Tax Controversy Update February 2023

In addition, we note that the Dutch State Secretary of Finance recently reported on the conclusions of a research study regarding the legal protection offered in the International Assistance (Levying of Taxes) Act (the WIBB) regarding the exchange of information to other (member) states. This research study was prompted by case law of the Court of Justice of the European Union (of 6 October 2020, ECLI:EU:C:2020:795) which appeared to imply that in case of a third party information request, member states should provide for sufficient legal remedy. The State Secretary concluded that an effective remedy in court is available to the parties, and therefore legal protection is adequately guaranteed in the WIBB. This conclusion is somewhat unsatisfying, as in the Netherlands, no regular objection and appeal procedure is open for the taxpayer (or another affected party). The affected parties have to seek remedy in civil court. Commencing civil proceedings does not suspend the obligations under the WIBB.

(i) Recent case law relating to the burden of proof in relation to tax fines

In various recent decisions (such as the ruling of the Dutch Supreme Court of 3 February 2023, ECLI: NL:HR:2023:97), the Dutch Supreme Court addressed that the tax inspector has an increased burden of proof in case he wants to impose a tax fine on a taxpayer. The recent case law makes clear that a tax fine imposed on a taxpayer will only hold in case the tax inspector demonstrates convincingly (overtuigend aantonen) that all elements and required facts and circumstances to issue the fine (beboetbare feit) are met. The case law makes clear that it, contrary to what the Dutch tax authorities had argued, is insufficient if these elements are only submitted as being plausible (aannemelijk) by the Dutch tax authorities. These safeguards follow, according to the Dutch Supreme Court, from article 6 of the European Convention of Human Rights. In its decision of 13 January (see also further below under (ii)) the Dutch Supreme Court explicitly ruled that such increased burden of proof also applies in cases of ‘gross negligence’ (grove schuld).
 
Following this recent case law, it always needs to be carefully reviewed and tested whether the tax inspector has met the increased burden of proof as stipulated by the Dutch Supreme Court. If this is not the case, there may not be room to impose a fine on the taxpayer. 

(ii) Principle of legitimate expectations in relation to a Horizontal Monitoring agreement

Recently the Dutch Supreme Court issued an interesting court decision with respect to, inter alia, the question whether taxpayers may have legitimate expectations that the tax inspector will not impose an additional tax assessment in case a Horizontal Monitoring agreement is in place.

Horizontal Monitoring between taxpayers and the Dutch tax authorities

In general, taxpayers have under certain circumstances the possibility of entering into a so-called Horizontal Monitoring agreement (Horizontaal Toezicht) with the Dutch tax authorities. The key words under such agreements are cooperation, mutual trust and transparency between the Dutch tax authorities and the taxpayer. Agreements under Horizontal Monitoring are in principle available for certain large companies by means of an individual agreement (individueel convenant). For small and medium companies Horizontal Monitoring takes shape in various ways, for example by means of an agreement between the tax advisor of the taxpayer who takes care of the tax returns and the Dutch tax authorities (fiscaal dienstverlenersconvenant). The intention of such agreements is to have a transparent and open relationship, in which both parties discuss relevant tax issues on a real-time basis to enhance compliance in an efficient way. Benefits for taxpayers under Horizontal Monitoring agreements are the possibility of communication with the tax inspector in an early stage (e.g. before an investment decision is made or a tax return is filed) and adapted supervision by the Dutch tax authorities (such as in audits). Under such agreements, the laws and regulations remain fully applicable.

The case in the Dutch Supreme Court ruling of 13 January 2023, ECLI:NL:HR:2023:26

The reason for the recent Dutch Supreme Court ruling was a discussion between a taxpayer (a plastic surgeon) and the Dutch tax authorities about the qualification for tax purposes of a loan that was provided to the plastic surgeon by his holding company. The tax return for the Dutch personal income tax (2010) of the plastic surgeon was filed under a Horizontal Monitoring agreement between the tax advisor and the Dutch tax authorities (fiscaal dienstverlenersconvenant). The tax inspector imposed the tax assessment (2010) in accordance with the tax return.  Afterwards, the tax inspector imposed an additional tax assessment on the plastic surgeon for the amount of the loan (around EUR 800,000), taking the view that this loan should have been characterized as a profit distribution. The tax inspector also imposed a fine for an offence (vergrijpboete) of 50% of the tax amount involved.

With respect to the tax procedural aspects of this case, the plastic surgeon invoked the principle of legitimate expectations (vertrouwensbeginsel). He argued, in short, that the tax inspector was not in a position to impose an additional tax assessment because a Horizontal Monitoring agreement was in place, which raised the legitimate expectation that tax corrections through additional assessments will not take place after issuance of the original tax assessment.

Judgment of the Dutch Supreme Court with respect to the principle of honouring legitimate expectations

The Dutch Supreme Court provided some new rules for the application of the principle of legitimate
expectations in case a Horizontal Monitoring agreement is in place.
 
In cases where the tax inspector did not make any explicit statements to the taxpayer or his advisor (such as in the case at hand) with respect to the tax return process, the following applies:

• According to long standing case law, the fact that the tax assessment has been determined in accordance with the tax return filed is as such insufficient ground to trigger legitimate expectations with the taxpayer.
• To constitute legitimate expectations, on which a taxpayer can rely, one or more other circumstances are required that could have given the taxpayer the impression that the assessment with regard to a certain item was determined on the basis of a position deliberately adopted by the inspector.
• These rules also apply in case the tax return was submitted by a taxpayer participating in Horizontal Monitoring or by a tax advisor participating in Horizontal Monitoring (on behalf of the taxpayer).

In its decision the Dutch Supreme Court also mentioned the that the Horizontal Monitoring policy rules did not provide any specific indications that could have led to the taxpayer’s impression that there was no longer room for the tax inspector to make corrections.

Observations

In our view, the decision of the Dutch Supreme Court leaves room for the argument that under certain specific circumstances, legitimate expectations of a taxpayer may imply that a tax inspector in Horizontal Monitoring situations is no longer in a position to make corrections. Unsurprisingly, the existence of such agreement in itself is in principle not a sufficient reason to successfully invoke the principle of legitimate expectations.  However, if specific circumstances could have given the taxpayer the (legitimate) impression that the assessment was determined based on a position deliberately adopted by the inspector, taxpayers may have room rely on this. This could for example be the case if the tax inspector made explicit statements in writing to the taxpayer or his advisor.
 
The application of a Horizontal Monitoring agreement in combination with discussing a certain tax matter between the taxpayer and the tax inspector can therefore be of importance for successfully invoking the principle of legitimate expectations.

(iii) Partial shift and increase of the burden of proof

The Dutch Supreme Court ruled in another interesting case on the shift and increase of the burden of proof (decision of 27 May 2022, ECLI:NL:HR:2022:767). Before this ruling, the shift and increase of the burden of proof on the taxpayer, based on an incorrectly filed tax return, was assumed to apply integrally for the whole of the tax assessment. In this ruling, the Dutch Supreme Court provides for more leeway with respect to the shift and increase of the burden of proof with respect to cases where a tax return was filed incorrectly. 

Shift and increase of the burden of proof (omkering en verzwaring van de bewijslast

The burden of proof is, as a procedural ‘penalty’, shifted by law towards to the taxpayer and is increased if:

• the taxpayer did not file the ‘required tax return’ (vereiste aangifte); in short, the required tax return is generally not filed if (a) no tax return is filed; or (b) a significantly incorrect tax return was filed (of which the taxpayer was, or should have been, aware); or
• a decision requiring information was imposed on the taxpayer that has become final (onherroepelijke informatiebeschikking). A decision requiring information may be imposed on a taxpayer by the Dutch tax authorities if the taxpayer has failed to reply satisfactorily to an information request of the Dutch tax authorities or if the taxpayer has not complied with the obligation to keep records.

In the case at hand, the required tax return was not filed (see (i) above). In an older case of 24 November 1990, the Supreme Court ruled, in short, that the tax return either is the required tax return or not (it cannot ‘partially’ be the required tax return). The consequence attributed hereto was that the shift and increase of the burden of proof also apply to the entire assessment (i.e. not ‘partially’).

The case in the Dutch Supreme Court ruling of 27 May 2022, ECLI:NL:HR:2022:767

In the case of 27 May 2022, the taxpayer answered one of the questions on his 2008 tax return incorrectly: Q37 “If you, your tax partner or the minor children were involved in a trust or other special-purpose fund, tick the box and give the full name of the special-purpose fund.” The taxpayer did not tick the box, while shares of a Dutch limited liability company (BV) of the taxpayer were, as of 2008, indirectly held by a Panamanian Foundation of which the taxpayer was a member of the board of advisors. In addition, the taxpayer received two distributions of each EUR 2,600 of one of the holding companies through which the BV was held. The taxpayer did not report the distributions in his 2008 tax return. The tax inspector imposed an additional tax assessment for 2008 in which he included the distributions as taxable income.

Decision of the Dutch Supreme Court

The Supreme Court judgment included several new rules regarding the shift and increase of the burden of proof: 

• Failure to answer a question in the tax return (correctly) in principle leads to the conclusion that the required tax return was not filed;
• The burden of proof will not be shifted and increased if the failure to answer the question in the tax return (correctly) is of insufficient weight to justify the penalty of shift and increase of the burden of proof;
• Partial shift and increase of the burden of proof is possible in the following situations:
  • If one or more questions in the tax return have not been answered or have been answered incorrectly. In such case, the shift and increase of the burden of proof does not apply to points of dispute for which that incomplete or incorrect answer cannot be relevant;
  • If questions posed in an information request (pursuant to section 47 of the General Tax Act (Algemene wet inzake rijksbelastingen)) have not been answered or have been answered incorrectly. Similarly, in such situation, the shift and increase of the burden of proof does not apply to controversies for which that incorrect or incomplete answer cannot be relevant.

In the case at hand, the application of the above rules of law led to the conclusion that the taxpayer (i) did not file the required tax return; (ii) that the failure to answer the ‘trust-question’ was of sufficient weight to justify the procedural penalty; and (iii) that partial shift and increase of the burden of proof did not help the taxpayer here, as the case did not concern any (other) controversies unrelated to the trust question.

Observations

The most important take away from this ruling is that there is more leeway with respect to the scope of the shift and increase of the burden of proof than previously assumed. Taking the judgment of the Dutch Supreme Court into account, the latest status on the scope of the shift and increase of the burden of proof seems to depend on the type of breach:

• Integral shift and increase:
  • if the required tax return was not filed due to substantive defects (significantly incorrect); or
  • when the required tax return was not filed due to failure to file any tax return.
• Partial shift and increase:
  • if the required tax return was not filed due to failure to (correctly) answer a question in the tax return; or
  • in case of failure to correctly answer a question asked through in an information request (pursuant to section 47 of the General Tax Act).

However, new questions also arise following the Supreme Court judgment. For example, we expect new controversies around the question what the scope of a certain question (posed in the tax return or in an information request) is, as this scope also seems to determine the scope of the shift and increase of the burden of proof if such question is not answered or answered incorrectly. 

Contact

Please contact your Stibbe tax lawyer to receive more detailed information or to discuss the implications for your business.