All citizens of a legal and democratically governed state should have the opportunity to enjoy free education, health, police and judicial protection, clean streets and much more that is perceived as “free of charge”.
However, in order for such a social system to function properly and efficiently, one of the basic constitutional principles of public finances must be realized, and that is to properly honour and respect the obligation to pay taxes.
Otherwise, in modern and regulated states, proper fulfilment of this obligation is considered as the general obligation of every individual in strengthening the stability and capacity of the state as an organization.
On the other hand, by delaying or evading payment of taxes, tax payers not only commit tax offences, but also endanger the domestic economy, thus, jeopardizing provision of the state “services” to its citizens.
Therefore, all modern states prescribe appropriate penalties for various types of tax offences. And the most serious tax offences are, in fact, tax criminal offences that represent a type of illegal tax evasion that occurs when tax payers knowingly violate tax regulations in order to avoid fulfilling the obligation to pay taxes.
Among the tax criminal offences, which belong to the criminal offences against the economy, bellow we will specifically refer to tax evasion.
Namely, the criminal offence of tax evasion is regulated by the Criminal Code of the Republic of Serbia (“CC”).
The corresponding provision of the aforementioned regulation reads as follows:
“(1) Whoever with intent to fully or partially avoid payment of taxes, contributions or other statutory dues, gives false information on acquired income, objects and other facts relevant to determination of such obligations, or who with same intent, in case of mandatory reporting (filing of returns) fails to report acquired income, objects and other facts relevant to determination of such obligations or who with same intent conceals information relevant for determination of aforementioned obligations, and the amount of obligation whose payment is avoided exceeds one million dinars, shall be punished by imprisonment of one to five years and fined.
(2) If the amount of the liability specified in paragraph 1 of this Article whose payment is avoided exceeds five million dinars, the offender shall be punished by imprisonment of two to eight years and fined.
(3) If the amount of the liability specified in paragraph 1 of this Article whose payment is avoided exceeds fifteen million dinars, the offender shall be punished by imprisonment of three to ten years and fined.”
Object of protection and forms of manifestation
Therefore, according to the valid CC, the object of protection of this criminal offence are taxes and contributions that are paid on the acquired income and items.
Otherwise, tax evasion has three basic and two qualified, more serious forms, where the basic forms are (a) giving false information about income / items / relevant facts, or (b) non-reporting of income / items / relevant facts, or (c) concealment income / case / relevant facts data.
Qualifying circumstances of this crime represent higher amounts of avoided obligations, over five million dinars (approx. EUR 42, 500) for the first qualified form, and over fifteen million dinars (approx. EUR 127, 500) for the second.
Act of Commission
First of all, it should be pointed out that in the theory of criminal law, a substance of the crime is defined as a set of elements that make up the characteristics of a criminal offence and distinguish it from other criminal offences regulated by law.
These elements derive from the legal description of the crime, and can be objective and subjective in nature.
The objective elements of corpus delicti (which Latin term had been used in the past by some old criminal law theorists for essential elements of the crime) are the act of commission, subject, object and consequence, as well as the manner, place and time of execution (which more closely determine the act of commission and concretize the criminal offence).
Subjective elements of a criminal offence, on the other hand, concern the offender’s attitude towards the committed act, and these are negligence and criminal intent (which are also forms of guilt), and less often intention and motive.
The act of commission of the basic form of criminal offense of tax evasion is alternatively prescribed, so the crime is committed by committing any of them (“who… gives false information on acquired income, objects or other facts relevant to determination of such obligations… or, fails to report acquired income, objects and other facts relevant to determination of such obligations…or, conceals information relevant for determination of aforementioned obligations…“).
In such context, the first basic form of act of commission of tax evasion is being committed by one “who gives false information on acquired income, objects or other facts relevant to determination of such obligations”, in which subject is usually a tax payer, be, for example, a natural person (who does not perform business activity) when filing for capital gains tax, or an entrepreneur, or even a legal entity and a person in charge in such a legal entity.
It is also interesting that there is even the case law per which the executor can only be a director or an owner of a company, but not an employee, even though the law does not make such limitations (Judgment of the Belgrade Court of Appeals, Kž. No. 169701/2012 as of 29.01.2013).
The act of commission of the tax evasion crime is also executed by the one “who fails to report acquired income, objects and other facts relevant to determination of such obligations”.
So, this is not about giving false information, but about failing to file a tax return at all, about late filing of tax return or filing an incomplete tax return – so it is a criminal offence of inaction.
In this type of the act of commission, it may be quite some challenge for the prosecution to prove the intention to evade taxes.
Does intention, as an obligatory element, exist in the passive behaviour of the defendant?
In that sense, although the eventual defence of the tax payer in this situation may go in the direction of invoking a mistake of law (non-reporting of taxes as a consequence of ignorance or misinterpretation of the law), proving that the act is an indication of the defendant’s conscious aspiration is also realistic and possible.
Finally, the third form of act of commission exists when someone “conceals information relevant for determination of aforementioned obligations”.
In practice, this usually refers to the concealment or destruction of business books and other relevant documentation, which leads to the fact that the competent authorities cannot correctly determine the tax liability of the offender.
Legality of Income
The earlier definition of this criminal offence required that incomes to which the tax liability referred to were legal, which has been changed and removed relatively recently, and in practice left opened questions as to whether the obligation to pay tax will exist in relation to illegally acquired incomes.
However, this legislative solution made it easier to prove the existence of a criminal offense, given that the former criminal law practice has shown problematic determination of “legally acquired income”.
In this regard, one of the verdicts of the Court of Appeals in Belgrade can serve as an example of that practice, in which, among other things, it is stated “that the court would determine whether it is legally acquired income or income acquired illegally, the act of commission which is related to the legally acquired income, must be stated in the factual description of the indictment. As in the factual description of the indictment, not all the legal features of the criminal offence from Art. 229. st. 1. of the old CC, i.e. it is not stated that it is legally acquired income, as a necessary element of the criminal offence, the conclusion of the first instance court is correct that the offence for which the accused is charged with is not a criminal offence” (Judgment of the Court of Appeals in Belgrade, Kž 1 no. 1220/18 as of 22 January 2019).
However, while it is no longer necessary to prove that the income was acquired legally, in order for the crime to be committed, the intention and outreach of the new legal solution is not to, by any means, legalize or legitimize ill-gotten incomes.
Amount of Tax Liability
Besides, the consequence is prescribed as an objective element of the criminal act, and that is specifically the avoided amount of the tax obligation, which amounts were increased in relation to the previously set amounts, in order to reduce the burden of the competent authorities with petty crime.
However, it is interesting that there are official attitudes of some Appellate Courts regarding taxes paid annually that when assessing the existence of this objective element, only the total amount of evaded tax in one calendar year should be considered, which represents the fiscal or business year (Decision of the Court of Appeals in Novi Sad No. Kž. No. 1 – 2739/2011 of 15 April 2013).
Also, the Serbian Supreme Court of Cassation seconded this approach, and for the purpose of establishing whether the crime has been committed, made clear that it is necessary to determine the sum of evaded tax within one fiscal / business year.
According to this, different taxes which relate to one fiscal year may only be observed in the context of a single tax evasion crime, which excludes taxes evaded in previous years (Judgment of KZZ No. 56/2011 as of 31 August 2011).
In practice, tax control, on the other hand, observes and investigates all unpaid tax debts that are 5 year old, which matches the criminal prosecution statute of limitation for the tax evasion.
Therefore, consistent consolidation of these opposing approaches is necessary to occur to achieve much needed and overly desired legal predictability.
As already mentioned, intention is an obligatory subjective element without which there is no criminal offence of tax evasion.
The offender’s act of commission is aimed exclusively at the consequence, which is tax evasion. Therefore, this crime can be committed only with the intent.
We have already mentioned that in the case of inaction, intent is more difficult to prove, but this is not excluded in the other two cases because a large number of tax payers are neither lawyers nor economists, and therefore, seek advice from people who consider themselves professionals or get information from easily accessible expert or other articles. Getting the wrong advice can be treated as a remediable mistake of law, and less often a compelling one. Remediable mistake of law is the basis for mitigation of punishment, and compelling mistake of law is the basis for exclusion of a criminal offence.
Thus, the Court of Appeals in Belgrade, acting on the appeal, considers that the intention to completely or partially avoid paying taxes must be unequivocally determined. In this regard, we quote a part of the verdict that reads: “Intention is part of intent as a subjective feature of tax evasion and must exist at the time of the act of commission, be clear and obvious. Intention as a subjective feature of a criminal offence always implies the existence of wilful negligence. Therefore, failure to file a tax return does not automatically mean that the crime of tax evasion has been committed, it will be an offence only if the intention to completely or partially avoid tax liability by concealing data or certain facts, is proven. The conclusion that the intention of not paying the disputed tax existed was not confirmed by any witness, as well as by any written document, which is not mentioned in the verdict grounds, and otherwise it is unknown on the basis of which the first instance court determined the existence of defendant’s intention. This is especially so if we keep in mind that the first instance court was also having a vexed question – whether there is a basis for paying taxes, for which an authentic interpretation by the National Assembly of the Republic of Serbia was sought, and that it is rightly to point out in the appeal that it is unclear on what basis it was then established that the defendants could have had the consciousness and will to evade paying taxes. Having in mind the defence of the defendants, who challenged the basis for payment of capital gains tax in this case, as well as the opinion of the Ministry of Finance, Tax Administration, which is stated in the Manual for the application of the Law on Corporate Income Tax, which was valid at the time of the criminal offence for which the defendants were charged with, then the reasons of the first instance court that the defendants committed the criminal offence for which they were found guilty with wilful negligence are unclear and insufficient. ” (Judgment of the Court of Appeals in Belgrade, Kž1 Po1. 5/17 as of 08. 09. 2017).
Payment of taxes after the commission of the act
Equally interesting, from legal point of view, are implications of paying tax obligation after tax evasion is committed.
Namely, what happens when the defendant files a tax return with false information or fails to file it at all, and the tax administration makes a decision determining the tax debt, and the defendant acts according to the decision and pays the debt?
It follows from the legal description of the criminal offence that for the existence of the criminal offence it is not necessary for the tax to actually be evaded, but that the offence is done by submitting a false tax return, i.e. on the day the deadline for filing the report expires, if the act of commission is inaction.
Therefore, the criminal offence exists, although the tax was not evaded, and the consequence was not realized, but the intention existed.
Certainly, the act of payment itself can be assessed in terms of mitigation of the punishment, and sometimes, the very fact that the tax was paid within the facts and circumstances of a particular case may indicate a lack of intention to evade the tax, and thus, lead to non-existence of a criminal offence.
The two qualified forms of this criminal offence are determined by the larger amounts of evaded obligation, which facts, if they have occurred, must also be covered by the intent of the offender.
Otherwise, qualified forms of offence carry more severe punishments, (a) from two to eight years and a fine if the amount of the obligation exceeds five million dinars (approx. EUR 42, 500), or (b) from three to ten years and a fine if the amount of the obligation exceeds fifteen million dinars (approx. EUR 127,500).
Thus, the realization of ‘corpus delicti’ of the criminal offence of tax evasion is conditioned by one of the three alternatively prescribed acts of commission, intention and consequence.
If some of these elements are missing, there is no word on a criminal offence, but it could possibly be a misdemeanour, which we will discuss in more detail below.
Proceeding of the competent authorities
The competent bodies relevant to detection of tax fraud are the tax inspector, the tax police and the prosecutor’s office, which act in accordance with the Law on Criminal Procedure and the Law on Tax Procedure and Tax Administration.
The tax inspector performs tax control by order or invitation, during working hours (exceptionally and outside working hours), in the business premises of the tax payer, or in the offices of the Tax Administration, and exceptionally, with a court permit in the apartment of the tax payer. The tax payer is obliged to participate in the control procedure and cooperate with the tax inspector, by answering the questions asked, allowing insight into the business documentation, stock of goods and raw materials, etc.
The tax inspector shall compile a report on all facts and observations, which shall be submitted to the tax payer, who may in turn submit objections to such findings. If, after the control, the tax inspector determines that the tax payer, contrary to the law, has not determined the tax liability or has determined it incorrectly or incompletely, the Tax Administration will determine the tax by issuing a tax decision. This does not influence the fact that, if in the procedure of tax control there is a grounded suspicion that the criminal offence of tax evasion has been committed, the tax inspector will inform the tax police for further investigation in the criminal procedure.
Otherwise, the tax inspector has broad authority in the control procedure, and may impose various measures in this regard. Thus, the tax inspector may temporarily seize the goods, the means of goods transport, the business books and other relevant documentation. There is also a measure of temporary ban on performing business activities for up to one year, which can be imposed during and after the tax control procedure. The measure of banning the disposal of funds on the tax payer’s account, except for the purpose of paying the determined but unpaid tax, may also be imposed after the control has been carried out.
If the tax inspector finds out in the tax control procedure that the facts and circumstances indicate the existence of grounds for suspicion that tax evasion was committed, he is obliged to compile and submit a report, together with the obtained evidence, to the competent head of the Tax Administration.
In that case, the Tax Police compiles a criminal report, in which it states the evidence it learned from the tax inspector and related investigation, and submits it to the public prosecutor.
If the Tax Police, on the basis of that report, determines that the facts and circumstances stated by the tax inspector in the report do not indicate the existence of grounds for suspicion that a tax criminal offence has been committed, the Tax Police inspector shall notify the competent head of the Tax Administration.
At this stage, it is back and forth between the Police and Prosecution.
Namely, along with the criminal report, all other documentation, reports, statements and other materials that are relevant for the successful carrying out of the procedure are also submitted by the Tax Police to the Prosecutor’s Office.
The Public Prosecutor conducts the investigation in cooperation with the police, and in this case with the Tax Police in order to gather evidence against the suspect.
If after filing a criminal report, the Tax Police discovers new facts, evidence or traces of a crime, it is obliged to, as a supplement to the criminal report, submit it back to the Public Prosecutor.
Finally, the Public Prosecutor files an indictment if there is a reasonable suspicion that the suspect has committed the crime of tax evasion.
Technically, it should first be identified on which exact act(s) of commission the charges for tax evasion are based within the indictment, and then whether the evidences adduced to prove (directly or by implication) that an accused has committed the crime have been admitted.
If so, attention should be paid to whether in a particular case it is possible to apply any of the grounds for exclusion of criminal liability (e.g. irresistible force, mental incompetence, compelling mistake of fact, compelling mistake of law), the basis for acquittal (e.g. the court may acquit the offender of a criminal offence punishable by imprisonment for up to five years, if after the commission of the criminal offence, and before he learns that it has been discovered, eliminates the consequences of the offence or compensates for the damage caused by the criminal offence), as well as some of the grounds for mitigation of the punishment (e.g. force which is not irresistible, threat, substantially diminished mental competence, but not self-induced incompetence or remediable mistake of law).
At the same time, the court may acquit the offender of a criminal offence committed through negligence, when the consequences of the offence hit the offender so hard that the imposition of a sentence in such a case would obviously not correspond to the purpose of the punishment.
Crime vs. Misdemeanour
Tax offences incriminating tax evasion, in addition to criminal offences, can also be misdemeanours.
The same factual set can lead to the initiation of misdemeanour and criminal proceedings at the same time.
If it is determined in a specific situation that there is a criminal offence, then it usually includes (consumes) a corresponding misdemeanour. This means that an offender who would be convicted of tax evasion could not be punished for a misdemeanour committed on the same occasion, because this is a situation of apparent concurrence of criminal offences. In other words, a final verdict for a criminal offence is a procedural obstacle for the subsequent conduct of misdemeanour proceedings against the same person.
However, the reverse situation occurs more often, that during or after the end of the misdemeanour procedure, the conditions for conducting criminal proceedings are met (e.g. it is subsequently established that tax evasion in the amount of over one million dinars or approx. EUR 8,500 has been established), thus, achieving an objective element (consequence) of the offence of tax evasion. However, the parallel or subsequent initiation and conduct of misdemeanour and criminal proceedings against the same person for the same set of facts may constitute a violation of the procedural prohibition “not twice against the same” (or in Latin ‘ne bis in idem’).
Given that the decision of the misdemeanour court in the previously initiated misdemeanour procedure, as the “decided matter” (in Latin ‘res iudicata’), would exclude the possibility of subsequent criminal proceedings regarding the same life event, it is clear that the choice of the relevant procedural path for protection of the most important social values depends on assessments of the acting administration, and especially the Tax Police which is authorized to submit both a request for initiating misdemeanour proceedings and a criminal report.