Tax authority’s duty to produce evidence
The Supreme Administrative Court’s recent judgment concerning the entitlement to VAT deduction reminds us that not only the taxpayer must prove facts during tax proceedings but also the tax authority. The tax administration’s attempt to shift the duty to prove facts in evidence proceedings entirely onto taxpayers does not stand before the courts.
The SAC judges have again dealt with the issue of spreading the burden of proof between the VAT payer and the tax authority. Recent Judgment No. 6 Afs 170/2016 observes that both parties involved in tax proceedings, i.e. the taxpayer and the tax authority, have the duty to produce evidence. In this particular case, the tax administration challenged the entitlement to VAT deduction, claiming that the VAT payer did not properly document a supply performed by the supplier stated in a tax document. During appellate proceedings, the Financial Directorate then confirmed the tax authority’s decision to cancel the entitlement, this time by asserting that the VAT payer knew, or might have known that they had received a supply affected by VAT fraud.
The SAC held that the above two reasons for cancelling the entitlement cannot be freely combined. If the VAT payer fails to prove the receipt of a supply from a specific supplier, it is not appropriate to examine potential VAT fraud involvement or to apply the “should-have-known” test. With respect to VAT fraud, the SAC objected to any further expansion of the VAT payers’ duty to produce evidence. The court pointed out that any potential involvement in VAT fraud would not be a matter put forward by the taxpayer themselves. It is therefore solely the tax administration’s duty to collect sufficient evidence to prove the VAT payer’s involvement in VAT fraud. This duty may not be foisted off on taxpayers, according to the court.
Considering the above, during tax inspections we recommend approaching any requirements and assertions made by the tax authority with healthy scepticism. Our practical experience has shown that not all tax authority requirements are legitimate. The outcomes of tax inspections are always worth analysing critically, taking into account the justifiability of the tax authority’s conclusions and their substantiation with sufficient evidence.