Introduction

For a lawyer educated in civil law tradition the principle of good faith and fair dealing prima facie rather implies standards of private law. Indeed, the English term good faith and fair dealing represents the modern expression of the old latin term bonus pater familias or even bona fides, known also in latin branches of civil law legal systems as bon père de famille or in German law as Treu und Glauben.

However, when dealing with case law of courts and tribunals in taxation and customs matter, one can easily see that the contents of the term good faith and fair dealing do not have the same meaning as in contract or tort law. This dichotomy is best explained by the separation of a general obligation of good faith and fair dealing imposed on any legal subject and of the principle of protection of good faith of a particular when dealing with the administrative authorities. [1] Therefore I shall explain in the first part of my lecture the differences between the private and public law approach of good faith and fair dealing (I), in the second part the link existing between the term of good faith and fair dealing and legitimate expectations in tax and customs law as in force in Slovenia (II). In the beginning I would like to stress that some issues addressed are specific to Slovenian public law.

Nevertheless, as both concepts are also known in EU legislation and sometimes also addressed by the ECHR, those issues might be interesting also for foreign administrative magistrates. 

Private and Public Law Approaches of the Principle of Good Faith and Fair Dealing

In Slovenia the origins of principle of good faith and fair dealing constituting legitimate expectations of a private person can be found in private law. One might cite the institute like culpa in contrahendo. However, as in Slovenia tax and customs law belong to public law, private law standards are not always identical with the public law standards. Indeed, in public law the issue of good faith and fair dealing concerns the legal position of an individual party before administrative authority and the administrative authority itself. Also the administrative authority is entitled to expectation of good faith and fair dealing. [2] 

Slovenian Private Law 

The term I translated as principle of good faith and fair dealing is considered to be a core principle of private law in Slovenia. It is codified in various legislative acts concerning private law. For example the official English translation of the Code of Obligation (henceforth referred to as : “the OZ”) stipulates in Art. 5(1) : When concluding obligational relationships and when exercising the rights and performing the obligations deriving from such relationships the participants must observe the principle of conscientiousness and fairness. However, even more important is the provision of Article 9 of the Code or Property Law (henceforth referred to as “the SPZ”) stipulating : “Good faith and fair dealing shall be presumed until proven otherwise”.

Perhaps one should mention that Slovenian legal writers consider those two principles as general principles of law. However, the legal nature of those principles is deemed not to be clear, do they ratione personae apply to contracting parties or to the judge deciding in a contractual litigation. [3] The main consequence of good faith in private law can be described as protection of legitimate expectations of a party having acted in good faith. However, the principle has its exceptions : one should mention that good faith when concluding a prohibited contract cannot convalidate the nullity and voidness of such a prohibited contract. [4] Good faith of contractual parties alone does not suffice for concluding a valid contract, if the contracting parties did not act with necessary professional diligence. [5] However, the question of good faith and fair dealing as a legal situation creating legitimate expectations is quite different in public law. 

Slovenian Public Law 

Good faith and fair dealing as a principle of public law is an issue not yet much discussed in Slovenian legal writing. Opposed to that quasi silence one might find almost extensive case law and legal writing on the principle of protection of legitimate expectations. Indeed, as one of the principles of the rule of law (Rechtsstaat) under Article 2 of the Constitution the principle protection of legitimate expectations provides that the legislature shall not engage in deteriorating legal position of particulars and legal entities without an objective reason based on overwhelming and legitimate public interest. [6]

However, in substance in public law there is always a clash of three general principles of law. On the substantive level the principles of protection of legitimate expectations and good faith and fair dealing are often balanced with the principle of legal certainty and principle of legality of acts undertaken by the executive branch. Sometimes it can be acknowledged that in taking account of the circumstances of a particulars case, the public interest in safeguarding the principle of legality overrides the interest of the beneficiaries in maintaining a situation which they took in good faith to be settled. I shall not enter into details of Slovenian administrative procedural law as there is no need to understand the details for giving a comprehensive picture of balancing the principle good faith and fair dealing with the principle of legality.

If we undertake a brief summary of links uniting those principles in Slovenian public law, we might find a curious finding. The principle of good faith and fair dealing constitutes the historical and teleological common ground of both the principle of protection of legitimate expectations and the principle of legality of acts undertaken by the administration. [7] It should be stressed that German legal writing considers the principle of legal certainty as the origins of the principle of protection of legitimate expectations. [8]

However, when dealing with the principle of good faith and fair dealing Slovenian constitutional case law considers it as a principle of private law. [9] Such a finding can be accepted only in a very limited scope. It is true that Slovenian courts are only starting to explore the principle of good faith and fair dealing in public law. The Administrative Court of the Republic of Slovenia had for example to examine the contention that an applicant acted in good faith when applying for a customs declaration. The Administrative Court accepted the principle of good faith and fair dealing and ruled that the sole contention without adducing any evidence of goods leaving the customs territory does not suffice to prove good faith and fair dealing. [10] In acting in this way, the Slovenian court accepted a convergent approach with the case law of the ECJ. Indeed, the EJ ruled that provided that the national court finds that the intention to commence economic activities giving rise to taxable transactions was declared in good faith and that that intention is supported by objective evidence, the taxable person is entitled immediately to deduct the VAT due or paid on the goods or services supplied with a view to the performance of the economic activities which it envisages carrying out, and the principles of the protection of legitimate expectations and of legal certainty preclude its being deprived retroactively of that right by a legislative amendment post-dating the supply of those goods or services. [11]

Questions of good faith also open new procedural issues like the burden of proof and standard of proof that shall be discussed later in this contribution. This said, one has to acknowledge that the Administrative Court of Slovenia recognised the basic difficulty of the principle of good faith and fair dealing in tax and customs law. Good faith namely cannot serve as a global source of every aspect of the principle of protection of legitimate expectations. Let us consider a case of a request of a taxable person to pay certain levies like VAT. Such a person addresses a request to the tax authorities. The administration responds in a form of e letter with a certain interpretation of tax law. However, the administration then assesses the basis in a different manner than indicated in her letter ? Can one speak of a violation of the principle of good faith and fair dealing ? In private law the answer would clearly be yes. One has to mention that in tax law the need for legal certainty is considered to be even higher than in other branches of public law. Legal writers therefore conclude that a special relationship of trust is deemed to exist between the tax authority and the taxable person that is governed by the principle of good faith and fair dealing. In Slovenia Article 7(1) of the Act on Tax Proceedings clearly stipulates that the taxable person shall be informed in advance with his or hers rights and obligations under the legislation conferring the power to the tax authority to collect taxes. Therefore, the tax authority shall act as indicated in her letter and shall not depart from its indicated line of conduct without valid reasons, especially as taxable persons have expected a different conduct. [12]

However, tax authorities are not precluded to change their expressed legal opinions, lines of conduct etc. They are obliged to state special conditions giving reasons to the assumption that such a modification of legal position is not unreasonable. To be clear, if the legal opinion expressed largely differs from a clear and settled legal situation or if it is clearly wrong, no expectations can be founded on such an opinion. Yes it is not to be forgotten that the principle of legality cannot be used for determining that tax authorities are be bound by illegal opinions. A wrongful or even illegal binding information issued by a tax authority cannot discharge that authority from correctly applying the legislation. [13] This can only be explained with the precedence of the principle of legality over the principle of good faith and fair dealing. I shall not examine the question of the reformatio in pejus in such cases.

Article 2 of Slovenian constitution defines Slovenia as a state governed by the rule of law and a social state. Article 120(2) of the Constitution states that Administrative authorities perform their work independently within the framework and on the basis of the Constitution and laws. Under Article 158 of the Constitution legal relations regulated by the final decision of a state authority may be annulled, abrogated or amended only in such cases and by such procedures as are provided by law. This is the legal basis of the presumption of legality in Slovenian public law. In this regard Slovenian administrative law does not differ from other administrative laws. Normally in administrative law, acts are presumed valid, as they are adopted in defending public interest. [14] A private individual is not allowed to assess the legality of administrative acts adversely affecting him. [15] This presumption of legality enjoyed by administrative authorities also means that the administrative authorities are always deemed to be acting with good faith and fair dealing. Indeed an administrative body deceiving a private individual is deemed to act contrary to the principle of good faith. This could imply that the origins of the principle of good faith and fair dealing in public law might be found in the principle of law venire contra factum proprium. [16]

In conclusion of the first part we might consider that there is a difficult separation of the notions of principle of good faith and fair dealing and the principle of legitimate expectations. 

Specifics of Tax Legislation and Case Law Concerning the Principle of Good Faith and Fair Dealing and the Principle of Protection of Legitimate Expectations.

In the beginning of this part of the paper I have to state firstly that case law of Slovenian courts on that issue has never been commented in legal writing and secondly that case law dealing with is not well known in Slovenia. Therefore I shall use the case law of the ECJ as findings by that Court apply not only to Slovenia.

As far as practical issues are concerned I shall now treat several situations, where taxable persons claim to have acted in good faith and refer to protection of their legitimate expectations.

Good faith and VAT Paid in Legal Transactions with the State 

Let us consider a specific situation of VAT paid in error by a non-taxable person (the State) and included in the invoice established by that person. [17] The question that arises is : If VAT is payable to the State if it is mentioned on an invoice or other document serving as invoice, is a reimbursement of an amount mentioned in error by way of VAT on an invoice precluded where the State is not acting as a taxable and that tax is not passed on to the final consumer.

The Answer by the ECJ is : In order to ensure VAT neutrality, it is for the Member States to provide in their internal legal systems for the possibility of correcting any tax improperly invoiced where the issuer of the invoice shows that he acted in good faith. [18] However, where the issuer of the invoice has in sufficient time wholly eliminated the risk of any loss of tax revenues, VAT which has been improperly invoiced can be adjusted without such adjustment being made conditional upon the issuer of the relevant invoice having acted in good faith. [19]

However, the amount mentioned as VAT on the invoice drawn up by a person providing services to the State may not be classified as VAT where that person erroneously believes that he is providing those services as a self-employed person whilst in reality there is an employer-employee relationship. [20]

The issue of good faith in VAT legislation seems therefore to be linked not only to principles of administrative law but also to the VAT neutrality as basic principle of VAT legislation.

The second issue is the burden of proof. It clearly follows from that ruling that the taxable person bears the onus probandi of good faith. This is only a petitio principii. The issue of the standard of proof is not addressed. However, given that there is no legislation at level of the Union governing the concept of proof, any type of evidence admissible under the procedural law of the Member States in similar proceedings is in principle admissible. [21] In Slovenia this would imply the application of the principle of unfettered Adduction and evaluation of evidence (Article 10 Act on General Administrative Proceedings). 

Onus probandi et allegandi and Good Faith 

The issues of onus probandi of good faith and legitimate expectations also emerge in customs cases. A newer reference by the Finanzgericht Hamburg (C-438/11) actually opens the question of the onus probandi of good faith in the framework of the erroneous entering of a customs duty into accounts. Lets us consider that an importer imports goods from Macao, the customs declaration states Macao as a country of origin. However, a subsequent inquiry finds that the real country of origin is China. The customs authorities of Macao confirm the existence of certificates on preferential treatment. However, they are unable either to confirm or to deny the country of origin due to closing of the exporter. The circumstances are even more complicated, as the impossibility of proving the country of origin was created by the exporter and the importer has acted with no fault. Under Article 220(2), third indent, the issue of an incorrect certificate shall not, however, constitute an error where the certificate is based on an incorrect account of the facts provided by the exporter, except where, in particular, it is evident that the issuing authorities were aware or should have been aware that the goods did not satisfy the conditions laid down for entitlement to the preferential treatment. Should an importer having acted in good faith bear the consequences of negligence of foreign authorities or contractual party ?

In VAT cases the issue is far simpler. The first subparagraph of Article 28c(A)(a) of Sixth Directive 77/388, as amended by Directive 2000/65 prohibits the competent tax authorities from requiring a supplier, who acted in good faith and submitted evidence establishing, at first sight, to preclude his right to the exemption of an intra-Community supply of goods, subsequently to account for value added tax on those goods where that evidence is found to be false, without, however, the supplier’s involvement in the tax evasion being established, provided that the supplier took every reasonable measure in his power to ensure that the intra-Community supply he was effecting did not lead to his participation in such evasion. [22]

Application of VAT to Each Production or Distribution Transaction

Let us consider also the issue of an enterprise having sold two Mercedes vehicles, at a certain cost to a person residing in another Member State by order of another domestic enterprise. [23] Following an inspection, in the course of which the genuineness of the supply of the Mercedes to the foreign customer was put in question, the tax authorities drew up a final report stating that the enterprise was liable to pay a certain amount of VAT. In the course of proceedings the enterprise contended that it sold the two vehicles to the private customer on the express order of a third party – another domestic enterprise. The enterprise contended that it had acted in good faith and had evaded no VAT.

The question was : Does the principle of the neutrality of VAT preclude a Member State from claiming additional VAT from a taxable person which has issued an invoice, correctly or otherwise, in accordance with the VAT exemption applicable to intra-Community supplies, where it is evident that the VAT has been paid by the end user and transferred to the Member State by the person who drew up the invoice issued to that end user ?

The answer is simple : VAT applies under Second and Sixth Directive to each transaction by way of production or distribution after deduction of the VAT directly borne by the various cost components. Therefore the principle of the neutrality of the VAT does not preclude a Member State from recovering VAT, after the event, from a taxable person which has wrongly invoiced a supply of goods as being exempt from that tax.

In other words good faith in private transactions as considered in private law does not constitute a valid defence of a taxable person precluding collection of VAT. Therefore good faith can be in certain circumstances ineffective in the terms of VAT legislation. However, this is an exception. The rule is that to ensure VAT neutrality, it is for the Member States to provide for the possibility in their internal legal systems of refunding any tax improperly invoiced, once the person who issued the invoice shows that he acted in good faith. [24] 

However, as far as intra-Community supply is concerned, it is indeed legitimate to require, that the supplier act in good faith and take every reasonable measure in his power to ensure that the transaction that he effects does not lead to his participation in tax fraud. However, once the supplier has fulfilled his obligations relating to evidence of an intra-Community supply, where the contractual obligation to dispatch or transport the goods out of the Member State of supply has not been satisfied by the person acquiring the goods, it is the latter who should be held liable for the VAT in that Member State. [25]

As far as evidence of good faith is concerned, it is incumbent as a rule on the supplier to establish that the goods have been dispatched or transported to another Member State, in circumstances where the right to dispose of the goods as owner is transferred to the person acquiring the goods in the Member State of supply and where it is for that person acquiring the goods to dispatch or transport the goods out of the Member State of supply. However, the evidence that the supplier might submit to the tax authorities depends essentially on information that he receives for that purpose from the person acquiring the goods. [26]

Risk of Losing Tax Revenues and Good Faith 

It might be deemed cynical that good faith should be conditioned by the risk of losing tax revenues. However, at least in intra-Community supplies the question whether the exemption from VAT may be conditional upon the good faith of the taxable person, the answer to that question depends on whether the Member State concerned is at risk of losing any tax revenues. [27] However, the non-collection of the VAT relating to an intra-Community supply which, initially, was incorrectly described as a supply effected within the territory of the country cannot be regarded as a loss in tax revenues. [28] 

Fraus omnia corrumpit 

Bad faith or tax evasion preclude the application of protection offered by good faith. The burden of proof of proving a tax evasion is certainly on the tax authorities.

The Member State of departure of the intra-Community supply may refuse to apply the exemption for the purpose of ensuring the correct and straightforward application of the exemptions and of preventing any evasion, avoidance or abuse. The principle of the protection of legitimate expectations cannot legitimately be invoked by a taxable person who has intentionally participated in tax evasion and who has jeopardised the operation of the common system of VAT. [29]

Principle of Protection of Legitimate Expectations 

In order to benefit from the principle of protection of legitimate expectations, the legal situation of a taxable person has to be uncertain. If the legislative or regulatory provisions are clear and need no interpretation, then one might have difficulties setting up a principle of protection of legitimate expectations. However, if legal and regulatory provisions need or require interpretation by the authorities, especially when the authority is vested with discretionary powers, then the principle of legitimate expectations is linked very much with the protection of god faith of the taxable person.

It is perfectly permissible and, as a general rule, consistent with the principle of the protection of legitimate expectations for new rules to apply to the future consequences of situations which arose under the earlier rules. However, a legislative amendment retroactively depriving a taxable person of a right he has derived from earlier legislation is incompatible with the principle of the protection of legitimate expectations. [30] It follows that the principle of the protection of legitimate expectations precludes a national legislative amendment which retroactively deprives a taxable person of a right enjoyed prior to that amendment to obtain default interest on a refund of excess VAT. [31]

In the end one should say that the principle of protection of legitimate expectations does not offer a stricter protection than the principle of good faith and fair dealing. The principles of the protection of legitimate expectations and legal certainty do not preclude a Member State, on an exceptional basis and in order to avoid the large-scale use, during the legislative process, of contrived financial arrangements intended to minimise the burden of value added tax that an amending law is specifically designed to combat, from giving that law retroactive effect when economic operators carrying out economic transactions such as those referred to by the law were warned of the impending adoption of that law and of the retroactive effect envisaged in a way that enabled them to understand the consequences of the legislative amendment planned for the transactions they carry out. [32]

Conclusion

Principle of good faith and fair dealing constitutes the basis of protection of legal position of a taxable person and constitute the basis for the principle of protection of legitimate expectations.