Tax Reliability Index

The Financial Administration has started to gradually deliver notifications to taxpayers about the assignment of the tax reliability index. In total, the tax administration will send out more than 600,000 notices to every taxpayer who is registered for income tax and is running a business. We describe what is the index, how it is assigned, what it means for you and how you can defend against it in more detail in our new article.

The Tax Reliability Index has been operating in some form in Slovakia since 2018 and was intended to serve as a tool for voluntary fulfilment of tax obligations by tax subjects towards the Financial Administration. However, until 1 January 2022, the assessment of tax entities was not transparent as the conditions for calculating the index were not published.

The amendment to the Tax Code, effective from 1 January 2022, should transform the Tax Reliability Index from a non-public to a public one, which should ensure transparency in the assessment of tax entities. After the new index, taxpayers will be divided into groups of highly reliable, reliable and unreliable.

The grouping will be done on the basis of tax compliance (filing returns and statements within the deadline), timely fulfilment of reporting obligations, payment of taxes, advances and penalties, results from tax audits, correctly calculated amount of tax in the tax return or supplementary tax return. The following link provides more information on the assessment of each criterion and examples of the calculation of the index - unfortunately it is published in the Slovak language only - (Criteria).

A list of all taxpayers with an assigned index will also be publicly available on the website of the financial administration by the already extended deadline of 30.9.2022 (published lists). Thus, taxpayers may face a reputational risk based on the assigned index, as the assigned index is publicly available to everyone.

Taxpayer ratings are all the more controversial as the results from tax audits enter into the calculation of the tax index. In many cases, it happens that the tax administrator has a different view on the interpretation of the tax rules than the taxpayers and the representing tax advisors. In these cases, taxpayers have to defend themselves during the court litigations. Unfortunately, taxpayers will also in this case be labelled as unreliable taxpayers and will suffer various disadvantages, including the aforementioned reputational risk or aggravation in the assessment of penalties. In this context, it is very questionable today how the tax administration will deal with situations where the court finds in favour of the taxpayers and how the tax administration will deal with the 'unreliable' index assigned to it. Will it retrospectively correct the malus or penalties imposed? In this context, we consider the deterioration of the tax reliability index to be unconstitutional. If the taxpayer can prove that he has suffered financial or other damage on the basis of the index thus wrongly assigned, he might be able to file a motion for damages caused by the tax administration.

It is also important to point out that in 2022, the tax administration will be assessing taxpayer compliance five years retrospectively for the period 2017-2021, at a time when the index was not yet operational in this form and taxpayers could not have known that future compliance with their obligations could have such consequences.

1. Tax code

The amended wording of the Tax Code specifies to whom and in what manner the Financial Administration will deliver the notification of the tax reliability index. What consequences, whether benefits or disadvantages, arise from the obtained rating and also how the taxpayer has the possibility to defend against the assigned index.

The framework criteria for determining the tax reliability index are laid down in a published decree of the Ministry of Finance of the Slovak Republic (decree). Details of the index allocation and its calculation have been published on the website of the Financial Administration.

2. To whom does the Tax Reliability Index apply and how will taxpayers be informed about it

The Tax Reliability Index refers to taxpayers who have been set up for the purpose of business and are also registered for income tax purposes in Slovakia. The tax administration sends the taxpayer a notification of the tax reliability index after two years since the taxpayer was registered for income tax. A new notification of the assigned tax index will also be delivered to taxpayers who have already received a notification in the past in 2018-2021, within the deadline of 28 February 2022. Due to the number of notifications and the evaluation of tax reliability, some notifications have not yet been delivered. We expect to them to be delivered shortly. Tax entities should be assessed on a semi-annual basis. Taxpayers should only receive a new notification of their assigned index if their assessment changes.

3. Categories of taxpayers and related benefits or drawbacks

A tax entity to which the Tax Reliability Index applies should be classified into one of the following groups on the basis of an assessment in relation to its compliance with its obligations towards the financial administration:

1. Highly reliable taxpayer
2. Reliable taxpayer
3. Unreliable taxpayer
4. An unassessed taxpayer not qualifying for inclusion in the assessment

As one of the main objectives of the Tax Reliability Index is to motivate taxpayers to fulfil their obligations properly and on time, inclusion in the group may bring with it benefits or, on the contrary, disadvantages. The Tax Code provides that tax administrator is obliged to provide the taxpayer who is assessed as highly reliable on the basis of the index, with following benefits:

1. to issue a partial protocol when carrying out a VAT audit on the eligibility of a claim for a excess VAT deduction,
2. set a deadline of at least 15 days for replying to the appeal during the local investigation or tax audit,
3. reduce the fee for issuing a binding opinion by half,
4. reduce the fee for issuing a decision on the application of a particular method of determining the tax base (APA),
5. to allow payment of the tax in instalments,
6. to allow deferment of payment of the tax.

On the contrary, if the tax subject is assessed as unreliable, the tax administrator should set a deadline of 8 days for replying to the appeal during the local investigation or tax audit. The period of 8 days may be extended on the basis of a reasoned request.

In addition to the above, the tax administrator may take into account the index assigned when assessing penalties.

4. Calculation of the index

The rules for the calculation of the new index will be available on the portal of the Financial Administration (FSSR). Breaches are scored according to severity and duration of the emittance. In the assessment, the Financial Administration assesses compliance with obligations under the tax laws, the Accounting Act and compliance with obligations under the eKasa.

At the same time, economic indicators are also taken into account in the calculation of the tax reliability index. The effective tax rate, in addition to the benefit to the state budget through the income tax reported, also takes into account the social importance of the tax entity as an employer, which is expressed through the employment tax withheld for its employees. The index is determined as follows:

• a tax entity is considered to be highly reliable if it has a maximum score of 10 points and also meets the economic indicator condition;
• a tax entity shall be considered reliable if it has more than 10 points and less than 25 points or if it has a maximum of 10 points and does not meet the economic indicator condition;
• unreliable is a tax entity that has a score of at least 25 points.

Based on the published decree, the evaluation criteria and their violations are as follows:

1. Compliance with the obligation to file a tax return within the statutory deadline. A distinction is made between filing after the deadline of up to 3 calendar days, over 3 days, non-filing for natural persons after a notice to file and for legal persons without a notice to file, even after a notice to file. Compliance shall be assessed over the last 5 years;
2. Compliance with the obligation to submit an VAT transaction statement and EC Sales List.
   The same time limits as in point a) shall apply. Compliance shall be assessed over the last 3 years;  
3. Compliance with the obligation to payroll annual report and monthly withholding payroll report within the statutory deadline.
   The same time limits as in point a) shall apply. Implementation shall be assessed over the last 3 years;
4. Compliance with the obligation to state the tax in the tax return or in a supplementary tax return in the correct amount;
5. Compliance with the obligation to state in the tax return or in a supplementary tax return the amount which the taxpayer should have declared under a relevant tax legislation and the amount to which the taxpayer has made a claim under a relevant tax legislation in the correct amount;
6. Compliance with the obligation to pay or remit within the statutory deadline the tax under relevant tax legislation and other pecuniary consideration.
   When an arrearage arises, the highest arrearage is assessed for the reference period, which is generally 6 months, with 8 thresholds, e.g. up to EUR 20, from EUR 21 to EUR 170, etc.;
7. Compliance with the obligation to pay customs debt, fines and other payments assessed or imposed under customs regulations, value added tax on importation and excise duty on importation within the time limit or in the amount specified.
   The same rules as in point (f) shall apply to the incurrence of an underpayment;
8. The findings of audits by the tax authority shall be evaluated with regard to any differences in the amount of tax or the amount of excessive VAT deduction or any difference in the amount of tax loss found;
   The above applies to audits carried out on personal and corporate income tax, VAT, motor vehicle tax and payroll tax over a period of 3 years;
9. The correct use of the eKasa shall be evaluated.
   Infringement is defined as the existence of a final decision imposing a fine within the 3-year period under examination. The amount of the fine as well as repeated infringements shall be taken into account;
10. Compliance with the Accounting Act shall be assessed.
    Infringement is defined as the existence of a final decision imposing a fine within the 3-year period under examination. The amount of the fine shall not be taken into account.

The evaluation criteria are binding and the subject of the evaluation should be the fulfilment of all obligations under the control of the Financial Administration.

Economic indicators - Effective tax rate (ETR)

The ETR assesses:

1. revenues or income for the taxable period, in the case of a natural person, income or receipts from business and other self-employment;
2. reported tax before the application of reliefs, in the case of natural person, the tax on the partial tax base from business and other self-employment also before the application of the tax bonus;
3. the amount of payroll tax withheld by the employer from its employees in respect of taxable income accounted for and paid out for the entire tax period.

The ETR is calculated:

ETR = 100x (Income Tax) / (Revenue or Income);

The effective tax rate threshold is calculated for the assessment period:

ETR₀ = 2 - log(Employment tax withheld / 1000);

The ETR is then compared with the threshold value ETR₀, whereby if ETR > ETR₀, the condition is considered to be satisfied.

ETR₀ is set at 2% for taxpayers who are not employers, and for employers it is set individually according to the amount of employment tax withheld.

5. How to effectively defend against the assigned index

As of January 1, 2022, the Tax Reliability Index notice should also include the explanation and calculation based on which specific violations were assigned such index.

If the taxpayer disagrees with the assessment, it has the possibility to object to the assigned tax reliability index. The objection must be filed within 15 days from the date of receipt of the notification. The objection must be substantiated and shall have suspensive effect. If the taxable person misses the time limit for filing an objection, the missed deadline cannot be waived.