New laws taking effect on 1 January next year will transform the tax audit procedure and the way tax lawsuits unfold. While some of the amendments are business-friendly, they also conceal a number of traps that are clearly detrimental to taxpayers’ interests. For example, the rights of taxpayers to defend themselves against the tax authority, and to make use of experts, will be compromised.

It’s never too soon to start building your defence

In the present system of tax procedures, taxpayers have numerous opportunities to put forward a defence. They have more or less unlimited scope to present a position that differs from that of the tax authority, and to back this up with evidence. Evidence can be attached upon submitting comments on the tax authority’s audit report, upon appealing against the decision and, as a last resort, upon filing a claim in court against the tax authority’s final decision. In this system it is common for a company to rely on the opinions of tax advisors during the tax-procedure stage of the process (that is, until the second-tier decision is passed), and then to engage a specialist tax lawyer for the judicial review.

However, the avenues for putting up a defence will be more limited from January. Under the new laws, taxpayers will not be permitted to refer to new facts or present new evidence, either when appealing the decision of the tax authority or in a judicial proceeding. Effectively, the comments on the audit report, which traditionally have not usually carried much weight, will be the last opportunity for the audited entity to state a position that opposes NAV’s position, or to present new evidence. (It should be noted that the prohibition on additional evidence only applies if NAV has already called on the company to present the evidence in question. NAV, however, can easily get around this by calling on the taxpayer to present “all the evidence relating to the case”.)

What’s the problem with this? The taxpayer does not know what NAV’s specific objections are until it reads the audit report, as the tax authority rarely reveals this information in advance. At that point they will have a mere 30-day’s deadline in which to involve an advisor and bring it fully up to speed regarding the case, in order to respond effectively to NAV’s audit report, and to present all the evidence and arguments needed to refute NAV’s claims. And 30 days is very little time for this. What’s more, if the deadline is missed, the law provides no opportunity for leniency.

This makes it particularly important for the audited company to be fully prepared for the inspection, and to understand why NAV is requesting certain documents and information and, based on this, what its findings are likely to be. This, however, is no easy task. Also, a specialist who will be able to handle the entire case (including representation in a judicial procedure) needs to be engaged right at the start, during the inspection stage. This is because, due to the limited opportunities to present new evidence later, it would be ill-advised to start using a new representative in a later stage of the procedure.

One expert above all

A significant proportion of tax lawsuits are presently decided on the basis of expert opinions. This is particularly true in the case of transfer pricing lawsuits, but the judging of numerous other taxation issues also requires expert opinions to be obtained in advance.

The new laws, however, significantly limit the opportunities for using experts in tax proceedings. According to the rules that come into force in the new year, if NAV uses an expert, then by default the court also has to appoint the same expert. And having done so, it will then only rely on the opinion of this expert during the course of the lawsuit; other expert opinions will not have a role in the case. This means that the opinion of the expert appointed by the tax authority is what will essentially decide the dispute.

Although the explanatory section of the law says that this rule cannot result in a breach of interests for the company, because the tax authority always appoints an independent expert, in reality the situation is not so clear-cut. NAV usually views the tax case with a preconception; that is, the presumption of a breach of tax obligations, which will have an influence on the expert’s opinion. Among various other factors, this is reflected in the kind of questions the tax authority puts to the expert, and how it phrases these questions. And even if we take the experts’ impartiality as a given, the taxpayers’ rights are still seriously prejudiced by the fact that the new Act on Tax Procedure provides it with no guarantees whatsoever during the selection of the expert: the company being inspected cannot recommend an expert, cannot object to the expert appointed by NAV, and cannot comment on the questions put to the expert.  The fact that a court will later base its judgement on an expert opinion prepared under such circumstances gives rise to serious constitutional concerns.

What can we expect?

As the new laws will limit the company’s opportunities to defend its position at a later juncture, it is critical that it be able to deploy all the weapons in its arsenal at the earliest possible stage of the procedure. It is unfair, though, that while the taxpayer will need to expend considerable defence costs in the early stage of the procedure, nobody will reimburse these costs to it – even if it turns out that the tax authority was in the wrong after all.