In my blog “The Value Of Benchmarking: Get Some Objective Evidence” I wrote that both negative as positive experiences (e.g. (the first and final) assessments, the amount of savings) would be something to register ongoing and communicate effectively within the organization. These are the benchmark findings of the own company and extremely useful for setting also the own ‘tax audit defense’ strategy. Important as their is a shift from direct to indirect taxation, increase of VAT rates and an increase of tax authority scrutiny are methods of government to balance their budgets.
Overview of Indirect Tax Objectives
Tax Planning: identify, recommend and successfully implement indirect tax projects that assist in achieving the objectives of the indirect tax department part of the business objectives.
Tax Accounting: proactively anticipate on changes in the business and outside the business and successfully communicate these changes to the concerning departments. Furthermore look after a correct implementation of these changes.
Tax Compliance: look after a correct, complete and timely Indirect Tax reporting of all entities. This includes that additional reporting relating to these Indirect Tax returns is taken into account.
Tax Governance: all corporate departments are well informed and/or have the availability of a VAT work instruction so it is clear when to consult the indirect tax department.
Support Other Departments: activities of departments that are being affected by VAT risks have been successfully identified and these departments have been well instructed to reduce these risks.
Audit Defense: roles and responsibilities have been determined who deals with the tax authorities during an audit (announcement) and tax authorities questions and procedures “how to act” (e.g. appoint one contact person, never provide documents without first making copies) have been documented and rolled out.
Tax Controversy Strategy: ‘Proactively Managing the Changing Landscape’
Developing a winning strategy to support your tax position requires having insight on how the tax authorities conducts their examination and anticipating their next move.
Some ‘Best Practice’ quotes
“be polite and cooperative, but don’t forget your rights, choose one room where auditors will be placed, don’t let them wander unattended (…) appoint one contact person to communicate with auditors and never provide documents without first making copies and list what has been handed over” Alexander Bychkov, Baker &McKenzie Russia
“give the auditor a presentation on the company and its business model to create trust” Nicole Looks, Baker &McKenzie Germany
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. I refer to OECD promotion of ‘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 can not only safe time and money but result in a good relationship.
The Dutch ‘horizontal monitoring’
In 2005, the Netherlands Tax and Customs Administration (TCA) initiated a pilot ‘horizontal monitoring’ programme involving 20 of the country’s largest corporate taxpayers. At the core of the programme is a concerted effort by the TCA to build greater trust with this taxpayer constituency as a means of encouraging greater disclosure of tax uncertainties and risks.
The TCA and all participating taxpayers enter into a non-binding but written ‘agreement’, by which the taxpayer undertakes principally to “actively notify the Tax Administration of any issues with a possible and significant tax risk.” In turn, the TCA promises, having received such disclosure, to “state its views concerning any legal consequences” of the matters disclosed, and to “take into account real commercial deadlines” when doing so. Importantly, the agreement covers both uncertain tax positions taken by the taxpayer in the past, and those which it is contemplating taking in the future.
Responses to the programme have been generally positive, with the majority of participating taxpayers and of relevant tax collectors agreeing that it has resulted in more effective and efficient working relationships. (Source: OECD report: Study Into The Role of Tax Intermediaries)
Some similar initiatives of Tax Authorities
- In 2005, the United States initiated a Compliance Assurance Process
- In September 2005, the Irish Revenue Commissioners initiated their ‘Co- operative Compliance’ programme with large corporate taxpayers.
- Budget 2009, Senior Accounting Officer sign off in the United Kingdom
Audit Defense – Key Considerations (overview via YouTube)
Richard’s other Big4 publications
- How to Execute A Tax Strategic Plan And Be Successful
- About Market Leadership And Non Traditional Competitors
- Centralized Business Models And ‘Indirect Tax Automation’
- How To Manage The Perception Of C-level And Realize Tax Objectives
- The Conflict Between ‘Actual To Budget’ Controls And ‘Budget-based Compensation Targets’
- About ‘Business Integrity And ‘Being Inspired’
- The Indirect Tax Profession Is Evolving From An Individual To A Team Sport
- Would European Value Added Tax Work For The United States?
- US VAT Introduction Versus The Proposed Changes Of The ‘European Union’ VAT System
Richard Cornelisse is CEO of the KEY Group and worked previously as Big4 Partner in the Tax Performance Advisory and Indirect Tax Practice and blogs on Tax Function Effectiveness and Tax Control Framework developments.