the “financial liability of the administration”.[11]

The action to be brought for the redress of damage arising from the acts and actions of the administration is the full remedy action. Full remedy actions may arise from three causes: administrative acts, administrative actions and administrative contracts.

• Administrative acts
• Administrative actions
• Administrative contracts

Liability for the acts and actions of the administration is divided into two types: fault-based liability and strict (no-fault) liability. Fault-based liability comprises service liability and personal liability. Accordingly, where an administrative service does not function at all, functions late or functions badly, the administration is liable on the ground of service fault.[12] Where there is service fault on the part of the administration, no action may be brought against the official who performed the faulty act; pursuant to Article 129 of the Constitution, actions for such damage must be brought against the administration. Where there is personal fault, however, the conduct in question is separable from the public official’s duties and can be assessed independently of them. An action for compensation is therefore brought directly against the official concerned. Such actions are heard in accordance with the principles of Turkish Code of Obligations No. 6098[13] .[14]

Liability of the Tax Administration and Types of Damage

Although the tax inspection is a reflection of the State’s sovereign power, the rules to be observed during the inspection are laid down by statute and other secondary legislation. Furthermore, the taxpayer also enjoys a number of important rights during the inspection.[15] Tax audit officers are therefore obliged to act in accordance with these rights and the legislation during the tax inspection, since taxpayer rights constitute the limit of the administration’s discretionary power during a tax inspection.

An examination of compensation actions brought on account of tax inspections shows that most of them concern unjustified assessments made in accordance with the recommendation of the inspection report and collection measures such as attachment and sale carried out on the basis of such assessments. Consequently, the taxpayer’s primary head of damage relates to their taxation, that is, to matters affecting their tax base. However, a taxpayer may also suffer damage during a tax inspection that is unrelated to their taxation and that will not affect their tax base either now or in the future. Examples of such damage include material damage occurring at the place of business during the inspection or the taxpayer being insulted.

Looking at these types of damage, it will be seen that service fault predominates in the first, while personal fault generally predominates in the second. Damage relating to the taxation process and the resulting assessment may be termed damage relating to the tax base, and damage arising from other situations may be termed general damage.

Damage Relating to the Tax Base

Since it is often not possible to separate clearly the acts performed by an official during a tax inspection from his or her duties, personal fault and service fault are combined and the concept of “duty fault” is used. In the case of duty fault, the discretionary power is exercised by the official on behalf of the administration. For this reason, no action may be brought directly against the official. This position has been criticised by some authors in legal doctrine, who state that it renders the official empowered yet unaccountable.

The fact that an official has broad discretionary power by virtue of his or her duties is not sufficient for compensation to be claimed directly from the official. Such a rule should not be possible, since it would cause officials to be hesitant in exercising their discretion and would make it difficult for them to take decisions on behalf of the administration owing to personal concerns.

In order for an ex officio assessment to be made in respect of a taxpayer, the conditions set out in the first paragraph of Article 30 VUK must be met, or one of the situations set out in the subsequent paragraphs of the same article must arise. An ex officio assessment cannot be made in respect of a taxpayer unless these conditions are met. [16]

A taxpayer in respect of whom the conditions for an ex officio assessment have been met is referred to the Assessment Commission for the determination of the tax base. The limitation period is interrupted in respect of a taxpayer referred to the Assessment Commission. In practice, it is sometimes seen that tax audit officers prepare a report with incomplete information and documents and refer the taxpayer to the assessment commission for the purpose of interrupting the limitation period, and that assessment commissions then make assessments in line with the report. Assessments made in this way are annulled by the Council of State.[17]

The existence of a fault affecting the tax base may manifest itself through two consequences: an assessment being made against the taxpayer in line with the inspection report, and a difference arising in the taxpayer’s tax base for future periods even though no assessment has been made.

Damage Not Relating to the Tax Base

Damage not relating to the tax base can be examined in two different groups. Accordingly, an irregularity not relating to the tax base during a tax inspection may be so serious as to affect the lawfulness of the taxation. There is no provision or distinction in the legislation on this matter. However, the Council of State has held in some cases that the assessment must be annulled as a result of unlawful conduct on the part of the tax administration.[18]

At the taxpayer’s request, the minutes recording the commencement of the inspection must be drawn up at the place of business. The tax inspection is regulated in Article 140 VUK. The first two paragraphs of that article state that the official commencing the inspection must inform the person concerned that the inspection has begun and must record this in minutes drawn up in the presence of the person under inspection. What is important here is that the commencement minutes are given to the person under inspection or their representative so that they can exercise their rights of legal defence. If the inspection is commenced without complying with this provision, a breach of the law will arise.

The purpose of a tax inspection is to verify the accuracy of the declaration.[19] In this respect, the fact that the taxable event occurred at the place of business and that the inspection is carried out at the place of business, where the tax arose, also serves the investigation of the accuracy of the declaration. Carrying out the inspection at the place of business provides the opportunity to access first-hand the evidence on which the declaration is based.[20] However, for this rule to apply, carrying out the inspection at the place of business must be of such a nature as to alter the taxation. In this respect, if an inspection of the records is sufficient to establish the accuracy of the declaration, there is no particular need for the inspection to be carried out at the place of business.[21] It is worth recalling here that e-ledger and e-document requirements have now been introduced for many taxpayers. Consequently, many of the documents on which the declaration is based can be audited through the system. This is also consistent with the principle that tax should be collected at the lowest cost and as quickly as possible.

Attaching to the notice the minutes, reports and decisions on which the assessment is based: Articles 35 and 366 VUK introduce the rule that both the inspection report and the other relevant minutes of findings must be attached to the notice. In line with this, there are views that failure to attach to the notice the documents on which the assessment is based will not in itself render the assessment defective, and that a decision should be made as to whether the documents not attached have restricted the taxpayer’s right of defence.[22] The Council of State has also adopted views to this effect and has held that the right of defence is satisfied where documents not served on the taxpayer are served, even during the proceedings, and time is granted.[23]

The second type of damage not relating to the tax base is damage caused by conduct that does not affect the lawfulness of the taxation but nevertheless causes loss to the taxpayer. The cause of this second type will generally be the personal fault of the tax audit officer. Examples of such cases include damage to a valuable item belonging to the taxpayer during an inspection, particularly an inspection involving a search, or the taxpayer being insulted at their place of business.

Actions for Pecuniary and Non-Pecuniary Damages

Where there is damage relating to the tax base, and where there are defects that affect the taxation even though they do not relate to the tax base, there is no doubt that the taxpayer may seek the annulment of the assessment. However, annulment of the assessment only ensures that the tax and/or penalty which the taxpayer would otherwise have been unjustly obliged to pay is not paid. If the taxpayer has suffered other losses, they have the right to bring an action for pecuniary and non-pecuniary damages against the administration or the official.

An assessment against the taxpayer based on an unlawful inspection directly results in an infringement of the right to property. In this case, the taxpayer may claim compensation from the administration before the administrative courts on the ground of service fault. It would be appropriate here first to bring an action for annulment, since the annulment of the assessment against the taxpayer amounts to a finding that the inspection was unlawful, and then to bring a full remedy action.[25]

Jurisdiction in Compensation Actions

Taxpayers who have had to pay additional late payment interest and tax loss penalties owing to the fault of the administration may claim the losses they have suffered by bringing a full remedy action. [26] Administrative Procedure Law[27] (İYUK): in such an action, brought pursuant to Article 12 of this law, the time limit for bringing the action is sixty days from the service of the annulment decision on the taxpayer. The competent court is the Administrative Court in the place where the tax office that performed the act is located.

Where there is pecuniary damage that does not affect the taxation, since one of the cases of personal fault or de facto action (fiili yol) will be present, compensation for this damage must be sought from the official in both cases. Consequently, the ordinary courts and the provisions of Code of Civil Procedure No. 6100[28] will apply here. Claims for non-pecuniary damages, on the other hand, may arise only where there is serious conduct damaging the taxpayer’s reputation or where the taxpayer’s reputation is damaged owing to an irregularity during the tax inspection. Examples of damage to the taxpayer’s reputation include the unlawful preparation of a tax evasion report against the taxpayer, harm to the taxpayer’s commercial reputation, particularly in front of customers, during an inspection carried out at the taxpayer’s place of business, and the taxpayer being insulted.[29]

Respondent and judicial route according to the type of damage

Situations cited in the article as examples for non-pecuniary damages:

• An unlawful tax evasion report being drawn up concerning the taxpayer
• Damage to the taxpayer’s commercial reputation in front of customers during the audit
• The taxpayer being insulted

Sources Used

[1] Official Gazette (R.G.) 04.01.1961 / No. 10703

[2] Y. Kaya. (2010) Vergi Hukukunda Yoklama Ve Yoklamanın Yargı Kararları Işığında Değerlendirilmesi, Vergi Raporu, Issue 130, July, pp. 164-165

[3] Mustafa Sefa Mazlum, Vergi Denetiminde Mükellef Hakları Ve Vergi İncelemesinden Kaynaklanan Hakların Danıştay Kararları Işığında Değerlendirilmesi, Unpublished Master’s Thesis, Adana, 2018, p. 171

[4] Ahmet Erol, Aramalı Vergi İncelemesi ve İhbar İkramiyesi I, Yaklaşım Dergisi, Issue 197, 2009, p. 22

[5] Burak Pınar, Yargı Kararları Işığında Vergi İncelemesinde Yükümlü Haklarının İhlâline İlişkin Tespitler, International Journal of Public Finance, Vol. 1, No. 1, 2016, p. 27

[6] Pınar, op. cit., p. 29

[7] Article 138 – It is not mandatory to give advance notice of when a tax inspection will be carried out. The inspection may be carried out at any time until the end of the limitation period for assessment, including an accounting period whose results have not yet been obtained. The fact that an inspection has previously been carried out or that the tax base has been assessed ex officio does not prevent a new inspection from being carried out and, if necessary, the assessment from being supplemented.

[8] Tax inspections are, as a rule, carried out at the place of business of the person subject to inspection. Where it becomes impossible to carry out the inspection on site for compelling reasons such as the place of business being unsuitable, death or cessation of the business, or where taxpayers and persons liable for tax so request, the inspection may be carried out at the office. In this case, the person subject to inspection is requested in writing to bring the necessary books and documents to the office. Where the inspection is carried out at the office, those who fail without excuse to bring the requested books or documents at the specified time shall be deemed not to have produced them. Those who show a justified excuse shall be given an appropriate period in which to bring their books and documents to the office.

[9] Official Gazette (R.G.) 31.10.2011 / 28101

[10] Ahmet Esen, İncelemenin İş Yerinde Yapılması ve İnceleme Tutanaklarına “Şerh” Konması ve Sonuçları, Maliye Postası Dergisi, Issue 287, August 1992, pp. 4-5.

[11] Ali Ulusoy, Yeni Türk İdare Hukuku, Yetkin Kitabevi, Ankara, 2019, p. 557

[12] Savaş Tek, İdare Hukukunda İdarenin Sorumluluğu, Türkiye Adalet Akademisi Dergisi, Issue 1, p. 318.

[13] Official Gazette (R.G.) 04.02.2011/27836

[14] Ulusoy, op. cit., p. 560

[15] Cansu S. Ceyhan, Ersan Öz, VERGİ İNCELEMESİ SEBEBİYLE DOĞAN ZARARLARDAN İDARENİN SORUMLULUĞU, Vergi Raporu Dergisi, No. 232, 2019, p. 105

[16] Ceyhan, Öz, op. cit., p. 106

[17] “It is seen that, in order to prevent the taxes and penalties that would result from the inspection from becoming time-barred, the taxpayer was referred to the assessment commission by letter dated 27.12.2010 and numbered VDENY-2010-2316/44; that a simple report dated 7.12.2011 and numbered 9 was prepared to serve as the basis for the assessment procedures; that value added tax assessments with penalties were made on the tax bases determined by the assessment commission; and that, following the dismissal of the action brought for the cancellation of these assessments with penalties, the case came before the Council of State with a request for the decision to be examined on appeal and reversed. Since a referral for assessment made solely for the purpose of interrupting the limitation period does not suspend the limitation period set out in Article 114 of Tax Procedure Law No. 213, and since, in the present case, it was not lawful to make a value added tax assessment with penalties on the tax base determined by the assessment commission on the basis of a simple report prepared after the expiry of the limitation period to serve as the basis for the assessment procedures, following a referral to the assessment commission on the ground of limitation without any inspection having been carried out in respect of the claimant on the disputed matter, the decision of the Tax Court dismissing the action on the grounds stated is not correct.” Council of State, 9th Chamber, 22.05.2013, Docket No. 2012/9726, Decision No. 2013/5028, source: https://www.lexpera.com.tr, accessed: 10.01.2021

[18] Turgut Candan, Vergi İncelemeleri Bağlamında Mükellef Haklarına Danıştay’ın Bakışı, https://turgutcandan.com, accessed: 10.01.2021

[19] Pınar, op. cit., p. 49

[20] 4 “Where the taxpayer notifies that the place of business is suitable and that the books will be produced at the place of business, the inspecting officer must go to the place of business and take delivery of the books. On this point, see: ‘An assessment made by disallowing VAT deductions, disregarding the fact that the taxpayer, who did not produce for inspection the books and documents requested for the purpose of determining the sugar price difference, had notified the administration that its place of business was suitable for inspection, is not lawful.’” Council of State, Plenary of Tax Law Chambers (VDDK), 08.11.2002, Docket No. 2002/275, Decision No. 2002/411, www.danistay.gov.tr, accessed: 11.01.2021

[21] “An inspection was carried out on the ground that the taxpayer company had not issued invoices, or had issued incomplete invoices, for the accounting services it provided to its clients in the months of April to December 1995. The matter concerns an assessment made in respect of value added tax found to have been under-declared; this matter, which could be established by an inspection of the books and documents, did not make it mandatory for the inspection to be carried out at the place of business, nor did the taxpayer make any request to the tax inspector that the inspection be carried out at the place of business. In these circumstances, the court’s decision to cancel the assessment with penalties without examining the merits is not lawful.” Council of State, Plenary of Tax Law Chambers (VDDK), 26.10.2001, Docket No. 2001/242, Decision No. 2001/388, source: www.lexpera.com.tr, accessed: 11.01.2021

[22] Candan, op. cit., p. 37

[23] It is understood from the examination of the file that the tax technique report prepared in respect of the claimant, which formed the basis of the assessment commission decision on which the assessment made in the claimant’s name was based, was not served on the claimant. In these circumstances, for the reasons set out above, it is indisputable that the claimant’s right of defence was obstructed, and the assessment notified to the claimant solely by service of the assessment commission decision and the tax and penalty notice must be cancelled. For this reason, the decision of the Tax Court was not found to be lawful.” Council of State, 4th Chamber, 10.06.2015, Docket No. 2015/497, Decision No. 2015/3174, source: https://www.lexpera.com.tr, accessed: 11.01.2021

[24] In the present case, since the claimant relies on allegations that the defendant insulted him, injured him by striking him and in doing so caused his glasses to be broken, such conduct on the part of the defendant public official clearly constitutes personal fault and can in no way be associated with public duty. Nor is it possible to assess an action based on these allegations within the scope of Article 129/5 of the Constitution. For the reasons explained, it was correct to direct the action against the defendant.” Court of Cassation, 4th Civil Chamber, 05.06.2017, Docket No. 2017/1471, Decision No. 2017/3657, source: https://www.lexpera.com.tr, accessed: 12.01.2021

[25] Ceyhan, Öz, op. cit., p. 109

[26] Oğuz Çetinkaya, Vergi İncelemesinin Gereğinden Uzun Sürmesinde İdarenin Hukuksal Sorumluluğu, Yaklaşım Dergisi, Issue 113, 2002, http://www.yaklasim.com/, accessed: 12.01.2021

[27] Official Gazette (R.G.) 20.01.1982 / No. 17580

[28] Official Gazette (R.G.) 04.02.2011/No. 27836

[29] Ceyhan, Öz, op. cit., p. 110