SAC on application of essential costs
Several recent administrative court decisions have dealt with the question in what circumstances it is necessary to consider essential costs even if the taxpayer has failed to fully prove them. The issue was therefore addressed by an extended chamber of the Supreme Administrative Court (SAC).
Essential costs are costs that must have been necessarily incurred in order to generate undisputed taxable income (e.g., a purchase of a car as a precondition for generating income from its sale). They are not explicitly defined in any provision of law. According to the prevailing professional consensus of the SAC, they have their place exclusively where tax is being assessed by the tax administrator using aids (according to whatever information and materials are available), i.e., in a situation where the standard method of determining tax (through evidence) fails.
The existing case law also agrees that tax may be assessed by the tax administrator using aids in cases of a "blackout of accounts or substantial part thereof”. However, the opinions of the various chambers of the SAC differ as to what constitutes a substantial part of accounts and in what situation the essential costs should be applied. The issue was thus presented to the extended chamber, to provide a unified standpoint.
According to the extended chamber, it is unsustainable that once the taxpayer has failed to bear the burden of proof, the tax authorities would, with no further ado, step in with the duty to consider essential costs. Also, it is not right that the tax administrator should resort to using aids as the only possibility to take into account essential costs solely in cases where doubt has been cast over a substantial part of the taxpayer’s account: a sufficiently high intensity of irregularities may be ascertained even for a rather marginal part of accounts.
The decision of the extended chamber thus appears to extend the scope of application of essential costs also to the determination of tax using evidence. The recognition of such expense shall be based on the taxpayer proving beyond reasonable doubt that the declared expense (group of expenses) actually occurred (must have been actually incurred), albeit under circumstances other than as shown in the relevant documents. Even in such a case, however, the taxpayer bears the burden of proof and must prove the new assertions in a credible manner. We expect that the scope of this burden of proof will be further clarified in the future.