The Burden of Proof in Tax Matters
Benn Folkvord, Associate Professor at the University of Stavanger, Norway
Part A: National concepts
1. General rule on the burden of proof
The Norwegian rules concerning the division of the burden of proof must be considered on
the basis that, according to the Norwegian Constitution, it is the courts’ duty to supervise
public administration. This implies that both the administration’s application of the law and
the facts– hence, the assessment of evidence – as a clear, general rule may and should be
reviewed.
According to Norwegian law, the burden of proof refers to the degree of probability that must
exist in order for a circumstance to form the basis of a tax assessment decision or a judgment.
The term is under criticism, as it may give the impression that if a party to a case is unable to
provide sufficient evidence for a tax matter, one cannot allow for this matter, which will harm
the party in question. The term has further been criticised for creating an impression that it is
of relevance what party in fact provided a piece of evidence, or even what party should have
done so.
The general rule in Norwegian civil law is that both the courts and the tax authorities shall
base their decision on the facts that seem more likely to have occurred. This is often referred
to as the principle of preponderance of evidence. The main argument for employing the
principle of preponderance of evidence is that, statistically, this provides the highest number
of correct judgments. The principle does not necessarily mean that the facts on which the
courts base their decision must be more that 50 percent probable, but rather that the facts
which it bases its decision on must be the facts more likely to have occurred. In criminal
trials, on the other hand, the courts may pass sentence on the defendant only if it is proven
beyond a reasonable doubt that he is guilty. Additional tax, however, is according to
Norwegian law considered a punishment. This implies special evidentiary requirements,
reference is made to item 5 for further details. In the assessment of evidence, the tax
authorities base their assessment primarily on written evidence; witnesses etc. are not
considered. It is not until a case is to be heard before the courts that one employs the principle
of immediacy, which means that the courts decision is based on primary evidence, including
witnesses etc.
The principle that Norwegian courts base their decisions on the more probable alternative is
applicable on a general basis. Regardless of whether this involves an income or a deduction,
the courts and tax authorities must base their decision on the more probable alternative. This
idea is supplemented by another basic principle, namely the principle of self-assessment. This
principle implies that it is the taxpayer’s duty to provide and to document the relevant facts of
the matter. The basis for this principle, however, is that the administrative law for tax
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assessment is mass administration. The principle of self-assessment, however, involves
something other than the burden of proof. The fact that Norwegian law does not separate
between proof of income and proof of deduction, as is done in other countries, is not
necessarily of much significance. In as much as one, in any case, bases a decision on the
principle of free evaluation of evidence, the fact that the taxpayer does not provide proof that
the requirements for deductions have been met is, by itself, an element of proof that may
weigh heavily. It is furthermore essential that if the facts of a matter are sufficiently obscure,
the tax authorities may estimate the taxpayer’s income by discretion, see further details below.
The same provisions regarding burden of proof apply to both the courts and the tax
authorities, and unlike some countries, Norway does not have any special provisions
concerning different types of evidentiary requirements.
The main principles in Norwegian law may be summarised as follows: Any decision should
be based on the facts that seem more likely to have occurred. It is primarily the taxpayer who
bears the responsibility of providing documentation, and one must base any decision on an
entirely free evaluation of evidence.
2. Variations on the general rule depending on time period or if it is claimed that the
taxpayer has submitted false/incorrect information
The principle of basing a decision on the more probable alternative applies to all time periods.
However, do note that that there are rules that cut off the taxpayer’ right to submit new
evidence during the tax proceedings. This may lead to a decision that is not necessarily based
on the more probable alternative. An example to illustrate this: A taxpayer fails to submit the
required tax return forms, and the tax authorities must estimate the income by discretion. To
avoid speculation by means of not returning one’s tax return form in order to be given a low
income, and then submitting one’s return form if the tax authorities’ estimation of income is
high, rules are in place that, to a certain degree, cut off the taxpayer’s right to provide new
information.
3. Burden of proof regarding discretionary decisions on tax issues or regarding
estimated assessments
In Norwegian law, the tax authorities may estimate the taxpayer’s income by discretion
should the taxpayer fails to fulfil his duty to file tax return forms, reference is made to item 2
above. A condition for making a discretionary decision is that the taxpayer’s tax assessment
statements do not provide a proper basis for the discretionary estimation of income. This
applies, for example, if the taxpayers’ statements suffer from incorrect information or if these
have not been kept in accordance with the law and such incorrect information weakens the
confidence in the relevant statements or the accounts in general. Another example is if the
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taxpayer’s statements disclose lower earnings than there is reason to expect, or if there is no
reasonable correlation between the stated income and a probable private consumption. The tax
assessment may further be estimated by discretion if the taxpayer does not comply with the
tax authorities’ request to provide documentation, or sufficiently cooperates or documents
routines for transfer pricing. Income may also be estimated by discretion if the taxpayer does
not submit the required tax assessment forms or accounts.
When tax authorities estimate the tax assessment by discretion, they shall, in principle, base
their decision on the facts that seem more likely to have occurred, i.e. the principle of
preponderance of evidence. This implies that the tax authorities, to a certain degree, may be
subject to the duty to inspect. The duty to inspect is not far-reaching; that would be contrary
to the principle of self-assessment. The tax authorities’ responsibility is to land as closely as
possible to the actual facts. In practice, however, this is often not possible in a discretionary
estimation of income, seeing that one is missing information.
Often the estimate will, to a great extent, be based on the taxpayer’s income over previous
years, generally adjusted upward somewhat. Emphasis on typical earnings in a relevant
business sector etc may also be of relevance. The right to estimate income by discretion does
not extend any further that the basis for the estimate. If, for example, it is merely one
particular item in the accounts that appears not to be probable, it is only this item, not other
items, which may be stipulated by discretion.
The courts’ may review the decision, to check that the requirements for an estimated tax
assessment have been met, but as a general rule they may not review the actual estimate.
Hence, the courts may review whether the fact on which the decision is based on is correct.
As a general rule, if the tax assessment is estimated by discretion, the estimate may not be
reviewed by the courts; the idea being that the courts should not act as a tax authority, but that
they should have a control function. The courts may review whether the tax authorities’
discretionary assessment is clearly unreasonable. The threshold for determining the
discretionary assessment as clearly unreasonable is high, and once a discretionary assessment
decision has been made, it is generally difficult for the taxpayer to have it altered. This means
that the taxpayer, to a very little extent, will be given an opportunity to provide new evidence
subsequent to the decision for a discretionary estimate, as the threshold for the courts setting
aside such a decision is high. Thus, this is partly related to the distribution of workload, since
the courts are not meant to act as tax authorities, and partly to prevent the taxpayer from
speculating in a discretionary estimation of income being set too low, reference is made to
item 2.
4. Variations in burden of proof with respect to tax havens, etc
In Norwegian law, there are no special rules regarding the burden of proof and tax havens.
The principle of basing a decision on the more probable alternative also applies to the
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determination of facts in such cases. There is no doubt that tax havens create practical
challenges, however, the view has been that special rules regarding the burden of proof would
not solve these issues. It must be said that the principle of self-assessment is applicable here
too. This means that it is the taxpayer who bears the duty to provide relevant information. If
the tax authorities find that there in no proper basis for determining an assessment of tax, it
may be estimated by discretion, reference is made to item 3 above.
In its recent research work (NOU 2009:19, Official Norwegian Report), concerning tax
havens, the commission that was set down points out that one of the principal issues of tax
havens is the problem created by such tax havens with regard to the burden of proof. The
commission proposes separate rules on the burden of proof for tax havens. The commission’s
opinion is unclear, and nothing is said of the subject matter and further grounds for the
proposition of said rules. It is unclear whether such rules will be introduced, should such
provisions at all be required.
5. Level of the burden of proof
The principle that courts and tax authorities must base their decision on the more probable
fact also applies here. A decision is moreover based on the principle of free evaluation of
evidence. This principle implies that it is up to the tax authorities or courts to decide what
weight and relevance the various pieces of evidence shall be assigned in each individual case.
As mentioned in item 1 above, there are no rules imparting the taxpayer with a special burden
of proof. The taxpayer has a duty to provide documentation, but if this obligation is not
fulfilled, any potential evidentiary doubt shall not count in his disfavour. The principle of a
free evaluation of evidence means that it is not of much practical consequence that Norwegian
legislation does not assign particular taxpayers a burden of proof. The taxpayer will have an
incentive to provide information that speaks in his favour, and if this is not done, that in itself
speaks against the taxpayer subsequent to an assessment of evidence.
The principle that courts and tax authorities must base their decision on the facts that seem
more likely to have occurred applies only in civil law, not in criminal law. The basis for this is
that if one were to accept that innocent people are convicted, one accepts more incorrect
decisions than a requirement for preponderance of evidence would give. Additional tax is
imposed if the taxpayer has provided incorrect or incomplete information, and these have lead
to or could have lead to an estimation of a too low tax. The additional tax is 15, 30 or 60
percent of the tax which has been or may have been evaded. According to Norwegian law,
additional tax is considered a punishment, and as such more stringent standards of proof apply
for additional tax. In a judgment of 2008, (Supreme Court Report 2008, page 1409), the
Norwegian Supreme Court established a requirement that, before imposing additional tax, it
must be clearly probable on the balance of probabilities that evasion has occurred. The
requirement is not as strict as for ordinary questions of guilt, where the question of guilt must
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be proven beyond a reasonable doubt. The requirement for clear probability can not be given
a precise percentage as regards probability, but it is often formulated as a requirement for
qualified preponderance of evidence. Accordingly, evidentiary requirements for additional tax
lie somewhere between the requirements to the standard of proof in ordinary tax cases and in
criminal cases.
6. Evidentiary requirements in discretionary/estimated tax assessments
There are no special rules for evidentiary requirement in discretionary tax assessments.
Reference is made to the description in item 4 above; however, a requirement to a clear
preponderance of evidence for additional tax is applicable, ref. item 5.
7. Evidentiary requirements depending on exchange of information, tax havens, etc
There are no special rules for the burden of proof with regard to tax havens. It must be noted
that the principle of free evaluation of evidence entails that insufficient information may work
in the taxpayer’s disfavour. The taxpayer has the incentive to provide information that speaks
in his favour, and if this is not done, one will often base a decision on the existence of hidden
income or assets, and subsequently give an estimated tax assessment. It must be mentioned,
however, that recently several tax treaties have been entered into with tax havens,
incorporating clauses concerning the exchange of information.
8. Different evidentiary requirements for different types of taxes
With the exception of additional tax as mentioned in item 5 above, there are no different
evidentiary requirements for different types of taxes. It may seem that one generally requires
certain types of evidence in certain cases. This is not an absolute requirement; instead it is
more about the courts’ free evaluation of evidence.
9. General rule on evaluation of evidence and the limitations to such a rule
Norwegian tax law is based on a principle of free evaluation of evidence. This applies both to
the tax authorities and to the courts. The principle is statutory in the Norwegian Civil
Procedure Act, Section 21-2. A free evaluation of evidence means that neither the judge nor
tax authorities are bound by regulation as to what weight the various means of proof shall
have. The Norwegian Supreme Court, however, has in several cases provided guidelines for
the assessment of evidence. These are not binding to lesser judicial authorities or the tax
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authorities, but are to be regarded as a set of directions as to how one shall consider evidence
in ordinary cases. An example of this is that the Norwegian Supreme Court has provided
guidelines to the effect that if a taxpayer claims the existence of loans from the company to a
closely related shareholder – with no taxable dividend – this should generally be proven by a
written loan agreement. In spite of this, there is no absolute requirement to a written loan
agreement. The courts may base their decision on a free evaluation of evidence reach the
conclusion that such loans exist, even in cases where nothing is put in writing. There is close
correlation between the principle of free evaluation of evidence and the principle of free
production of evidence. The principle concerning free production of evidence means that the
parties, as a general rule, has access to produce evidence as they see fit.
An important exception from the principle of free evaluation of evidence is the so-called ‘Butt
principle’. The principle is named after one of the parties to a case tried in the Norwegian
Supreme Court (from the Supreme Court Report 1995, page 1768), and implies that the
person liable to taxation as a general rule must bear the risk of an incorrect fact, if he fails to
provide information which he is obliged to provide, or has a request to submit, or provides
incorrect/false information. He will not be able to set aside the tax decision by providing new
factual information in the case. The rule is substantiated by the taxpayer’s disclosure
requirement during tax assessment process.
Part B:
Burden of Proof in Anti-Abuse Provisions
10. General anti-abuse provision
The Norwegian anti-abuse provisions are generally speaking non-statutory rules that have
been developed through case. There are some statutory provisions that have a limited field of
application. The most well-known provision is the Norwegian Tax Act, Section 14-90, where
taxpaying positions may lapse in the case of tax motivated transactions. There are no special
rules for the burden of proof according to either non-statutory or statutory anti-abuse
provisions
Proof is a fundamental issue in the case of tax evasion. It is extremely difficult for tax
authorities to prove tax evasion. This is particularly the case where tax evasion involves
several companies and frequently cross-border transactions. The burden of proof issue comes
about partly as a result of insufficient facts to view the transaction in context, and partly due
to a lack of information. It appears that the Norwegian rules regarding anti-abuse are seldom
employed in cross-border transactions. This is probably related to the burden of proof issue.
In order to redress the burden of proof issue that arises, provisions may be imposed that affect
tax evasion indirectly. A typical example of this would be that conditions are laid down for
the tax-free implementation of certain transactions. According to Norwegian law it is not, for
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instance, the transfer of business is not a condition for a tax-free merger of tax-free demerger.
The Norwegian Ministry of Finance has put forward a motion that such transactions only be
implemented if there is also a transfer of business. One of the arguments of the proposal
appears to be the indirect prevention of tax evasion. The need to indirectly affect tax evasion
arises because it is so hard both to detect and to prove evasion.
11. Alternative or supplementary approaches
Norway has no alternative or supplementary provisions to the ones mentioned above. For
example, there is no substance over form approach, or similar approaches in Norwegian law.
Pro forma agreements are not accepted; here the basis is facts of the matter. The nonacceptance of pro forma arrangements is not based on special provisions, but is really only an
application of the principle of free evaluation of evidence.
12. Special anti-abuse provisions
Norway has no special provisions regarding the burden of proof in the case of anti-abuse. The
evidentiary requirements are the same as for the rest of Norwegian tax law. Moreover, in the
case of anti-abuse, the principle of preponderance of evidence shall form the basis of any
decision.
13. Competent authority
The courts can decide whether the evidentiary requirements for the anti-abuse provisions have
been met. In Norwegian law there is no special court or other body that reviews whether the
tax authorities’ assessment of evidence is correct.
14. Judicial review
The requirement to burden of proof does not shift the course of judicial proceedings according
to Norwegian law. During the entire process, there is a requirement for preponderance of
evidence. In practice, there may, however, be a degree of variation in the process, in as much
as the courts base their decision on the principle of immediacy. This principle implies that
witnesses and other means of evidence shall be heard directly. The tax authorities’ form of
procedure, including the assessment of evidence, is done in writing. Consequently, in practice
this means that the submission of evidence before the courts is more comprehensive.
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15. Case law
Seeing that there are no special rules regarding the burden of proof for anti-abuse rules, there
are no special judgments on this issue either.
Part C: The burden of proof and European tax law
16. EC law and the reversal of the burden of proof
Norway is not a member state of the European Union, and EU tax legislation is of limited
significance. The EEA Agreement that binds Norway does not comprise tax legislation, and
Norway is not bound by tax directives, including the EU Merger Directive as in the LeurBlouem case. Nonetheless, through the EEA Agreement, one is obliged to comply with the
four freedoms, and consequently, parts of the EU tax legislation have indirect consequences
for Norwegian tax legislation. It is, however, difficult to envisage Leur-Blouem having a
major direct consequence on Norwegian tax legislation. The Norwegian Ministry of Finance
has proposed a provision for maintaining continuity of business operations for certain tax-free
restructurings. This provision is similar to the one laid out in Leur-Blouem. As this provision
will apply equally to Norwegians and citizens of other EEA countries, there is no de jure
discrimination, and the provision is hardly contrary to the four freedoms. To my knowledge,
there are no Norwegian rules at variance with the Leur-Blouem judgment.
17. Reversal of the burden of proof and time limits
Norway has no legislation corresponding to Article 14, paragraph 4 of the Netherlands
Corporate Income Tax Act of 1969. It may be worth mentioning that one had rules providing
that shares owned more than three years could be sold tax-free. The requirement to period of
ownership was partially justified by the aspiration to prevent speculation; however, these rules
were repealed in 1992.
18. Reversal of the burden of proof and transactions with non-domestic entities
Norway has no such regulation.
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19. Donations to foreign charitable institutions and the burden of proof
Norway has no special legislation on donations to foreign institutions, nor has there been any
particular focus on, or debate on, this issue. Nonetheless, one must assume that the Norwegian
rules concerning deductions for donations to charitable organisations must be put into practice
in such a way that they in fact give equal consideration to Norwegian charitable organisations
and charitable organisations domiciled in other EEA member states. Pursuant to Norwegian
law, however, deductions for donations to charitable organisations are allowed to a very
limited degree, and consequently this issue comes up only to a very limited extent.
20. The burden of proof and proportionality
To my knowledge, the Norwegian rules are in compliance with the SGI case (C-311/08).
Part D: Burden of Proof in Cross-Border Situations (International Tax Law)
Transfer Pricing Aspects
21. The burden of proof between tax authorities and taxpayers
In principle, the general rules for the burden of proof also apply to transfer pricing. The
burden of proof is neither placed on the taxpayer nor the tax authorities. In transfer pricing,
one must comply with the principle rules, courts and the tax authorities shall, according to a
free evaluation of evidence, base its assessment on the facts that seem more likely to have
occurred. Unlike other countries, Norwegian law does not have rules that shift the burden of
proof if the taxpayer does not act in good faith, or files false information etc. Such
circumstances, however, will be emphasised in the free evaluation of evidence, and impairs
the taxpayer’s credibility.
An important exception to this is transactions between closely related parties, where one of
the companies involved is domiciled outside the EEA area. Here, new rules became effective
as of 2008 and, in such cases, one deviates from the principal rule that the courts shall base its
decision on the more probable alternative. In these cases, the taxpayer must prove that arm’s
length values have been employed. The basis for the provision only applying to companies
outside the EEA area is the aspiration that the rules would not be contrary to the four
freedoms.
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22. Set of documents
As of 2008, new rules were introduced into Norwegian law for the requirement of
documentation of arm’s length values. In broad outline, these rules, based on OECD
guidelines, require the submission of separate statements for intra-group transactions. These
shall provide an overview of the type and scope of the intra-group transactions. Moreover,
documentation proving arm’s length values must be prepared. This documentation shall be
kept on file by the taxpayer and submitted to the tax authorities upon request.
Exceptions have been made from the documentation requirement, although these are
primarily made for smaller companies. If a company, together with its closely related parties,
has less than 250 employees, and furthermore either has a sales revenue below NOK 400
million (approx. EUR 50 million), or has a balance sheet amount that is lower than NOK 350
million (approx. EUR 43 million), the documentation requirements do not apply.
23. Imposition of penalties and burden of proof
If the documentation requirement is not met, discretionary estimation of the taxpayer’s
income may become relevant. Furthermore, imposing additional tax may be applicable. A
condition for this is that the lack of documentation has given, or may have given, a too low
taxation. Failure to provide documentation may, in some cases, entail a lapse of the taxpayer’s
right of appeal.
24. Type of documents to be provided
When a company is subject to documentation and filing requirements, it may be required to
produce functional analyses, information concerning agreements, information regarding
comparability analyses, information as regards the chosen pricing method etc. The
documentation must be comprehensive enough to form a basis for the assessment of the
correctness of arm’s length values. Thus, the extent of documentation will vary from case to
case. If, for example, the same products are sold to non-related parties and closely related
parties, comprehensive documentation will not be required. If, however, the matter involves
unique and complex own-manufactured objects, requirements will often be far more stringent.
The documentation must furthermore include a description of operations and organisation.
25. Choice of transfer pricing method
The Norwegian regulation governing transfer pricing is based on the OECD guidelines. It is
clearly evident in the Norwegian law text that, upon application of these rules, the OECD
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guidelines must be taken into account. The Norwegian rules are, however, to be interpreted to
mean that one is not under obligation to make use of a hierarchy of valuation methods. One
must employ the method that most accurately demonstrates arm’s length value. The general
opinion in Norway has been that formal rules regarding choice of valuation methods hardly
provide the best outcome. Each case is different and should be assessed separately. Thus,
according to Norwegian law, one may employ the traditional valuation methods, which the
OECD guidelines provide guidance to, but one is free to make use of other methods should
these be better suited.
26. Burden of proof and bilateral conventions
There has been no focus on this particular issue in Norwegian law. I am not familiar with tax
treaties where this issue subject to regulation, nor, to my knowledge, has this issue often
presented itself in Norway.
27. Burden of proof and information exchange procedures
Norwegian tax law is based on the principle of self-assessment. Accordingly, this means that
it is primarily the taxpayer who bears responsibility for providing information. This is further
applicable to information regarding circumstances in other countries. This is reinforced by the
new rules concerning documentation requirements in transfer pricing that were introduced in
2008.
28. Burden of proof in the mutual agreement procedure
According to Norwegian law, the taxpayer will not be party to a mutual agreement procedure.
He may nonetheless institute arbitration proceedings according to the OECD Model Treaty,
Article 25 (5). To my knowledge, this has not been incorporated into any of the tax treaties.
Furthermore, the taxpayer would not be considered as a party in such cases.
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