Tax Arrears as Grounds for Exclusion from Public Procurement Procedures

The contracting authority must ensure that there are no grounds for exclusion from the procurement procedure for the applicant or tenderer before qualifying them, and must ensure that there are no grounds for exclusion from the procurement procedure for the tenderer before concluding the procurement contract. One of the grounds for exclusion from the procurement procedure is a tax arrear.

The objectives of exclusion from a procurement procedure are primarily considered to be the protection of public funds and thereby maintaining public trust, ensuring fair competition, and preventing corruption. Although Estonian public procurement law has considered a tax arrear as a mandatory basis for exclusion from the procurement procedure since 2000, European Union (EU) public procurement regulations have deemed a tax arrear as a basis for mandatory exclusion since 2016. Previously, the EU public procurement law treated tax or social security arrears as a basis for voluntary exclusion.

According to paragraph 95 subsection 1 point 4 of the Estonian Public Procurement Act (PPA), the contracting authority shall not conclude a procurement contract and shall exclude from the procurement procedure a tenderer or applicant who has tax arrears within the meaning of the Taxation Act regarding state taxes, contributions or environmental charges or tax arrears or overdue social security contributions under the legislation of the country where the tenderer or candidate has their seat.

Within the meaning of the paragraph referenced, it is not important which specific state tax the the tenderer or candidate has. If the tenderer or candidate is not registered in Estonia, the state taxes established in the country where the entrepreneur is located are considered as state taxes. What is important is that the tenderer or candidate has fulfilled its tax payment obligation or has been given a deferral for the taxes.

In the context of tax arrear, PPA does not separately regulate its amount or the time of the tax arrear, therefore the Taxation Act (TA) applies in this regard.  In accordance with TA § 32, tax arrears are, the amount of tax outstanding by the due date, the amount of tax outstanding by the due date arising from the customs debt, the amount refunded or set off without reason based on an application of the taxable person and unpaid interest. An amount of tax is not assessed, and a notice of assessment is not issued where the amount of tax is less than 10 euros unless otherwise provided by an Act concerning a tax or the customs legislation (TA § 100 subsection 1).

In accordance with Article 57(3) of the Public Procurement Directive [1], Member States may exceptionally provide for an exemption from the mandatory withdrawal requirement laid down in Article 57(1) and (2) for overriding reasons of general interest, such as public health or environmental protection.

Member States may also provide for a derogation from the mandatory exclusion provided in referenced paragraph 2, where an exclusion would be clearly disproportionate, in particular where only minor amounts of taxes or social security contributions are unpaid or where the economic operator was informed of the exact amount due following its breach of its obligations relating to the payment of taxes or social security contributions at such time that it did not have the possibility of taking measures as provided for in the third subparagraph of referenced Article 57 paragraph 2 before expiration of the deadline for requesting participation or, in open procedures, the deadline for submitting its tender.

Irrespective to the existence of a tax arrear, the contracting authority or entity is not required to apply exclusion of the tenderer or candidate in cases in which, in the general interest, make the award of the public contract indispensable and no public contract would be awarded should the tenderer or candidate be excluded. The authority or entity makes a reasoned written decision concerning non-exclusion of the tenderer or candidate from procurement proceedings, and may award the contract to the tenderer or candidate regardless of the presence of a ground for exclusion.

PPA does not provide for an exceptional possibility to qualify a tenderer or applicant in a situation where the tenderer or applicant has a small tax arrear. However, the contracting authority may conclude a procurement contract with a tenderer with a tax arrear if the conclusion of the procurement contract is essential for reasons of overriding public interest.

At first glance, it may seem that the Estonian legislator has established the exception arising from the EU directives more strictly than the wording of the exception provided for in the referenced directives implies, since the Estonian legislator has made the implementation of the exception dependent not only on the “public interest” but also on the “overriding public interest”. However, this is not the case, as in practice it would be difficult to distinguish between a situation in which there is a public interest and an overriding public interest. The contracting authority must always specify whether the contract is concluded from an urgent need or from an overriding public interest.

PPA also gives the contracting authority the right to apply as a qualification condition the condition that the tenderer or applicant has no local tax arrears.

PPA § 95 subsection 4¹ states that the contracting authority or entity may, in the procurement documents, reserve to itself the right to exclude from procurement proceedings any tenderer or candidate that, for the purposes of the Taxation Act, has an outstanding tax debt of a local tax of the locality in which the authority or entity has its seat, or – in the case of a joint procurement – of the localities in which of each of the respective joint contracting authorities or entities has their seat, or – where the contracting authority is a group of local authorities – of the seat of each of the contracting authorities that belongs to the group. Local taxes are advertising tax, road and street closure tax, animal tax and entertainment tax.

Where the contracting authority or entity identifies at any time during the procurement procedure that the tenderer or candidate has a tax arrear, the authority or entity gives the tenderer or candidate at least three working days to settle the tax debt or to obtain a deferral. Where valid reasons are present, the authority or entity may extend the time limit given to the tenderer or candidate. If the tenderer or candidate has settled the tax debt or obtained a deferral by the due date set by the authority or entity, the authority or entity does not exclude the tenderer or candidate from the procurement procedure.

Therefore, the tenderer or applicant must be given at least 3 working days to pay the tax arrear or to obtain a deferral. However, the contracting authority may also set a longer deadline and the tenderer or applicant may submit a request for an extension of the deadline if there is a valid reason for it.

If the contracting authority does not extend the deadline and does not qualify the tenderer or applicant, they may dispute the contracting authority’s  decision in the Public Procurement Appeals Committee.

The non-existence of tax arrears  of the tenderer or applicant participating in the procurement procedure still remains mandatory in Estonian public procurement procedures. If a tenderer or applicant is in arrears with taxes and wishes to participate in a public procurement procedure, it is advisable to settle the debt early on or submit a request to the Tax and Customs Board for a tax deferral.

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[1] Directive 2014/24/EU of the European Parliament and of the Council of 26 February 2014 on public procurement.