Time factor and standard of proof in tax inspection
In its recent judgment, the Supreme Administrative Court (SAC) dealt with the issue of proving the right to deduct VAT on supplies of assembly work and the amount of evidence that the tax administrator may require considering the time elapsed between the supply and the subsequent tax inspection. The court held that the time factor should be taken into account by the tax administrator.
A company engaged in the production of building accessories (steel stairs and railings) supplied its products to German customers. The company carried out the production using its own employees, but occasionally, for larger orders, also used an external supplier. The supplier’s employees then carried out the work at the company's production facilities. Within a tax inspection initiated in June 2017, the tax administrator assessed additional VAT on the taxable supplies (assembly work) received from this supplier for tax years 2015 and 2016, on the grounds that the company failed to prove that they had received the assembly work in the declared scope and at the declared price.
The company provided a range of evidence to prove the delivery of the assembly work, including documentary evidence (e.g. tax documents/invoices, purchase orders, contracts for work, handover protocols, underlying documents for billing that contained the link between the work carried out and the company's specific orders, lease agreements) and witness evidence (testimony of a company employee on the presence of the supplier's employees on the company's premises and on the performance of the assembly work).
In its own investigation, the tax administration verified, inter alia, that the transactions had been declared in the supplier's VAT ledger statements, that VAT had been paid on the transactions in due and timely manner, that the payments had been made to the published bank accounts, that the turnover had been reported by the supplier in the financial statements filed in the collection of deed of the commercial register, and that the supplier had been registered in the register of employers. Nevertheless, the tax administrator found the evidence submitted by the company insufficient and considered it to be merely formal and not proving the actual scope and object of the supplies.
Court: excessive evidence cannot be required
In its judgment, the court admitted some of the tax administrator’s doubts regarding the supplies as justified (e.g., non-standard price arrangements between the company and the supplier, the supplier and its subcontractors not being fully available during the tax inspection, etc.). Nevertheless, the court considered the documents, together with the company's explanations, sufficient for the tax proceedings.
Both the SAC and the Constitutional Court had previously ruled that requiring an excessive standard of proof to establish a certain fact may violate the fundamental rights of a party to the proceedings. No past facts can subsequently be proved with absolute certainty and there will always remain a question of some degree of probability. The tax authorities therefore cannot require the taxpayer to meet a standard of proof that would render it virtually impossible to bear the burden of proof.
Implications of the verdict for practice
In our view, the judgment may, at least to some extent, help with proving facts in tax proceedings initiated with a time delay, and may be relevant, e.g., when proving marketing or intra-group services. According to the SAC, the tax administration should set a reasonable level of certainty for proof based on which it would be possible to draw certain conclusion from the evidence beyond serious doubt. In this respect, it is also necessary to consider the time elapsed since the occurrence of the facts being proved.
Although the conclusions of the judgment are favourable for taxpayers, we would still recommend archiving as much relevant and non-contradictory evidence as possible during the course of a particular transaction.