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When does burden of proof lie with tax authority?

The tax authorities often put taxpayers in the position of having to prove the overall accuracy of the tax reported in their tax returns. The burden of proof is generally on the taxpayer, but in certain cases it can rest on the tax authority instead. To choose an appropriate procedural strategy for tax inspection, it is essential to correctly identify with whom the burden of proof lies.

Three main areas where the burden of proof is reversed, i.e., where it is the tax administrator who must prove facts to assess an additional tax, have crystallised from relevant case law.

Transfer pricing

The tax administrator is obliged to determine and prove the specific price that complies with the arm’s length principle. In practice, tax inspections focusing on related party transactions often do not go that far as to determine the price; instead, the tax administrator usually focuses on proving the content of the supply received and on the so-called benefit test. Their position is easier here, as it is the taxpayer who must bear the burden of proof, while the tax authority only needs to challenge it. The taxpayers thus have to prove the substance of expenses (e.g., the justification and content of the service received) and demonstrate that they have been incurred for the purpose of generating, maintaining, and securing taxable income. This is particularly difficult for intangible services, such as management fees.

Abuse of right

If tax administrators challenge a transaction by arguing that its predominant (or sole) purpose was to obtain a tax advantage contrary to the purpose of law, they are obliged to prove that this was indeed the case. Taxpayers may present sound economic reasons In their defence, , but the primary burden of proof is on the tax administrators.

VAT fraud

One of the reasons why a VAT deduction is denied during tax inspections is proving a VAT fraud in the supply chain which the taxpayer should or could have known of based on certain indications. It is for the taxpayer to prove the substance and receipt of the supply (e.g., the provision of advertising services) and its use for the taxpayer’s economic activity. However, it is for the tax authority to prove that tax fraud has been committed and document the indications leading to this. The tax authority cannot force the taxpayer to prove that they did not or could not have known about the fraud. The taxpayer can prove that they have taken sufficient measures not to accept the supply affected by a VAT fraud.

The question of how, when and what to prove is always crucial in tax inspections to be able choose an appropriate strategy. As can be seen from the individual instances when the tax authority bears the burden of proof, the distribution of the burden often changes during an inspection. It is important to recognise this turning point and adapt the procedural strategy accordingly.