Active defence pays off in tax fraud investigations

The Supreme Administrative Court (SAC) has brought a new perspective on proving the taxpayer’s involvement in a transaction affected by tax fraud. While remaining consistent with its previous case law as to the distribution of the burden of proof, in its recent judgement (9 Afs 194/2017) the court pointed out that it may be quite harmful for taxpayers not to make any efforts to prove their non-involvement in a tax fraud.

The taxpayers have by now become used that based on case law, when proving involvement in tax fraud, the burden of proof lies primarily with the tax administrator. This, however, does not mean that it is tactical not to challenge the tax administrator’s arguments during tax fraud investigations. According to the SAC, the intensity of a taxpayer’s defence plays an important role. The more effort a taxpayer makes, the more demands are placed on the arguments of the tax administrator who has to defend their assertions.

In the case in question, a taxpayer was denied an entitlement for VAT deduction on received advertising services on the grounds that the chain of transactions had been affected by tax fraud. According to the SAC, the tax administrator had gathered a fair amount of evidence and had come to completely logical conclusions. Although the taxpayer disagreed with the conclusions, the taxpayer did not challenge them with any relevant arguments or evidence. The SAC thus considered the conclusions as to the taxpayer’s involvement in tax fraud sufficiently proved, emphasising that the tax administrator was not obliged to consider and take into account all possible versions of the facts of the case and assertions to be made by the taxpayer.

The judgement sends a clear message to taxpayers that the courts’ leniency as to proving the taxpayers’ non-involvement in a transaction affected by a tax fraud is not boundless. It is thus recommendable for taxpayers not to rely on their (presumed) unaccountability for producing evidence. Instead, they should actively cooperate in ascertaining the circumstances of the transactions under review, and not underestimate the importance of proper argumentation.

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