TAX EVASION CORPORATE RESPONSIBILITY

May. 2020

Can legal entities be held responsible for tax evasion

when the manager embezzles the assets of the company?

 

Context

There are many situations in which managers, directors or other highly-positioned representatives decide to embezzle the assets of the company they should honestly manage. To cover their tracks, they can relay on other fraudulent means, like registering and paying invoices that are released based on fictitious transactions, involving the company in tax evasion carrousel schemes, omitting to register certain incomes or involving third-party shell companies in the transactions of their company.

This can lead, alongside embezzlement (and related) accusations, to the incidence of the crime of tax evasion. The question which follows naturally is if the company can be held responsible for the crime of tax evasion in these cases or if only the manager should be held liable for such accusation.

Criminal liability of legal entities

In our legal system, corporate criminal liability can incur when the crimes are committed by the representatives or the employees in the performance of the object of activity of the legal entities or in their interest or on their behalf. These cases are alternative, meaning that one of them is enough to justify a criminal accusation against the company.

The Criminal Code stipulates that the criminal liability of a legal entity does not exclude the criminal liability of the individual participating in the commission of the same criminal act. Therefore, a legal entity and its representative can be investigated and punished for the performance of the same crime. In the context presented above, this could mean that both the manager and the company could be held responsible for the mentioned crime of tax evasion.

In the legal literature there is a debate whether the company should or should not be held responsible for the actions performed by the individuals against it, as legal provisions do not impose the benefit of the company for their criminal liability, this being only one of the alternative conditions.

Tax evasion incrimination

The crime of tax evasion, provided by art. 9 from Law no. 241/2005, has multiple forms in which it can be committed and most of them can be used in order to cover an action of embezzlement, but probably in most cases would be used: b) the omission, in whole or in part, of the registration, in the accounting documents or in other legal documents, of the performed commercial operations or of the incomes; c) the registration, in the accounting documents or in other legal documents, of expenses that are not based on real operations or the registration of  other fictitious operations.

An essential condition for the perpetration of the tax evasion crime is the special scope that must characterize the acts: the purpose of eluding the fulfilment of tax obligations. In the lack of the scope, the actions should not be qualified as tax evasion. However, in most cases from the judicial practice, the criminal investigation authorities and courts consider that the special scope derives from the actions, and therefore no further proof is gathered or expected in this respect.

Possible legal interpretations

Formally analysing the constitutive elements of tax evasion and the way in which the criminal liability of the legal person is formed, we could draw the superficial conclusion that the legal person should be liable for the tax evasion in the premise, the arguments being the following:

– the constitutive elements of the tax evasion offense are met;

– the deed was committed in the object of activity, in the interest and name of the legal person (nota bene, these conditions are alternative, not cumulative, and here they are all, apparently, fulfilled);

– the manager, obviously, is among the persons who can engage the criminal liability of the legal person;

– the legal entity has benefited from committing the crime of tax evasion, as its taxable base was reduced and thus it benefited from the payment of a lower tax and/or reduced VAT obligations;

– the guilt of the legal person can be identified as resulting from the guilt of the manager and from its interest in committing the deed.

However, in the provided context, the manager does not act on behalf of the company, but on the contrary, he acts against the company, using it for an individual purpose. As the entire embezzlement-tax evasion operation must be looked at as a single operation, it is obvious that it was performed against the company and the manager did not have the functional liaison with the legal entity.

Therefore, the company should not be held responsible for tax evasion when its assets were embezzled, as the criminal activity cannot be attributed to it and it has no guilt in the performance of the actions that were established as tax evasion.

However, the lack of intent of the company does not per se, exclude the fiscal liability of the company to modify its financial statements accordingly, by eliminating the fraudulent transactions and thus rectifying its financial statements, with the possible effect of having to pay supplementary taxes to the State (thus increasing the damage it suffered because of the fraudulent operations by the manager).

Prevention is a solution

First and foremost, protection against embezzlement should be implemented at the level of the company, by using proper checks & balances in the internal procedures between the manager, the shareholders and the audit.

Moreover, the accounting personnel should be very prudent and any suspicious transactions should be reported, according to pre-established procedures, to different persons from the management and/or the company, as to avoid reporting to the manager who performed the irregular actions.

In conjunction to that, audit services should also be a key element in uncovering improper management actions, especially when the services or products purchased by the company are not reflected in actual goods or services received by the company.

Lastly, external legal services are recommended in the drafting, implementation and reviewing of internal procedures or even in the investigation of suspicious activities, usually in relation to managerial activities over a certain financial threshold.