By Arjan Hassing, Richard Cornelisse and Fred Lawson
The time of the taxman's interminable audits of company tax records would appear to be on its way out. The emergence of horizontal supervision and the complementary use of sampling and data analyses make it possible to demonstrate the reliability of your tax administration yourself. This provides opportunities for companies to avoid additional taxes and tax penalties.
The (Dutch) tax authority's Company Plan for 2008-2012 was recently published. In this, special attention is given to the impact of technology on the tax authority's work activities and range of tasks. One of the objectives and ambitions formulated by the authority was the strengthening of supervision in the coming years. They want to realize this ambition by broadening their supervision. Horizontal supervision, directed actions, enforcement communication and cooperation with other enforcement agencies should be considered here.
Increasingly, the tax authorities view the responsibility for monitoring as a joint responsibility with the fiscal partners. These include entrepreneurs, accountants and tax advisers. In its 2008-2012 Company Plan, the tax authority indicates that research will be conducted into the question of whether agreements can be made about the content and quality of the work activities performed by accountants and tax advisers. There is even the possibility that a type of certification for certain groups of professionals will play a role in the future.
Sampling and data analysis
Against the background of supervision being a joint responsibility of the tax authority on the one hand and the company and tax advisers on the other, certain activities that used to be performed by the tax authority will now have to be done by the taxpayer himself. Generally, companies turn to advisers for this. One good example of an activity that can be done by the company itself or its adviser is conducting sampling and data analysis for timely signaling and management of tax risks.
At this moment, the tax authority conducts its vertical audits using monetary samples whereby, based on the selection of a number of elements (euros), the likelihood that certain tax entries have been drawn up reliably can be ascertained to a high degree. Data analysis is another alternative for conducting efficient audits. In recent years, possibilities in the area of data analysis have been refined and grown quickly so that large volumes of data can efficiently be investigated in their entirety. Data analyses can also usually be performed with the same software with which samples are selected. Data analysis is still not much used by the tax authority, but this will change in the near future based on the indicated Company Plan for 2008 2012. This change must become part of a company's tax strategy.
Sampling methodologies and data analysis play an important role in the framework of horizontal supervision. Horizontal supervision was introduced in 2005 by the tax authority as a new method for monitoring companies. As the name indicates, horizontal supervision is to be contrasted with vertical supervision. Vertical supervision is the tax authority's traditional method monitoring where the tax authority assesses ex post facto (by way of audits, etc.) whether the companies have honored their tax obligations. If this is not the case, a correction is applied, often many years later and often accompanied by (occasionally severe) penalties.
Horizontal supervision involves mutual trust between the taxpayer and the tax authority. In the aforementioned Company Plan for 2008-2012, this is expressed as follows: "The principle is that monitoring is approached as the joint responsibility of all the partners in the fiscal chain. (…). The purpose of the cooperation is to try to resolve problems beforehand as much as possible and to prevent double work in the chain. By working in this manner, the taxpayer gets certainty earlier and fewer time-consuming audits need be conducted after the fact." With horizontal supervision, companies must notify the tax authority beforehand of (significant) tax risks. In return, companies can be certain about their own tax position earlier than would otherwise be the case. Horizontal supervision is therefore an important instrument for a company in the context of its risk management. After all, the company knows which potential risks exist and, by notifying the tax authority of these, clarity is quickly achieved about the amount of tax to be paid. There are no more skeletons in the closet, as it were. For the (financial) management of a company, this is, of course, very important.
Tax Control Framework
But how does a company derive insight into its own tax risks? If a company has no insight into its tax risks, it can't notify the tax authority of these, of course. So the company will have to acquaint itself with its own risks in one way or another. The so-called Tax Control Framework (TCF) plays an important role in this context. A TCF is an instrument for internal risk management, specifically aimed at the tax function within a company. A TCF is usually an integral component of a company’s Business- or Internal Control Framework. A TCF ensures that processes within an organization are structured so that tax risks are visible in a timely manner.
The application of sampling techniques makes it possible for companies not only to identify tax risks, but also to qualify these risks for tax purposes along with the quantification of any risks that may arise from this. By identifying risks, a plan of attack can be drawn up with which these risks can be managed - both for the future and for the past.
Against the background of Horizontal Supervision, companies see themselves increasingly forced to be more proactive in their communication with the tax authority about tax risk areas and to include these in the optimization of their own Tax Control Framework.
By conducting VAT ‘pre-audits’ and by using data analysis and sampling techniques, among other methods, the following benefits can be achieved:
- Improvement of the work relationship with the tax inspector (after all, by using the same audit techniques as the tax authority, the first stumbling block in any future discussion about the results of an audit is already removed);
- Companies get rapid and efficient insight into the nature and size of their tax risks in a statistically valid manner;
- The quality of the external accountant's work activities will increase because he can spend less time testing fiscal risk in the areas of indirect taxes and salary deductions, for example;
- Reduction in the number of 'vertical' audits and cost savings from the deployment of one's own resources;
- Decrease in penalties.
At first, this would appear to be a strange development: companies and advisers who take over certain supervisory and/or audit tasks from the tax authority... and this while most companies are only audited by the tax authority roughly once every five years.
However, the above shows that companies can achieve interesting benefits from the concept of horizontal supervision where work can take place in "real time" and tax risks can be managed. It is then a logical step within this concept to perform sampling and data analyses oneself instead of having the tax authority do this. In other words: conducting sampling and data analysis oneself (or having it done) is a fine way of keeping the tax authority at a distance without this having a negative impact on the relationship with the tax authority. What's more, our experience has shown that it only serves to improve their relationship with the tax authority. What more could a company want?