Case-Law Rulings by the Supreme Administrative Court

Interesting Tax-Related Case-Law Rulings by the Supreme Administrative Court – documenting standard (reference) prices

Ruling No. Afs 74/2010-81 has been published in the Collection of Rulings of the Supreme Administrative Court No. 4/2012. The dispute involved the tax authority’s increase of a tax entity’s tax base by the difference between the agreed rent for residential and non-residential premises and the arm’s length rent for comparable premises (the “reference” or “standard” price). The Regional Court upheld the decision of the tax authority and the appellate body, which propelled the tax entity to take the matter to the Supreme Administrative Court.

The Supreme Administrative Court dismissed the Regional Court’s judgment and ordered the Court to dismiss the tax authority’s decision and return the case to the tax authority for further proceedings. The judgment includes the following interesting conclusions of the Supreme Administrative Court:

- There is a principle in tax proceedings that a tax entity is required to make a statement in relation to their tax duty and, also, shall bear the burden of proof in respect of such statements. However, this general rule does not apply to certain circumstances where both the burden of statement and the burden of proof rest with the tax authority, which is where the application of Section 23(7) (first sentence) of the Income Tax Act comes into play, under which the tax authority shall adjust the taxpayer’s tax base if prices agreed between related parties differ from standard prices (unless the taxpayer sufficiently supports the grounds for the difference). Hence, the tax authority bears the burden of proof that is substantial to prove the case;

- Primarily, the tax authority must prove that the parties involved are related in terms of capital or otherwise as per Section  23(7) of the Income Tax Act. If it manages to do so, the tax authority shall then proceed to find out and document the amount of the reference price to compare it subsequently with the challenged price. If the tax authority manages to prove the difference, it is required to provide the taxpayer with the opportunity to explain the difference;

- The Supreme Administrative Court defined in great detail the circumstances necessary for ensuring an accurate calculation of the reference price and that the tax authority is required to find out, apply correctly, and be able to prove and document the circumstances. The Supreme Administrative Court also ruled that the tax authority must be able to document all substantial parameters pursuant to which the related parties agreed on their price. Merely disputing the tax entity’s statement is not sufficient. If the tax authority is not able to disprove the tax entity’s statements, it would have to follow them or, as the case may be, adjust them with other evidence.

The Supreme Administrative Court’s judgement also implies the importance of raising objections against the tax authority’s findings and conclusions as early as possible. Since the tax entity did not raise an objection that the authorities had failed to prove any personal connection between it and the tenant until its cassation complaint, the objection is inadmissible as it was not raised in the Regional Court even though the tax entity could have done so. The Supreme Administrative Court therefore overruled the objection.