Background
Normally, the tax inspector must establish the facts leading to a higher tax liability, whilst the taxpayer must establish the facts that reduce the tax liability. If a taxpayer has not filed the required tax return, the burden of proof is reversed and increased pursuant to article 25(3) and article 27e of the General Tax Act (GTA). This means that (i) the burden of proof, if it does not already rest with the taxpayer, shifts to the taxpayer and (ii) the taxpayer must demonstrate that and to what extent the tax assessment imposed by the inspector is incorrect. ‘Demonstrating’ is a very high standard of proof and implies that there must be no doubt as to what needs to be proven.
When the burden of proof is reversed
If a tax return contains substantive errors, this may lead to the conclusion that the required tax return has not been filed. According to the Supreme Court, this is the case if the tax due as stated in the return is significantly lower than the tax actually due, both in relative and absolute terms. Furthermore, the taxpayer must have been aware of this (or at least should have been) at the time the return was filed.
For many years, it was established case law that if the required tax return had not been filed, the burden of proof would be reversed and increased for the entire tax assessment. In practice, doubts had arisen as to whether the Supreme Court still held this view. In the so-called ‘trust question’ judgment of 27 May 2022, the Supreme Court ruled that whilst failure to answer questions on the tax return form, or answering them incorrectly, does indeed lead to the conclusion that the required tax return has not been filed, the reversal and increase in the burden of proof is limited to the points at issue for which the answer to that question may be relevant. Advocate General Koopman advised the Supreme Court to extend this line of reasoning to cases in which the required tax return has not been filed as a result of substantive errors. This would have represented a significant relief for taxpayers.
Supreme Court judgment
The Supreme Court has now resolved the uncertainty. The Supreme Court does not follow its Advocate General and adheres strictly to the wording of the law. It follows from this that if the required tax return has not been filed, the consequence is that the heightened burden of proof applies to the entire tax assessment. The Supreme Court therefore sees no scope for limiting the reversal and increase of the burden of proof to specific points of dispute. As mentioned, the Supreme Court did see such scope in cases where the error in the tax return consists of failing to answer questions or answering them incorrectly. The Supreme Court confirms this once again in the present judgment.
Impact
A single substantive error in the tax return can have major consequences for the burden of proof regarding all points of dispute within the same tax assessment, even if they are unrelated to the original error. This has far-reaching implications for taxpayers, as they will have to demonstrate convincingly, in respect of the entire contested assessment, that it is incorrect and to what extent.
This poses particular difficulties in complex tax disputes where the interpretation of facts plays a major role. This occurs, for example, in disputes over transfer pricing, where there is often no single correct outcome. For a transaction, it will generally not be possible to determine a single arm’s-length price, but rather a range of prices that independent parties could have agreed upon. It is precisely because of this inherent uncertainty that it can be particularly difficult to demonstrate that the inspector’s adjustment results in a price outside the range. Furthermore, even in respect of items where a taxpayer initially had a strong evidential position, they may face a significant challenge following the reversal and increase in the burden of proof.
It should be borne in mind that the thresholds set by the Supreme Court in its case law for the absolute and relative ‘significant’ tests are relatively low. A correction of a few thousand euros resulting in a relative deviation of 10–20 per cent is often sufficient. Consequently, an error in the tax return can quickly lead to the conclusion that the required tax return has not been filed, provided that the requirement of awareness is also met. It is therefore expected that the requirement of awareness will play a prominent role in future discussions regarding whether the required tax return has been filed. The fact that a tax return subsequently proves to be incorrect is not sufficient to reverse and increase the burden of proof. When filing the return, the taxpayer must have known, or ought to have been aware, that the substantive defect would result in a significant amount of tax not being levied. In this regard, what matters is what the taxpayer, having regard to all the circumstances of the case, could reasonably have believed regarding the position taken in the return. An objectively defensible position plays a major role in this regard, but so does, for example, the question of whether a taxpayer sought expert advice before filing the return. The court may also take the complexity of a case into account.
Should you have any questions on this topic, please contact your regular trusted Loyens & Loeff contact or one of the authors mentioned below.
