Insights on Burden of Proof on Transfer Pricing

Multi-national enterprises (MNEs) need to build robust transfer pricing strategies as the corporate tax has become effective in the UAE. Transfer pricing involves setting the prices of transactions at arm’s length when products, services or Intellectual Property (IP) are exchanged between the divisions of an MNE that are located in different tax jurisdictions.

When a transfer pricing dispute involving two or more tax jurisdictions occurs, it becomes critical to determine who has the burden of proof. The burden of proof rules differ from jurisdiction to jurisdiction. In this blog, we shed light on certain key insights on the provision of the burden of proof in transfer pricing. Read ahead for more insights:

Who bears the burden of proof in transfer pricing?

The burden of proof rules for tax cases differs among OECD member countries. In most tax jurisdictions, tax administrations bear the burden of proof both in their own internal dealings with the taxpayer (e.g. assessment and appeals) and in litigation.

However, the burden proof can be reversed in some jurisdictions. This allows the tax administration to estimate taxable income if the taxpayer is found not to have acted in good faith, for example, by not cooperating or complying with reasonable documentation requests or by filing false or misleading returns.

In other jurisdictions, the burden of proof is on the taxpayer. Transfer pricing consultants in Dubai can guide you on the burden of proof requirements in relevant tax jurisdictions.

Burden of Proof on Tax Administration

If the burden of proof is on the tax administration in line with the domestic law, the taxpayer has no legal obligation to prove the correctness of transfer pricing unless the administration makes a prima facie showing that the pricing doesn’t meet the arm’s length principle.

However, even in such a case, the tax administration might still reasonably oblige the taxpayer to produce its records so that the administration can examine them.

Some jurisdictions mandate the taxpayers to co-operate with the tax administration imposed on them by law. If the taxpayer fails to cooperate, the tax administration may be given the authority to estimate the taxpayer’s income and to assume relevant facts based on experience.

In such cases, the OECD forbids the tax administrations to impose such a high level of cooperation that would make it too difficult for reasonable taxpayers to comply.

Burden of Proof on Taxpayer

In some jurisdictions, the burden of proof rests with the taxpayer. In such cases, the tax administrations do not have the freedom to raise assessments against taxpayers which are not soundly based on law.

For example: the tax administration of a jurisdiction that applies the arm’s principle is not at liberty to raise an assessment based on a taxable income calculated as a fixed percentage of turnover and simply ignore the arm’s length principle.

The case of shifting Burden

When litigation arises in jurisdictions where the taxpayer is mandated to bear the burden, the burden of proof is often seen as a shifting burden.

Where the taxpayer presents to a court a reasonable argument and evidence to suggest that its transfer pricing was arm’s length, the burden of proof may legally or de facto shift to the tax administration to counter the taxpayer’s position and to present argument and evidence as to why the taxpayer’s transfer pricing was not arm’s length and why the assessment is correct.

On the other hand, where a taxpayer makes little effort to show that its transfer pricing was arm’s length, the burden imposed on the taxpayer would not be satisfied where a tax administration raised an assessment which was soundly based in law.

Conflicts regarding the Burden of Proof

Conflicts may arise when the controlled transaction under examination involves one jurisdiction in which the burden of proof is on the taxpayer and a second jurisdiction in which the burden of proof is on the tax administration.

If the burden of proof is guiding behaviour, the tax administration in the first jurisdiction might make an unsubstantiated assertion about the transfer pricing, which the taxpayer might accept, and the tax administration in the second jurisdiction would have the burden of disproving the pricing.

It could be that neither the taxpayer in the second jurisdiction nor the tax administration in the first jurisdiction would be making efforts to establish an acceptable arm’s length price. This type of behaviour would trigger significant conflict and double taxation.

Tax Gian can Advise you on the Burden of Proof

Understanding the burden of proof requirements in different tax jurisdictions is critical to navigating transfer pricing disputes. Since the burden of proof rules is not the same in every jurisdiction, taxpayers may need to assistance of experienced transfer pricing advisers in Dubai such as Tax Gian.

We are one of the leading providers of transfer pricing services in Dubai equipped with a team of highly qualified tax experts. Tax Gian, a brand of Jitendra Tax Consultants (JTC), can advise you on any corporate tax or transfer pricing issues. Since 2001, Jitendra Chartered Accountants, an associate of JTC, has been providing end-to-end advisory services including tax solutions in Dubai, UAE to its clients globally. We can help you navigate the complex provisions of transfer pricing.

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