Court judgments

Tax arrears arising from an employee’s fraudulent behaviour

The Supreme Court denied the appeal filed by Tartu Mill AS against the tax authority’s decision not to approve the grain processing company’s claim for tax refund. The court referred to the involvement of the company’s former purchasing manager in a tax fraud scheme in 2012–2013, in which grain originally purchased without paying value added tax was subsequently sold to Tartu Mill through letterbox companies in a series of fictitious VAT-taxable transactions. The VAT payments transferred to the accounts of the companies were taken out in cash and divided between the parties involved in the scheme, including the purchasing manager. The fake invoices presented for the fictitious transactions entitled Tartu Mill to input VAT deductions.
While lower courts found that Tartu Mill’s appeal should be granted, the Supreme Court did not agree and sent the case back to the circuit court. The Administrative Chamber of the Supreme Court pointed out that if a company has authorised an employee to act in its name and on its behalf, and the employee is involved in tax fraud, the employer will be held liable for tax arrears even if the management of the company was not aware of the fraudulent behaviour.

Obligation to prove the amount of cash held on hand

Tallinn Circuit Court recently ruled in a matter involving an unannounced cash balance audit by the tax authority.
In accordance with the tax decision, the cash-on-hand balance recorded in the appellant’s general ledger was fictitious, and the company in fact did not have this amount of cash in its cash drawer. As the appellant could not convincingly explain why cash was frequently withdrawn from the company’s current account and the company denied access to its cash drawer for counting purposes, the tax authority concluded that the cash had been taken out of the company as outflows unrelated to the company’s business. 

  • Agreeing with the tax authority, Tallinn Administrative Court denied the appeal. These rulings were upheld by Tallinn Circuit Court, who reasoned as follows: 
  • the claim that the balance of cash held on hand cannot be ascertained is not true. While the actual balance of the cash held in the cash drawer may indeed somewhat differ from the cash balance as recognised in the accounts, this does not mean that auditing cash on hand is not possible or permitted; 
  • pursuant to § 62 (2) of the Taxation Act, a tax authority has the right to request that a taxable person present cash in order to ascertain facts relevant to tax proceedings. Cash must be presented at the place where it is located; 
  • if a company’s accounting records show that it keeps cash on hand, the cash must exist not only on the books, but be physically present in the cash drawer. Cash may be kept at the home of a legal representative of the company; however, in accordance with § 62 (2) of the Taxation Act, this person must present it to the tax authority if so required, and to keep it in such a way that it can be easily distinguished from cash belonging to other persons, which may be kept in the same location;
  • in case a company decides to keep cash at the home of a management board member, the appellant cannot claim a breach of privacy of the member of the management board as a private individual;
  • if a person is given prior notice of a cash audit, the sums may be deposited in the cash drawer only for the time of the audit. In accordance with law (§ 40 (3) of the Administrative Procedure Act), an administrative proceeding may be conducted without hearing the opinions and objections of a participant in the proceeding if prior notification of the administrative act or measure may jeopardise the achievement of the purpose of this act or measure.