Burden of Proof in Tax cases


Case Study:KRA VS TRICAL AND HARD LIMITED

Sometime in the year 2018, KRA profiled THL as a beneficiary of the ‘missing traders’ invoice scheme whereby several businesses were registered with the sole aim of fictitious invoicing with no actual sale being made. KRA conducted investigations into the tax affairs of THL with a view of ensuring due tax compliance with the tax provisions for the period 2013-2018

On 31st May 2018, KRA issued additional assessments on VAT for the months February – March 2017, June 2016 and November 2016 being KES 867,943.00 and further additional assessments on 12th June 2018 in respect of Corporation Tax for the period 1st April 2016 to 31st March 2017 being KES1,644,267.00

KRA accused THL of claiming input VAT on supplies that were never made to it and only held tax invoices and/or ETR receipts, which were never accompanied by actual supplies and were only fictitious to allow THL claim input VAT to reduce its tax liability.?

To support its position, THL furnished KRA with documents including copies of invoices issued for each purchase, copies of delivery notes for each purchase and copies of payment records and client statements

Upon unsuccessful objection, THL appealed to the TAT

The Tribunal noted that THL furnished KRA with the documents detailing the transactions as provided by section 17 of the VAT Act and further provided bank records, delivery notes and payment records and that this evidence established prima facie that it indeed purchased the said goods.?The Tribunal held that KRA did not rebut this evidence and that even though KRA insisted that its investigations established a missing trader scheme of which THL was a beneficiary, the evidence of this investigation was not tabled before it and that all the Tribunal had was the KRA’s assertions.

The Tribunal was of the view that KRA ought to have furnished information to prove that the invoices submitted by THL to support its claim were fictitious and that it was not enough to just allege that the documents presented were fictitious. The Tribunal, therefore, concluded that THL had furnished sufficient proof of purchase.?

As such the TAT allowed the appeal

KRA appealed to the High Court

In its ruling on 08/07/2022, the High Court held that:

  • ??In this case, KRA adduced evidence by one of its officers who outlined details of its investigations and how it was established that there were no deliveries that were made to THL as claimed in the invoices. This evidence was not countered by either a witness statement, affidavit or such documents from THL responding to KRA’s allegations. It would have even sufficed for THL to call the flagged companies as witnesses before the Tribunal or obtain such statements or letters from them to prove that they indeed supplied goods to THL.
  • ?Where the veracity and authenticity of the documents availed have been called into question by KRA, the burden shifts ?back to the taxpayer, in this case THL, to prove KRA wrong
  • ??The evidential burden of proof rests with the taxpayer to disprove KRA and that once competent and relevant evidence is produced, then this burden now shifts to KRA.In this case the competence and the relevance of the evidence was challenged by KRA
  • ?Section 112 of the Evidence Act states that, “In civil proceedings, when any fact is especially within the knowledge of any party to those proceedings, the burden of proving or disproving that fact is upon him
  • THL did not discharge its burden of proof before KRA and at the TAT

As such the High Court allowed KRA’s appeal

David S.

The Wise Realizes His Ignorance - Thomas Sowell

2 年

Dear David Ndiritu,? Very interesting. We had in my home country a similar case, where companies were using their various fiscal years to circumvent taxation. It was a large-scale collusion, involving more than 100 companies over time, who had done everything normally necessary according to the book, but exactly one thing was missing: The trade, the movement of goods, the factuality was not there.? The Danish Tax authority lost the case towards many of these traders, due to the enormity of the matter, but at least it got so much noise stirred up, so that the evil circle was dissolved, as nobody naturally wanted to get involved in a prospect criminal ring, but I think both your case presented here and the similar Danish case shows everyone that it can be a hard sneezer to trawl through the catacombs of?systematic, well thought out tax fraud.? In my personal view, mistakes happen, and then the tax authorities must make corrections. In my view it is also the opposite - that when authorities find that someone has deliberately not only doctored, but systematically and structurally and meticulously participated in "Tax fraud rings" - I think severe penalties amounting to treason should be applied - if no doubts!

Thanks CPA David

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