The value of benchmarking is to gain objective evidence. Important is for example to register the first and final assessments and communicate effectively to the relevant stakeholders within the organization especially if structural change is needed and buy-in has to be established.
Audit Defence Objectives
To define the performance requirements for Audit Defense the following non-exhaustive overview could be used as a guideline. The overview relates also to Indirect Tax Planning and other regulatory matters to avoid a silo approach.
Developing a winning strategy to support a tax position requires having clear insight about your tax policies and execution, how the tax authorities conducts their examination, anticipate next moves, etc.
An non-exhaustive overview of questions that could be useful as a guideline:
- What is the nature of the desired relationship between taxpayer and tax authorities?
- Is there a tax policy who in the organization is allowed to contact the tax authorities and vice versa who can the tax authorities contact?
- What are the audit approaches of the tax authorities?
- What is the impact of any new approaches?
- What information has to be shared mandatory on tax authorities request (understanding the rules of the game)?
- What is the company’s strategy re disclosing exposures?
- Why is the audit conducted?
- What is the time schedule and scope?
- What is the financial impact re any non compliance?
- Is there a reputational risk that needs to be considered?
- How can the audit be more streamlined or even accelerated (e.g. how to set up a joint tax audit plan)?
- Is there a tax policy to maintain an audit summary sheet (outstanding issues, status etc)?
- What is the number and amount of penalties assessed or paid on VAT/GST assessments ?
- What is the number of unanticipated audit assessed or paid and even important what is the root cause?
- What is the cost of audit defense?
A New Trend: Open Dialogue Between Revenue Bodies, Taxpayers And Tax Intermediaries
The new trend is to have an open dialogue between revenue bodies, taxpayers and tax intermediaries. OECD promotes ‘enhanced relationship’ (OECD report: Study into the Role of Tax Intermediaries). Even if the authorities have not embraced such an approach (yet), a proactive mode and using elements of this way of working might not only safe time and money but also result in a good relationship.
- A Guide on Compliance Risk Management for tax administrations has been developed as an update to the 2006 Risk Management Guide. It was made by tax officials for tax officials, both policy makers and operational staff. It is the outcome of work undertaken by the Fiscalis Risk Management Platform group since 2008. Compliance Risk Management Guide for tax administrations (2010)
- A Guide on Risk Management for tax administrations has been developed in order to provide a common foundation for decisions at all management levels within tax administrations. The guide has been prepared by tax officials for tax officials. It is the outcome of work undertaken by a Fiscalis Risk Analysis Project team since 2004. Guide on Risk Management for tax administrations (2006)
A new Trend: Tax Authorities and Standard Audit Files
The OECD has issued in May 2005 a guidance note on the development of Standard Audit File –Tax (SAF-T) and recommends the use of SAF-T as a means of exporting accurate tax accounting data to tax authorities in such way that can it can be analyzed easily.
Portugal has now implemented this guidance per January 1, 2013. On monthly basis, companies are obliged to submit the SAF-T (PT) reports for sales invoices to the tax authorities. Besides the SAF-T (PT) requirement there is also a Portuguese requirement to implement a digital signature for all sales invoices.
From a risk management perspective mandatory data filing should give food for thought. The submission of the SAF-T file means that a taxpayer has to provide specific data to the tax authorities every month. From a tax controversy strategy it is common practice that before information is provided to the authorities, a company performs a risk assessment and determines the worst case scenario to avoid unforeseen tax risks. What if there are glitches in your data, input errors, empty fields, awkward descriptions in fields or apparent inconsistencies?
A non exhaustive checklist re submitting data to the tax authorities:
- Has data been analyzed and a tax risk assessment performed?
- What are the tax authorities doing with this data: perform data analysis?
- Does not meeting the requirement result in a higher risk of a tax audit?
- What are the KPIs of the tax authorities?
If not impacting the present does the company show a audit trail that can be retroactively be investigated and backfire to tax position taken (ammunition for contra arguments, increase of penalties). If the data provided does not meet the required data format could this result in a higher risk of a tax audit? To avoid unanticipated risks or mitigate this risk is it not necessary to perform a data analysis prior to submitting data, as an internal pre-audit?
Some questions to answer re Audit Defense objectives:
- Is the mandatory data request approach of the Portuguese tax authorities incidental or will this become a future trend?
- Is it not likely in the downturn economy that more countries will follow this in order to maximize tax revenues?
- What is the current status in the European Union or beyond?
In Austria it is also mandatory to provide data in electronic format. It looks like in France this will be introduced per January 2014. In Luxembourg, Norway, Singapore and Canada providing data is still on a voluntary basis and only mandatory upon request by the tax inspector. In Belgium, Slovak Republic, Germany, Spain, Malta, Finland, UK, Slovenia, Croatia and Lithuania discussions on implementing SAF-T or a similar method are already taking place.
- Is likely that tax data analysis is or will be the standard tax audit methodology?
- Does this impact your company’s Audit Defense objectives?
The above relate to tax in general, but how does the above impact VAT and the indirect tax function?
Increased Audit Risk due to Fraud Priorities?
A recent European Union study (2013) says the bloc’s 28 member nations may be losing almost 200 billion euros ($267 billion) annually in value-added tax revenues due to tax evasion and a lack of enforcement.
EU Tax Commissioner Algirdas Semeta said the amount of revenues slipping through the governments’ nets is “unacceptable, particularly given the impact such sums could have in bolstering public finances.”
The study for the European Commission, the bloc’s executive arm, found member states lost an estimated 193 billion euros ($258 billion) in VAT revenues in 2011, or 1.5 percent of the EU’s economic output. European Commission – Press Release – Fight against fraud: new study confirms billions lost in VAT Gap
Actively combating VAT fraud is a priority for the European commission and local governments. New measures are being taken such as the introduction of individual liability for not remitting VAT if the buyer knew or should have known that he was buying from a fraud. To prevent such a condition of liability, the ability to demonstrate that sufficient control measures have been taken is essential.
In the next paragraph an overview is given of the estimated VAT Gap per Member State.
Is it not realistic to state that the risk of a tax audit increases in countries that have lost substantial tax revenue because of VAT fraud. Something to consider from an audit defense strategy perspective and could be a reason to challenge the company’s current indirect tax priorities set.
One of the tasks of the indirect tax function is to timely identify changes in legislation and regulations potentially affecting the group and/or its business. There could be many other arguments why for example review of control measures to avoid such liability should be a top priority.
Top on my list is managing reputational risk.
Estimates of the VAT Gap per Member State