The rules for providing evidence, related tax authority obligations as well as taxpayer rights are crucially important during a tax inspection. This article provides some help here, paying particular attention to the provisions of the draft tax administration law, effective from 2018, which lays down limitations in this respect.
Rules for providing evidence – in a nutshell
The rules for providing evidence are prescribed by Act XCII of 2003 on Rules of Taxation and Act CXL of 2004 on the General Rules of Public Administration Procedures and Services. “Freedom of evidence” generally crops up during tax inspections, which means that the Act on Rules of Taxation only lists tools and examples of evidence, while the tax authority can freely choose the applicable means of evidence it wants.
The NAV evaluates evidence one by one and as a whole, and establishes the facts of the matter on this basis at its own (free) discretion. The most common way of providing evidence is to compare and evaluate the documents, receipts and records required to assess taxes. In addition, the tax authority can summon taxpayers to make declarations, it can hear witnesses, or it can initiate a related investigation. Of course, taxpayers are also entitled to submit motions. It is important that evidence provided but ignored, and the reasons for this, must be included by the tax authority in its decision. One of the most important tools for the taxpayer in providing evidence and putting forward arguments is to make comments on the inspection report. The tax authority mainly expresses its position in a decision.
Obligation to produce evidence and reversal of the burden of proof
The obligation to produce evidence determines the party responsible for providing evidence according to procedural rules, while the reversal of the burden of proof means that failure to provide evidence may result in findings detrimental for the taxpayer.
During the inspection the tax authority is obliged to clarify and prove the facts of the matter. It is very important when clarifying the facts that the NAV is also obliged to disclose facts in favour of the taxpayer. The taxpayer’s obligation (task) in producing evidence is very limited, and basically restricted to cases when the taxpayer is entitled to a tax exemption or tax allowance, as this must be proven by the taxpayer with a document or other relevant means.
In estimation procedures (e.g. examining wealth gains), the taxpayer can prove estimated differences from the tax base with reliable data. So in the case of estimations, the burden of proof shifts, but this does not mean that the tax authority is exempted from its obligation to clarify the facts of the matter, i.e. it can abandon the taxpayer in relation to providing evidence.
What does “providing evidence in dribs and drabs” mean?
A tax inspection can cover a period that is about to lapse, so it is questionable whether the NAV can close the inspection with a final decision before the limitation period expires (in the case of personal income tax this means within 6 years of the relevant fiscal year). In these cases, taxpayers may engage in malicious conduct that is difficult to identify, i.e. withholding evidence or finding the right time to put forward proposals to extend the term of the inspection and the subsequent public administration procedure.
This can cause difficulties for the inspectors in many respects as the tax authority is obliged to examine the proposals put forward by taxpayers related to providing evidence, and clarify the facts of the matter, even if this means the final decision may not be made in a timely manner.
Limitations on providing evidence according to expected new rules
The draft tax administration law prescribes stricter deadlines for tax inspections. According to the draft law, a tax inspection must be finished within 365 days, and there is a deadline of 30 days to make comments on the report closing the inspection, after which the taxpayer loses this right.
One of the most important potential changes is that when submitting an appeal it is not possible to bring up new facts, or refer to new evidence which the appellant was aware of before the first-instance decision, but refused to submit or refer to it despite a call from the tax authority.
The appellate tax authority may also take action for facts to be supplemented. According to the draft law, the procedural deadline will be 90 days following receipt of the order sent to the first-instance tax authority from the superior authority. This “extra” period for producing evidence will extend the deadline for legal remedy proceedings.