Dissertation at the II JORNADA TRIBUTARIA 2022 “Entre la LEGALIDAD y la ARBITRARIEDAD. The New Provisions of the Tax Administration for the Compliance of Tax Obligations” Organized by C-Educa.
Discretionality arises from the legal powers vested in an administrative body. What should really be called arbitrary is often called “discretionary”. Arbitrary is that which has no legal basis.
Every administration, including the tax administration, has in its range of functions and powers, those discretionary powers. In some cases, the discretionary space is totally broad, as in the case of the rules that indicate that the presentation of the documents accompanying the annual income tax return shall be made by means of the tools made available by the Tax Administration. The regulation only indicates that this tool must be available, but it does not provide any specific framework that the Administration must comply with. In other cases, the exercise of legal powers implies a field of discretion, such as the decision to verify one taxpayer and not another. Of course, the power of verification, the duty of verification implies some criteria, if you will, subjective, to decide to go for one or the other.
In these cases and areas that give ambiguity, the solution is publicity. The fact of publishing the audit plans, the risk criteria and, at the beginning, informing the taxpayer the reason why he/she was chosen would decrease the suspicion of taxpayers that they are being “revenged” for some reason. However, this transparency does not eliminate that the decision to verify one or the other is a discretionary power, since it is materially impossible to verify the tax obligations of all taxpayers.
Discretionality
Regarding the submission of audit reports, we find several rules that we will analyze in the context of the exercise of discretionary powers.
The first, Article 40 of Congressional Decree 10-2012, which establishes, within the Income Tax regulation, in numeral 2:
“Taxpayers qualified by law as Value Added Tax withholding agents and special taxpayers, must submit to the Tax Administration, by the means provided by it, attached to the annual affidavit, the financial statements duly audited by independent Public Accountant and Auditor with their respective opinion and report, signed and sealed by the professional who issued it”.
This rule clearly contains an area of discretionary application. The first situation is the qualification as Value Added Tax withholding agents, which occurs, sometimes by legal mandate (credit cards and exporters) and others by the qualification that the Tax Administration makes on taxpayers by naming them as “special” or not, for example. These qualifications are discretionary in the sense that they allow the Tax Administration, based on a legal power[1], to establish the criteria to qualify as a special taxpayer or as a VAT withholding agent at the request of a party or for the convenience of the Tax Administration.
Now, once qualified as special taxpayers or VAT withholding agents, the Tax Administration may require such report.
It is incorrect, however, for the Tax Administration to require a specific format for the content of the audit reports for the financial statements, beyond requesting the opinion and report that must be signed and stamped by the auditor who issued it. Requests to require opinions with comparative figures of the previous year and the one stated, for example, as it was being notified, exceeds the legal powers, so it is not a discretionary exercise, but an arbitrary requirement, outside the law.
Moreover, the financial statements may be poorly prepared and may not meet the respective technical requirements, but the Tax Administration cannot “refuse to receive them” as long as they are signed and sealed by the auditor who issued them. If applicable, by virtue of the law, the Tax Administration is obliged to file the respective complaints regarding the crimes that may have been committed by the professional who issued financial statements without the technique and content prescribed by the rules governing the profession.
The regulation for the opinion of a public accountant and auditor that must accompany the VAT credit refund request is different. The optional VAT credit refund regime requires, as part of its procedure, that the application be accompanied by an opinion on the validity of the requested tax credit, issued by an independent public accountant and auditor. In this case, the opinion has specific requirements to be complied with that are given by the law and the VAT regulations. By virtue of being a specific opinion and not an audit report and opinion, the professional rules are not applicable as to the content, since the specific content and responsibilities involved in its issuance are given in the same article 24 of the VAT law. Moreover, it must be registered in a proper registry of the Tax Administration, so we see that it is much more an auxiliary function of the tax administration than the liberal exercise. Of course, the law establishes the consequences of the opinion, both criminal and administrative, because when any of the assumptions of article 24 are fulfilled, the Tax Administration must, without any discretion, take criminal action against the public accountant and auditor, as well as the denial of the refund of the credit for the reasons contained therein.
Now, it is worth reviewing the discretionary powers, if any, that this same article establishes for the Tax Administration:
A) Obligation to resolve within 10 days: “Once the request has been filed and the requirements listed above have been met, the Tax Administration shall resolve within ten (10) business days following receipt thereof and send notice to the Bank of Guatemala to proceed with the refund of one hundred percent (100%) of the amount of the tax credit that has not been withheld. The taxpayer shall submit to the Bank of Guatemala the respective resolution and notification in order to be refunded the corresponding tax credit within the following five (5) business days”.
In this regime, as it is observed, the Tax Administration cannot reject if the requirements previously listed were complied with. Once these requirements are met, there is no discretionary space. The rule is imperative “shall resolve” in a specific sense: “send notice to the Bank of Guatemala to proceed with the refund of one hundred percent (100%) of the amount of the tax credit that has not been retained”. It is curious that this norm is read by the Tax Administration as if it had room to decide to carry out tests, audits or other prior to resolving. The refund is “automatic”.
B) Clearly, the article establishes a mechanism to verify such refund: “The foregoing does not limit the powers of the Tax Administration to verify and audit the origin of the tax credit refunded or pending refund and to take the actions it deems pertinent” which are powers subsequent to the refund, if it complied with the requirements, or to verify what it has denied for lack of compliance with the requirements in the request.
C) The following two paragraphs are important in that the verification powers extend to the audit opinion:
“Likewise, the Tax Administration shall have the power to require any information related to the opinion and its annexes, as well as the exhibition of the working papers prepared by the public accountant and auditor, on the occasion of the taxpayer’s tax credit refund request, as well as books and records of the taxpayer that it has taken into account for the purpose.
The public accountant and auditor who issues the required report will be liable in cases where falsehood is determined, for which he/she will be civilly and criminally liable, as appropriate, as well as the sanctions deemed appropriate by the court of honor of the professional association to which he/she belongs”.
These powers make it possible to review the opinion and establish the respective consequences.
D) The denial is regulated, so it is not discretionary to decide not to return. The grounds for denial:
“The denial of the request for refund of the tax credit shall be applicable when the aforementioned opinion falls within any of the following cases:
1. If the public accountant and auditor who issues the opinion is not duly registered in the Registry of Public Accountants and Auditors of the Tax Administration or is not authorized to issue opinions related to tax credit.
2. If the public accountant and auditor is not an active member of the corresponding professional association.
3. If the opinion issued is not in accordance with the applicable legislation and auditing standards.
4. If it is established that he/she has a relationship of dependency with the taxpayer to whom the opinion is issued, or that he/she is related within the degrees of law with him/her, his/her partners or with the legal representative of the individual or legal entity”.
In black and white, these are the grounds for denying the request. Additionally, once returned, SAT may perform the audits and verifications it deems prudent, within its discretionary powers, but it is not possible to extend the request for more than 10 days, within which time it may deny the request for the 4 causes contained therein.
We have received some news that SAT intends to implement a quadratic reconciliation format under the excuse of the presentation of the bank reconciliation that must be presented by the taxpayer who keeps full accounting. This request is not a discretionary power, but an arbitrary, illegal, bad faith and unethical requirement.
Article 93 of the Tax Code, in its numeral 5 establishes that “The following are considered actions of resistance: … 5. Omitting the registration in the accounting books, of the bank accounts and investments, that the taxpayer has in the different banks or financial groups of the Republic of Guatemala or abroad, in accordance with the provisions of the Code of Commerce. It is understood that there is omission of registration in the accounting books, if the taxpayer does not register one or several bank accounts that are in his name in the different banks or financial groups of the Republic of Guatemala or abroad; he does not prepare the bank reconciliations that determine the reasonableness of the accounting balance and the journal entries are not supported by the documents that originate the transaction”.
It is easy to conclude that what should be submitted to SAT is a bank reconciliation. Every audit and accounting professional knows that a quadratic reconciliation is an instrument or tool of the accounting sciences very different from a bank reconciliation. There are no aspects of discretion possible in the cited standard. The terms of accounting science are interpreted in accordance with that science, so it cannot be intended under the label “reconciliation” to include auditing tools such as a bank reconciliation. It is, therefore, an arbitrary act. The SAT requirement violates the function given to the professional associations to establish the technical conditions for the provision of services.
Although the idea could be useful for the Tax Administration, it has no basis as such. Moreover, not even within the verification processes could the taxpayer be asked to perform the quadratic reconciliation, since, being an audit procedure, it corresponds to the tax auditor himself to perform it.
This legal regulation, therefore, does not contain powers that allow SAT to provide the formats or contents of a bank reconciliation. It is the accounting rules and techniques that define what a bank reconciliation is, when and how it is performed. SAT can only verify that it exists and that the accounting and bank balances are reasonably reconciled. Then, it will impose the penalty if it was not performed.
Two additional examples of discretionary powers of the Administration are found in articles 40 and 41 of the Tax Code.
Article 40 regulates payment facilities. This article regulates several moments in which a payment agreement may be requested and its formalities or consequences. The first discretionary power is in the first paragraph: “The Superintendency of Tax Administration may grant taxpayers, facilities in the payment of the tax, up to a maximum of eighteen months, provided that they so request, before the expiration of the term for the respective payment and the causes that prevent the normal compliance of the obligation are justified, facility that may not be granted to the cases established in Article 91 of this Code.”
Thus, the power to grant payment facilities is a discretionary power. It is not obliged to grant the request, nor is it obliged to grant the maximum term. Everything will depend on the qualification made by the Administration on the justifying causes presented by the taxpayer.
In a second scenario, the same article establishes that in cases where “…there is a risk…” the amounts payable must be guaranteed. But this risk rating is not a discretionary power. The law itself defines “risk”: “…in those cases in which the taxpayer has failed to comply, during the four previous years, with another payment agreement signed with the Tax Administration or when there is a coercive economic proceeding against him”. Thus, the law allows the execution of the agreement, but not the qualification of risk. This qualification is given by the same law as a measure to avoid abuses, since these limits are a guarantee of the right to property.
In Article 41, on the other hand, we find the institution of withholding and the possibility of requesting SAT not to be subject to such withholding when applicable. The rule states: “Notwithstanding the foregoing, the taxpayer may request the Tax Administration not to withhold the withholding. In this case, he/she shall pay the total tax when due, under the conditions established by law. The Tax Administration shall resolve within fifteen days; otherwise, the request shall be considered favorably resolved”. This article, therefore, allows direct payment to be authorized. It does not have any parameter, which leaves it to the discretionary exercise of the Administration to grant or not to grant the same, as long as it denies within 15 days of the request being made. Decree 10-2012, in addition to the above, contains, in Article 46, particular rules for requesting direct payment in the optional simplified regime: “Taxpayers registered in this regime, who wish to make all payments directly to the Tax Administration, must request before the Superintendence of Tax Administration the respective authorization, which must be resolved within a term not exceeding fifteen (15) days. The Superintendency of Tax Administration may authorize those cases of taxpayers that at the date of their request are up to date in the compliance of their formal tax obligations, have no economic coercive process initiated by the Tax Administration and that comply with the criteria established by the Board of Directors of the Tax Administration.
Taxpayers who are authorized by the Tax Administration to make payments directly must indicate on the invoice that they pay the tax directly to the Tax Administration, identifying the respective authorization; in such case, withholding shall not be made.”
We have, therefore, some specific requirements:
- To be up to date in the compliance of formal tax obligations;
- Not to have any economic coercive process initiated by SAT;
- And that they comply with the criteria established by the Tax Administration Board.
Thus, the third requirement is totally discretionary in that it is established by the Board of Directors. The other two are totally clear.
Conclusions
- We must distinguish between arbitrariness and discretionality.
- Our legislation contains many cases of discretionality in the Tax
- Administration.
- In matters of audit reports, the regulation has little room for discretionality.
- Discretionality is found in the qualification of the assumptions for requesting them.
- The refund of the VAT credit in the optional regime does not give discretionary powers for its rejection.
- Granting payment facilities or allowing direct payments in withholding regimes are powers with broad discretionary powers.
[1] Articles 5 and 6 of Decree 20-2006 of the Congress of the Republic.