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What evidence to keep should tax authority come knocking?

By the time the tax authority arrives, it may be too late to think about what documents the taxpayer should have kept. Hence, let's look at the specific evidence that the tax authority may require during various tax inspections, as there are fundamental differences between inspections focusing on the tax deductibility of expenses, claiming the right to deduct, restructuring, transfer pricing, or on an alleged abuse of right.

Regardless of whether the burden of proof lies with the tax authority or the taxpayer in a particular case, it is worthwhile to keep documents that the taxpayer may use to prove an asserted claim.

At first, the taxpayer may argue that it is sufficient to provide the tax authorities with accounting documents, extracts from records or transport documents, i.e., evidence that any taxpayer usually has at their disposal. However, in an actual tax inspection, these standard documents may not be sufficient. Keeping a wider range of evidence can make the taxpayer's life significantly easier. Let's look at some examples from our practice and pass on some tips.

First tip: routine transactions

For major but also routine transactions, you’ll do best to note what the nature and purpose of the transaction was and, in this regard, to collect and maintain all relevant documentation of an appropriate quality. Certain transactions such as advertising campaigns and mediation activities are especially difficult to prove. In such cases, it is advisable to carefully archive contracts, tender documentation, handover reports and even online administrator account statements. The documents must be carefully prepared so that they do not contradict each other and reflect the actual state of delivery.

Second tip: transfer pricing

Another special area is transfer pricing where it is particularly advisable to have your own documentation available, i.e., a thorough analysis to justify the setup of transactions between related parties. It is useful to archive controlling department calculations and related email communications as well as have internal regulations at your disposal when referring to them. And then there are management fees, where the taxpayer must prove not only the performance of a transaction but also the benefit from the services, e.g., by providing employee worksheets and, in the second case, an internal calculation of similar costs.

Third tip: restructuring

In restructurings where a tax saving is realised, the tax administrator often examines whether there has been an abuse of right. It is then up to the taxpayer to obtain supporting evidence as to the economic sense of the whole project and its broader context at the group level, be it through an impact analysis of the restructuring prepared by an independent agency or properly kept minutes of management meetings.

Evidence should already be collected once the transaction or taxable supply takes place, because when the tax authority comes to inspect, it will be virtually impossible to provide comprehensive evidence due to the considerable time lag.

As time goes on, it will be increasingly difficult to remember all details of the supply, to track down the necessary emails and to contact the people involved who may already be doing something else. So those who honour the Scout’s motto "Be prepared!" can save themselves a lot of trouble in a tax inspection.