In recent years, there has been a steep increase in criminal proceedings for tax matters in some European countries, such as France, Germany, Italy, and Spain, with a potentially major impact on the way in which tax audits are managed as tax authorities may, for instance, use the threat of criminal proceedings to encourage settlement.

Among the reasons for this trend are changes in law which made it more likely or even mandatory for tax authorities to refer cases for criminal prosecution. For instance, in France, the law was changed in October 2018, to require the French Tax Authorities to refer any fact discovered in the context of a tax audit to the Public Prosecutor, where that fact triggered a reassessment of taxes in excess of €100,000 and the imposition on these taxes of certain penalties, e.g. a 100% penalty for obstructing the tax audit, an 80% penalty for concealing activities or abuse of law or, with a reiteration condition, a 40% penalty for wilful misconduct (see this earlier post for details) . In Spain, the law was changed such that the tax debt can be collected pending the criminal proceedings (rather than only after their conclusion), thus making the referral of a case by the Spanish Tax Authorities to the relevant judicial authority more likely, and in Italy, the quasi-criminal liabilities of companies for offences committed by their managers or employees has been extended to tax offences. Germany has further extended the statute of limitation in connection with serious tax fraud from 10 years to 15 years.

Other factors that contribute to the increasing criminalisation of tax matters in some jurisdictions include tax inspectors’ growing awareness of the relevant offences following training programmes within the tax authorities and the increasing amount of data that is available to tax authorities. Media attention and reports from whistle-blowers have also played a role.

Criminal sanctions could generally be triggered in respect of any tax matter as a matter of principle unless, generally, the taxpayer has taken reasonable care to get its filings right. For instance, filing returns on the basis of incorrect transfer pricing could, in principle, trigger criminal sanctions, but it would generally be difficult for a tax authority or prosecutor to establish a tax offence where the pricing is supported by careful economic analysis and the taxpayer has complied with all applicable documentation requirements. Some jurisdictions, such as Italy and Spain, even provide for an automatic exemption from criminal sanctions for transfer pricing issues, provided that certain conditions have been met. In Italy, if the relevant transaction took place and the taxpayer described the criteria it applied to price the transaction in its financial statement and/or other documentation relevant for tax purposes (e.g. the Masterfile and/or Local file), then no criminal offence should be committed. In Spain, not even administrative penalties can be imposed, where the taxpayer has prepared adequate transfer pricing documentation and used the values from that documentation in its tax returns.

In certain circumstances, tax advisors may be prosecuted as an accessory to the taxpayer’s offence. In Spain, depending on the tax offence, it is possible that the tax advisor may be considered an abettor of, or collaborator in, the offence, but this would normally be the case only where, given the complexity of the operation, the Spanish tax authorities and relevant judicial body would regard the participation of the tax advisor as crucial. Germany has even seen a case in which a tax lawyer involved in cum/ex-transactions was sentenced to more than eight years in prison.

Where it is found that a tax offence has been committed, penalties for the taxpayer can be substantial. In France, the criminal fine for tax fraud can be up to ten times the amount of the relevant tax. A taxpayer should therefore assess the associated risks early on in a tax audit. In some jurisdictions, including Germany, authorities can also disgorge the profits from the underlying transactions.