Burden of proof in tax disputes could rest either on the tax payer or on the tax authority or sometimes both could bear the burden of proof. For instance under the United States and Canadian tax laws the primary burden of producing an adequate evidence to rebut the assessment or decision of the tax authority rests on the tax payer. On the other hand countries like Sweden, Netherlands and Spain in their tax laws share the burden of proof in tax disputes between the tax payer and the tax authority. Hence in these counties the burden of proof in tax disputes is shared between the litigating parties. As such the tax inspector must deduce evidence for a profit adjustment and on the other the tax payer must substantiate an exemption or deduction alleged. To the contrary tax laws in Denmark, France and Finland locate the burden of proving the accuracy of the tax decisions made according to estimation on the tax authority. Similarly in Hungary the tax authority is obliged to prove the bad faith of the tax payer when prohibiting the deduction on VAT. This shows that there are possibilities where by tax authorities could bear the burden of proof in tax disputes.
In Ethiopian context when tax disputes arise the first venue to visit by the tax payer is the tax review committee structured with in the tax authority. Its role is just to give recommendation to the tax authority. The next body available for aggrieved tax payers is the federal tax appeal commission, found outside of the tax authority and enjoys a relative autonomy and independence. Then the federal high court comes to picture at this point as a next step available for aggrieved tax payers. Up to this point the ordinary court of the country does not involve itself in tax disputes.
In our country when tax disputes emerge burden of providing whether an assessment of the tax authority is excessive or that a decision of the Authority is wrong, rests on the tax payer. The tax payer must deduce adequate evidence to rebut this tax law assumption. Hence leaving the burden of proof requirement on whether an assessment is excessive or that a decision of the Authority is wrong on the taxpayer have some negative consequences starting from the tax payer up to the economy of the country. For instance in estimated tax decisions it might be impossible for the tax payer to produce evidence in order to rebut the decision of the tax authority. But on the other hand proving the estimated tax decision could relatively be easy and possible for the tax authority. As such there should be some circumstances in Ethiopian federal tax laws where by burden of proof in tax disputes could be shared by the tax authority.
Consequently, this work explores how other jurisdictions place the burden of proof in tax disputes and compare the findings with Ethiopian tax laws regarding burden of proof requirements. The author of this work used a comparative analysis between tax laws in other jurisdictions and practical experiences with Ethiopian tax laws regarding burden of proof in tax disputes.
The works the author reviewed depicted the burden of proof standards in tax disputes in different jurisdictions vary tremendously. Worldwide there are a plenty of works related to burden of proof in tax disputes. However finding any work entirely devoted to burden of proof in tax disputes in Ethiopia is impossible. Therefore, this paper is justified because it explores the burden of proof standard in Ethiopian tax laws and renders a critical comparative analysis with foreign best experiences.
The general objective of this work is to comparatively analyze the stance of Ethiopian federal tax laws regarding the burden of proof requirement in case of tax disputes. The work mainly focuses on the examination of Major Ethiopian federal tax laws regarding burden of proof in tax disputes. The work will be employing doctrinal and empirical research method because of the nature of the research topic. Data collection instrument such as interviews is employed to gather the empirical data used in the research. The author employed foreign tax laws and Ethiopian federal tax laws as primary data. Plus, secondary data such as books, journals, periodicals and internet sources will be used specifically to examine issues dealing with the burden of proof requirement in tax disputes found in foreign tax laws. The assessment aims giving complete and detailed description. Finding tools such as publications are used. Legal analysis will be employed aiming to clarify and convey regal rules on the burden of proof in case of tax disputes The technique of analysis and interpretation of the data collected through the aforementioned tools will be analyzed qualitatively, aimed to uncover the problems pertinent to the tax payers in tax dispute with the tax authority and the possibility of shifting the burden of proof to the tax authority. In analyzing the data, the author will analyze Ethiopian federal tax laws in light of foreign tax laws and experiences.
This work is organized as follows, in the first part the notion of burden of proof and tax disputes are discussed in addition burden of proof in tax disputes under different foreign tax laws is discussed. In the next part burden of proof in tax disputes in Ethiopia, tax disputes litigation process, burden of proof under Ethiopian federal tax laws, the justification behind imposing the burden of proof on the tax payer and the implications are discussed. Lastly conclusion and recommendation are forwarded.
Burden of Proof
To start with the general burden of proof definition it is the obligation of a party to prove its allegation in a trial. Black’s law dictionary defines the concept by elaborating two components, burden of production and burden of persuasion. Burden of production literary means that the one who alleges a given fact for the affirmation of is claim also has the burden of producing relevant evidence to maintain the continuance of the case. On the other hand burden of persuasion relates to the activity of the party in convincing the trial judge to entertain the facts that suits the interest of the party. In civil proceedings the plaintiff is the one who bears the burden of proof for factual substance that support the claim in the initial stage of the proceedings. However later on the burden of proof may be shifted to the defendant, but in criminal proceedings the prosecutor shoulders the burden of proof in relation to facts that support the allegation.
Tax Disputes between the tax payer and the tax authority could originate in a number of different ways, starting from disagreements on the assessment of the tax, up to, disagreements on the understanding and interpretation of tax legislations by the parties and this could lead to a dispute.
But for our purpose this work will examine disputes which arise between the tax authority and taxpayers as a result of the disagreements in the assessments and the amount of tax liability imposed on the taxpayer. As such the tax assessment made and the decision rendered by the tax authority may not enable the parties to reach an agreement as to the facts and circumstances on which the tax liability rested. Hence tax disputes are inevitable scenario in the business world.
In Ethiopia a huge amount of tax disputes between the tax payer and the tax authority are related to tax deductions. The tax payer strives to make his/hers business expenditures to be deducted by the tax authority and on the other hand the tax authority endeavor to dis allow the deductions as much as possible. In our country the tax authority faces a lot of challenges in collecting a hefty amount of tax revenue for the government. Fraudulent activates are rampant among the tax payer community, hence mind of the tax authority is tuned from such perspective while deciding the amount of tax due to the tax payers.
Tax Dispute Litigation Process
When tax disputes between the tax payer and the tax authority arise in Ethiopia, the first administrative body to entertain the case is the review committee, which is established within the tax authority. The power of the review committee is to make recommendations to the authority regarding the tax dispute. There is a directive which specifies the procedure for reviewing a tax payer objection including hearings, and the basis for making recommendations to the authority.
A tax payer dissatisfied by the decision of the review committee may file a notice of appeal to the tax appeal commission. The tax appeal commission is a body established outside of the tax authority as such it enjoys autonomy and independence. An appeal from the decision of the tax appeal commission lies to the high court which will entertain errors of laws only. A party dissatisfied with the decision of the federal high court could lead the case to the Federal Supreme Court. Still again if a party is aggrieved with the decision of the high court or Supreme Court, he/she has one opportunity to seek review of judgment if the decisions of the Supreme Court or the high court contain fundamental error of law.
Burden of Proof Under Ethiopian Federal Tax Laws
Before I embark in to the details of the subject matter its worth mentioning the legal ground for Ethiopian tax laws. The first legal document for taxation matters is the F.D.R.E constitution. The constitution follows a federal structure as such it shares taxation powers between the federal and regional states. Federal tax administration power is vested on the ministry of revenue. As such the ministry is duty bound to implement and enforce the tax laws.
When we indulge to Ethiopian tax laws they are clear enough to depict where the burden of proof lies in case of tax disputes. For instance the tax administration proclamation, the repealed income tax proclamation, the VAT proclamation, the turn over tax proclamation and the excise tax proclamation all stipulated that the burden of proof in tax disputes entirely rests on the tax payer.Hence the tax payer is the one who bears the burden of proof regarding the excessiveness of the assessments done by the tax administration or the wrongness of a decision of the tax administration. In addition under tax appeal commission working directive 02/2011 article 5(2), the applicant must provide relevant evidences to ascertain his/her claims before the tax appeal commission. Requiring the tax payer to bear the burden of proof in the initial stage of the tax dispute process seems in compliance a burden of proof requirement in civil litigations.Hence the tax payer is required to come forward with sufficient credible evidence on factual issues to allow the tax review committee, the tax appeal commission or the ordinary courts to decide the issue in favor of the party. Contrary to the current tax laws, Ethiopia used to have an agricultural income tax law, which encompassed the possibility of sharing the burden of proof in tax disputes between the tax payer and the tax authority.
For instance to see the procedure followed by the tax appeal commission, the commission’s directive No 02/2011 made it clear that once the tax payer deduced adequate evidences to ascertain his/her claims, the burden of the proof in the litigation process will eventually shift to the tax authority. The bench is using preponderance of evidence method to examine tax civil cases brought to it. In this regard the author of this work went to examine the practice of tax appeal commission and conducted an interview with the president of the tax appeal commission; he noted the logical assumption of the tax laws on resting the initial burden of proof on the tax payers in tax disputes. However, sometimes the tax authority uses the burden of proof requirement in its favor by imposing unjustified amount of tax on the tax payers. In addition in house memos and circulars are used by tax authorities in deciding the amount of tax due to the tax payers. As such the commission plays a vital role in shifting the burden of proof to the tax authority and requires them to base their tax assessment on the tax laws and to come up with a justified tax assessment decisions.
However the burden of proof requirement in criminal proceedings is different. The government has the burden of proof in criminal matters because it initiates the proceedings. In addition the standard of criminal liability is very much higher than the preponderance of the evidence requirement in civil proceedings. The prosecutor must prove beyond a reasonable doubt that the tax payer is liable in relation to criminal tax matters.
The Justification behind Imposing the Burden of Proof on the tax Payer
It is worth to note the justifications behind the Ethiopian tax laws imposing the burden of proof entirely on the tax payer. One possible justification could be the aggressive aspiration of our tax policies towards collecting a hefty amount of revenue in order to address our balance of payment issues. Generating revenues is the most important goal of the Ethiopian tax system, because of the urgency to meet the targets set by the GTP II, by maximizing tax revenues. This plan sets a massive target to improve the tax share of the GDP in Ethiopia. The tax authority also follows this path by placing “increasing revenue” as the primary goal of the authority.
Hence to achieve this benchmark the tax laws are very essential instruments by which they empower the tax administration to collect a greater amount of revenues from tax payers. The imposition of burden of proof in times of tax disputes entirely on the tax payer connotes that the tax administration is permitted to relentlessly generate revenue by whatever means possible, as such it may not be surprising to witness our tax laws imposing the burden of proof requirement on the taxpayer. Hence from the vantage point of the infamous Ethiopian tax administration our tax laws made out comes of tax proceedings predictable and also possible for it to generate revenue by hook or crook from tax payers.
The justification of imposing the burden of proof in tax disputes entirely on the tax payer could be the assumption that the tax payer is the one who mainly engages in the taxable operation hence he/she should provide relevant documents at times of dispute with the tax administration. This seems a logical method to expect the tax payer to deduce adequate information to the auditors of the tax administration when this information is needed by the tax auditors, because the tax payer is the one with closer access to these documents and providing them could help him/her to reduce the tax burdens.
What Are The Implications?
The imposition of the burden of proof entirely on the tax payer has different implications when pictured from different perspectives. For instance for the tax authority it is an advantage when the burden of proof is entirely shouldered by the taxpayer, this has a positive implication from the perspective of the tax administration at least in generating revenue from a tax payer. As stated above to fulfill the desires of collecting a much greater revenue by the tax administration there must exist such kind of laws that pave a way and enable the administration to stretch his hands in the tax payers pocket and tear whatever it finds there.
When we come to the implications of imposing the entire burden of proof in the shoulder of the tax payer; among other things this method opens a door for the possibility of arbitral decisions by tax auditors of the administration. Since the burden of proof rests on the tax payer it becomes problematic to provide evidence to rebut the arbitral tax decisions made by the tax authority. The auditors of the tax authority could eventually involve in corruption and persuade the tax payers to deal with them in order to avoid tax burden, but this is another unjust recourse. Hence, the burden of proof requirements in our tax laws have a negative implication on the tax payer because of the impossibility of proving an unjust and arbitral decision of the tax administration. As a result the right to access to justice of the tax payers could easily be endangered because of this burden of proof requirement threshold damped on the tax payers by our tax laws. Seeing the whole picture from the bird’s eye view this practice has damaging factor on prudent businesses and investors and deter them from fully engaging in economic activities. As a result the economy of the country will be impacted negatively.
This is a worst scenario when it comes to taxes imposed on the taxpayers based on estimations. Ethiopian tax administration proclamation 983/2016, article 26 stipulated estimated assessment method. This type of assessment is conducted by the tax authority when the tax payer fails to file a tax declaration for a tax period as required under a tax law; the tax administration may on such evidence as may be available and at any time could make an assessment. In addition the tax administration has its own assessment directive for estimated taxes (Directive no 138/2010 estimated taxes assessment directive issues in 2010 ERCA). However despite the existence of this assessment directive for estimated taxes, discriminatory and arbitral tax decisions are made. The tax auditors are not legally obliged to prove the adequacy of the tax decisions they made following the estimation method, as such the tax decision made by estimation highly depend on the personality or morality of the tax auditors. One could imagine the high probability of disputes arising from estimated tax decisions. But still Ethiopian tax laws require the tax payer to prove the wrongness of the tax authority regarding estimated tax decisions. Mentioning the experiences of foreign jurisdictions in this regard is relevant, for instance tax laws in Denmark, France and Finland locate the burden of proving the accuracy of the tax decisions made according to estimation on the tax authority. However, if the tax administration succeeds in proving the accuracy of the estimation, then the burden will shift to the tax payer. This scenario has its own positive effects on the tax payer because the burden of proof on estimated tax decisions lies on the tax administration. In doing so the tax payer is relived from the duty to ascertain the wrongness of the estimation made by the tax administration.
Having this in mind the author of this work conducted an interview with Dr. Tadesse Lencho regarding burden of proof in tax disputes in Ethiopia. He pointed the structural deficiencies of Ethiopian tax laws in relation to burden of proof in tax disputes, the federal tax laws are one sided and inequitable eventually if it is not impossible it is very hard to prove any arbitral decisions of the tax authority. Tax auditors of the authority treat the big companies who are conducting their business in appropriate manner similarly with small traders in Merkato who conceal their income and mostly involve in tax crimes. As such to rebut the presumption of the tax authority makes the burden of proof unrealistic for the tax payers. Even in the first place the tax payer must not even engage in this kind of unjustified and arbitral tax decisions, let alone bear cumbersome evidentiary thresholds. Lastly the interviewee said “the tax authority is untamed horse” Hence there should be a check and balance mechanism put in the tax laws where by the burden of proof could be shared among the tax administration and the tax payers.
In a nutshell, if unjust tax decisions of the tax authority are not effectively challenged by the justice system as a result of strict burden of proof requirements on the tax payer, and then investment and enlarging of existing businesses are not desired by tax payers leading to slow economic activities. Stagnant economic activities in the county will impact the revenue authority in its revenue generation task. As a result the economy of the country will be affected at large. As such tax laws are important aspects of an economy which needs to be crafted carefully by considering major concerns of tax payers.
Tax disputes are inevitable scenarios in the business world. Burden of proof in tax disputes could rest either on the tax payer or on the tax authority or sometimes both could bear the burden of proof. This work tried to depict the experiences of foreign countries regarding burden of proof in tax disputes. Some countries rest the burden of proof in the tax payers while others share the burden between the tax payer and the tax authority, in addition selected countries rest the burden of proof on the tax authority.
Under Ethiopian federal tax laws the burden of providing whether an assessment of the tax authority is excessive or that a decision of the Authority is wrong rests on the tax payer. The tax payer must deduce adequate evidence to rebut this legal assumption.
Putting the initial burden of proof in tax disputes on the taxpayer could be justified because of the need to generate revenue for the country and also because the tax payer is there always doing the business with creditable evidences so he/she is expected to deduce sufficient information to rebut the assertion of the tax authority.
However the down side putting the burden of proof only on the tax payer may trigger tax assessors and auditors to decide arbitral tax debt on the taxpayer. As such disproving this unfair tax assessment could be a very hard task, if not impossible, for the tax payer. Hence this scenario will have a negative implication on the right to access to justice for the tax payer because the evidentiary burden of proof will bar the tax payer to freely access the justice machinery and rebut the legal assumption in order to defeat the tax authority. As such the guilty minded tax authority of Ethiopia tend to treat all tax payers in similar way in which prudent tax payers could be negatively affected by wrong assumption of the tax authority towards them. This practice has its own elongated implication on the doing of business and investment in our country. If tax payers are treated in tax disputes in a way that endanger their constitutional right to access to justice, they don’t what to do business and invest or even if they engage in economic activities, they tend to evade or avoid taxes which were supposed to be revenues for the government. As a result economy of the country could be hit by deficiency.