Clearer tax law

Many cases brought by the tax authority are conventional and fully justified. In most criminal proceedings the facts are mostly undisputed and only exists because courts are bound to proceed them.

However, the reason for this article is the increasing number of court cases where fundamental questions regarding tax liability are disputed.

Requirements towards tax law

Tax law, like criminal law, is relatively easy to understand because the basic principles of constitutional law stipulate that taxes may only be levied according to clear wording of the law. This follows from the principle of legality and from the constitution, which states that tax matters must be decided only by law and that the government cannot be entrusted with the decision on whether to impose tax, change it or abolish it.

Most literate adults should therefore understand tax laws and how taxes are levied and collected, because taxpayers should be able to read these rules from the law itself. And if taxpayers do not want to or do not have the time to read the law themselves, they can buy the service of experts and even have them prepare their tax returns for them. Tax law, like criminal law, should therefore be transparent and easy to understand so that the tax burden is predictable for those who are properly aware of their obligations.

On methods of interpretations

It is certainly not possible to have all the details in the law, and no matter how clear they are, something will always come up in practice that requires further clarification or guidance.

In the past, it was considered urgent to publicly publish new interpretations by the tax authority in “decisive letters”. Under certain conditions taxpayers could (and still can) apply for “binding rulings” as well. Now the tax authority nearly never publishes its interpretation in decisive letters. It is thought to be sufficient to send the requested explanations to the individual parties, verbally or in e-mails and sometimes there are no answers.

Binding rulings have not been sufficiently successful due to strict formal legal requirements as well as the fact that a request for an opinion can easily be rejected (rejection is non-appealable).

It can be said that since 2010 publication on decisive letters has almost completely ceased although occasional letters have appeared since then. The tax authority mainly publishes Value Added Tax (VAT) “basic amounts” in accordance with its legal obligations. These developments can be seen on the tax authority’s website.

Thus, the tax authority decided to change the interpretations of their legal obligation to publish the precedent interpretations and significantly reduce the important information for taxpayers and their advisors. This development goes against the principles of transparency and predictability of tax enforcement as well as the obligation of the tax authority to provide guidance.

This dire situation needs to be rectified as soon as possible. It is necessary to clarify in more detail what the obligation to provide guidance is, where its limits lie, and to ensure that information on important interpretations is not only available to one party, but that other taxpayers have equal access to the information.

It can be argued that if the tax authority cannot provide guidance on how to interpret the law with given and clear assumptions, then the doubt would not be interpreted against the taxpayer if the assumptions are exactly the same as before. This follows from the basic principle, mentioned above, that taxes may only be imposed according to a clear legal authority. If the law is not clear to the tax authority, then that should no less apply to the taxpayer.

Is opacity perhaps more desirable?

It must be in everyone’s interest that the tax laws are clear and accessible to everyone. Or what?

Could it be that the tax authority feels it is better to keep some tax rules vague so that they have more flexibility to respond to different situations that they can then adapt to the “correct” interpretation each time? If such views prevail, this author considers them doubtful and that they may even be illegitimate. If there is a need to respond to a situation, then Alþingi (the Parliament) should be informed about the situation, which will take a position on whether to amend the tax law and then decide on a clear provision on what was previously regarded as uncertain tax liability under the wording of the legislation.

The Precedents

Increased number of court cases in the field of tax law can i.a. be explained by the tax authority’s tendency to try new interpretations. In that context, it is sometimes suggested that it is urgent to “get a precedent on the issue”. As mentioned before, the tax authority is constantly going further in this regard.

It is not the role of the courts to create new rules in the field of tax law, as discussed in the clear wording of the constitution, although obviously courts must interpret established laws in their decisions. The tax authority’s path can therefore be doubtful on this basis and the methods quite costly. In any case, it is intolerable that taxpayers must pay for it through expensive litigation, even criminal proceedings, on the grounds of law that was never clear enough in the opinion of the tax authority, who then use litigation against the taxpayer trying to get the controversial understanding of the tax law confirmed.