Unburdening the burden of proof

In taxation, tax audits by the taxman are to be expected. During the audit process, the taxpayer is expected to provide documentary evidence to support their explanations in the context of issues raised by the taxman.

In Tanzania, some of the common queries that taxpayers are likely to encounter during audits of their tax affairs include evidence to support realization of foreign exchange losses, evidence to indicate that intragroup services were indeed rendered and evidence to indicate that a certain expense was actually incurred.

Provision of documentary evidence to the taxman is key to ensure contentious issues are resolved before an assessment is issued. The significance of providing requested documentary evidence was emphasized in tax appeal No. 2 of 2014 between Kenya Kazi Security and Commissioner General, the Tax Revenue Appeals Board, whereby the Board stated as follows:

“It was the Appellant’s legal duty to avail documentary evidence to prove that such services were actually rendered by the ultimate holding company. In the absence of availing such evidence, the Respondent is justified in disallowing such expenses”.

The above position was also echoed by the Court of Appeal in civil appeal No. 401 of 2020 between Unilever Tea Tanzania Limited and Commissioner General, whereby the court stated that “the onus is on the taxpayer to establish its case thus ought to provide relevant documentary evidence to ascertain her provided explanations “.

In a nutshell, the burden of proof in tax matters usually lies with the taxpayers. Hence, taxpayers should prioritize readying documentary evidence in relation to significant expense figures that are likely to be queried, procured foreign services that are likely to be ascertained or any potential items that the taxman is likely to query. In practice, the Tanzania tax administration law requires that any evidence that is not availed during the audit stage cannot be used as evidence in a later stage of the dispute resolution.

Some of the ways that taxpayers can prepare on this is by doing tax health checks which will pinpoint potential areas of interest that taxman might request documentary evidence. Tax health checks are akin to body health checks which aim to highlight the ailing parts of the corporation from a tax perspective and the best way to address the inherent tax exposures including but not limited to potential documentary evidence to substantiate certain items.

A friend of mine was surprised at the pile of files I was carrying when we met at one of the TRA’s office premises. He wanted to know the purpose of such files. Obviously, these files are intended to serve as documentary evidence relating to the incurrence of certain expenses by one of our clients as requested by the taxman.

He then asked whether providing all such files in hardcopy is not a burden to me as a tax consultant and our client as a taxpayer. His question challenged conventional thinking and it was clear that although the burden of proof is always on the taxpayers ideally it should not be this cumbersome.

I believe that to unburden the burden of proof on taxpayers, the following areas need to be revisited:

• modality of providing evidence;

• specificity on requested evidence; and,

• shiftability of burden of proof.

Currently, the modality of providing documentary evidence to the taxman constitutes printing two sets of documentary evidence in hardcopy during tax audit, printing two sets of documentary evidence in hardcopy during objection stage, printing five sets of documentary evidence in hardcopy while submitting statement of appeal at TRAB and printing three sets of documentary evidence in hardcopy during hearing of the case before TRAB.

This process is indeed burdensome to taxpayers as it subjects them to the unnecessary effort of printing and re–printing similar set of evidence during different stages of the dispute resolution. Since the world has gone digital, it is obvious that taxation and its corresponding aspects should follow suit. Thus, it might be better to develop tax IT infrastructure to enable taxpayers to provide documentary evidence electronically in different stages of dispute resolution as opposed to the current paper-based process.

For lots of tax audit scenarios, the taxman has been stating specifically the nature and type of documentary evidence required for purposes of resolving any misunderstanding in the context of issues queried by taxman. However, there are some very few instances where the taxman doesn’t specifically state the nature and type of documentary evidence being requested. It would be helpful if the taxman specifically states the type of documentary evidence to be availed say tax invoices, relevant contracts, travel tickets to ascertain the procurement of foreign services.

In conclusion, the taxman should take note that once taxpayers have discharged their burden of proof, the onus now shifts to the taxman to avail evidence to back up their reasoning for rejecting the taxpayers’ evidence. This also applies when they need to support their position in how they treat certain matters that are contrary to taxpayers’ expectations as stated by the Court of Appeal in the celebrated civil appeal No.14 of 2007 between Insignia Limited and Commissioner General (TRA).

The view stated above are those of the author and not necessarily those of his employer