4.25 Onus of Proof

Primary Reference to Article 16 – Burden of Proof

The issue of the onus of proof arises in a taxation context in a number of quite distinct circumstances. These include the following:

  • At the assessment stage,
  • At the objection stage
  • At the appeal stage; and
  • At the collection stage.

The last of these is dealt with in the discussion on collection.

In each except the last of these, the issue may be either

  • Whether the primary facts demonstrate an amount to be taxable or deductible;
  • Whether some discretionary process (such as application of an anti-avoidance rule) displaces the outcome otherwise applicable;
  • Whether a taxpayer is entitled to the benefit of a safe harbor due to having taken reasonable care or some such standard; and
  • Whether (in the case of an assessment going back a number of years) factors such as the existence or otherwise of negligence, fraud or evasion entitle the reopening of an assessment

Most taxation systems provide that, unlike the state of affairs normally obtaining when one person makes a claim on another, there is a reverse onus of proof.  Taxpayers must establish that they are not liable to tax, rather than the tax authority establish that they are. Typical of the justifications for this approach are the following:

It is criminal law policy that the prosecution should prove all the elements of an offence beyond reasonable doubt.... However, while departure from this standard is not to be undertaken lightly, placing the burden of proof on the defendant will be acceptable in circumstances where:

  1. the matters to be raised by way of defence are peculiarly within the knowledge of the defendant; and
  2. it would be extremely difficult and costly for the prosecution to be required to negate the defence.

And, in the context of safe harbours:

In this case it would seem that proper record-keeping, full and honest disclosure to a taxpayer's agent, and conformity with the advice of the agent are probably matters which could be said to be peculiarly within the knowledge of the defendant. In addition, it could be costly for the prosecution to obtain evidence of the record keeping of the defendant. It would also be difficult for the prosecution to prove full and honest disclosure and that the defendant followed the advice of his agent. Accordingly, it would seem that the reversal of proof is justified in this case.

But it should be noted:

  • An assertion of fact by the tax authority that is unsupported by evidence has no relevance or weight. It does not need to be disproved;
  • The tax authority bears an evidential onus of supporting any positive assertion it makes;
  • Once the taxpayer has adduced probative evidence that discharges his evidential onus, prima facie he has discharged his legal onus too. The evidential onus shifts to the tax authority;

The character of each of the legal relationships that are the necessary setting for working out the taxpayer's taxation liabilities is to be determined on the same evidence as would a civil dispute.

The same applies at the objection stage. The tax authority is not confined in the course of considering the taxpayer's "objection" to the matters raised by the taxpayer in that "objection". It has an obligation to administer the applicable legislation. It may determine to allow the objection for grounds totally unrelated to those raised by the taxpayer, if that be the correct course, just as it could form the view, based on a reconsideration of the matter, that the assessment should be confirmed for reasons which it had not previously considered.

It is only when the assessment and objection stages are complete, and the taxpayer (being dissatisfied with the outcome) seeks external intervention, be that curial or administrative, that the question of onus of proof properly arises.

At that point it needs to be kept in mind that if a dispute arises between the tax authority and a taxpayer and it is forwarded to a Court or referred to an administrative tribunal, that the tax authority appears before the relevant Court or tribunal as an opponent of the taxpayer. But this is not to exact tax improperly payable - rather it is to assist the Court or tribunal in coming to an answer to the statutory question as to whether the assessment is excessive having regard to the facts as ultimately determined and the law.

It also needs to be kept in mind that although, generally speaking, the taxpayer knows or should know the facts relevant to a correct assessment of his income, there are other facts which might be relevant on the hearing of an appeal. The relevant facts in the appeal include the view of the facts on which the tax authority has based its assessment, and the manner in which it has arrived at its assessment, including the possible application of an anti-avoidance rule. These facts are not within the knowledge of the taxpayer until disclosed by the tax authority.

The initial legal onus is rarely of importance after all the evidence is submitted because it is rare that competing evidence will balance the scales precisely.

The proper role of the onus of proof generally adopted in common law countries is thus set out below:

  • The taxpayer bears the ordinary civil onus, not any special onus;
  • The taxpayer discharges his onus by adducing evidence that – when weighed with any contrary evidence adduced by the tax authority - more likely than not shows either that (i) the assessment is invalid (so no debt is owed to the tax authority) or (ii) the amount assessed should have been less;
  • The same principle applies in relation to matters on which the tax authority bears the onus.
  • Regard is to be had only to the evidence adduced by each party. The slightest balance of probative evidence in favour of the taxpayer is enough for him to succeed. The taxpayer need not exhaust all the possible evidence that might be produced on a point. Any probative evidence will be sufficient to weigh the balance in his favour if there is no contrary evidence;
  • The taxpayer's sworn evidence is, if accepted, probative evidence of the fact in issue. It is wrong to treat it as prima facie suspicious;
  • The rejection of some evidence in support of a fact is not evidence of the contrary fact; and
  • If the court is satisfied on the evidence that the amount of the assessment is, on the balance of probabilities, excessive, but that the true amount is probably higher than that asserted by the taxpayer, it should making findings on the evidence before it as to the true amount.

Where penalties are applied on the basis of allegedly delinquent conduct, additional considerations arise. The Universal Declaration of Human Rights provides, in Article 11:

  1. Everyone charged with a penal offence has the right to be presumed innocent until proved guilty according to law in a public trial at which he has had all the guarantees necessary for his defence.

Accordingly, where fraud or evasion is asserted, or a claim of a penal nature is made, the presumption of innocence should apply, to be displaced only by positive evidence. To approach the matter in any other way is to reduce a fundamental right to a mere formalism, easily avoided by the device of imposing a tax penalty rather than a prosecution, even though the consequences may be almost as severe.

Such is the classic approach to the onus of proof. But we are witnessing an erosion of the rights of the taxpayer to a level playing field by certain measures which increase the taxpayer's burden of proof. These come in various forms but among them are:

  • The taxpayer has to show that none of the main reasons for an action was for tax purposes.
  • Discretion is given to the tax authority by words such as "where in the opinion of the Minister of Revenue...". Here the taxpayer has to show that the Minister exercised discretion invalidly by some standard.

It is easy and very tempting to draft tax legislation in this way, but it is unfair unless truly necessary.

Lastly, in applying tax avoidance rules, particularly where they are general in nature and derive from a violation, misuse or abuse of tax policy, the initial burden of proof to show that policy and how it is violated should rest on the tax authority.