Dutch Financial Magazine published in 2008
The at times prolonged operational audits performed by the tax authorities seem to be turning into a thing of the past. With the arrival of horizontal supervision, combined with the use of audit samples and data analyses, businesses can prove the reliability of their accounting records for tax purposes themselves, which offers the opportunity to avoid supplementary tax assessments and penalties.
The Dutch Tax Office [Belastingdienst] recently issued its 2008-2012 Business Plan [Bedrijfsplan 2008-2012]. In the Plan, special attention is devoted to the impact of technology on the Tax Office's work and tasks. One of the objectives and ambitions for the years ahead as laid down in the Plan pertains to the strengthening of supervision.
The Tax Office wishes to realize this ambition by aiming to broaden supervision, among other things. This should include horizontal monitoring, specific action, enforcement communication and collaboration with other enforcement bodies.
The Tax Office increasingly regards responsibility for supervision as a joint responsibility shared by tax partners, which include businesses, auditors and tax advisers alike. In its 2008-2012 Business Plan, the Tax Office states that the question is being examined whether arrangements can be made about the scope and quality of the procedures performed by auditors and tax advisers.
The certification of specific groups of professionals may even play a part in this respect in the future.
Audit samples and data analyses
Within the framework of supervision as a joint responsibility shared by the tax authorities, on the one hand, and businesses and their advisers, on the other, specific work traditionally performed by the tax authorities will have to be performed by the taxpayers.
Businesses usually engage their advisers for this. A good example of work that may be performed by businesses or their advisers would be audit samples and data analyses as part of timely identifying and controlling tax risks.
The Tax Office currently performs many of its vertical audits using monetary-unit samples, determining with a high degree of certainty, because of the selection of a few elements (euros), whether tax items have been prepared reliably.
An alternative for performing an efficient tax audit would be data analysis. Data-analysis options have increased and been refined rapidly over the past few years, allowing for large data volumes to be audited fully and efficiently.
Besides, data analyses can usually be performed using the same software as that used to draw audit samples. The tax authorities have not used data analysis much to date, but, because of the said 2008-2012 Business Plan, this will change in the near future. And it will be a change that has to become part of a business's tax strategy.
Horizontal monitoring
Audit-sample methods and data analyses play an important part respecting horizontal supervision. The Tax Office introduced horizontal supervision in 2005 as a new way of supervising businesses. As its name suggests, it is the opposite of vertical supervision.
Vertical supervision is the traditional type of supervision by the Tax Office, with the tax authorities assessing retrospectively (because of tax audits, etc.) whether businesses have fulfilled their tax obligations. If this is not the case, an adjustment is imposed, often after many years and usually together with a penalty, which is liable to run high.
Horizontal supervision implies mutual confidence between the taxpayer and the Tax Office. This has been formulated as follows in the said 2008-2012 Business Plan: "The underlying principle is supervision as a joint responsibility shared by all partners in the tax chain. [...]
The idea of the collaboration is to try to solve any problems in advance and to avoid any double work in the chain to the extent possible. By operating in this fashion, taxpayers can obtain certainty more quickly and fewer time-consuming audits will have to be performed at a later stage."
On the grounds of horizontal supervision, businesses must report - significant - tax risks to the tax authorities in advance. In return, they obtain certainty about their tax position more quickly than is otherwise the case. Applied in this way, horizontal supervision is an important business tool for controlling risks, as a business knows its potential risks.
By reporting these to the tax authorities, it will quickly have clarity as to the amount of tax payable and there will be no unpleasant surprises. Obviously, this is critical within the framework of a business's - financial - management.
Tax Control Framework
But how can a business obtain an understanding of its own tax risks? If it simply does not have an understanding of such risks, it cannot report them to the tax authorities. So it will have to be aware of its risks one way or the other.
This is where the Tax Control Framework ("TCF") plays an important role. A TCF is an internal risk control tool specifically aimed at a business's tax function. Usually, the TCF forms an integral part of an organization's Business or Internal Control Framework, ensuring that the organization's processes have been structured so that the tax risks become visible on time.
The application of audit-sample techniques enables businesses not only to identify tax risks, but also to qualify them from a tax perspective and to quantify the possibly ensuing risks. By identifying risks, an action plan pertaining to both the future and the past may be drawn up to control these risks.
On the grounds of arrangements made within the framework of horizontal supervision, an increasing number of businesses will be compelled to take a more proactive stance where communication with the Tax Office about tax risks is concerned and to involve such risks in optimizing their own TCF.
The following benefits may be realized if VAT pre-audits are performed using, among other things, data analyses and audit-sample techniques.
- Improved relations with the Tax Inspector (evidently, by using audit techniques similar to those used by the Tax Office, the first hurdle in any future discussions about the outcome of an audit is already taken).
- Businesses obtain an understanding of the nature and scope of their tax risks in a statistically responsible, quick and efficient way.
- The quality of the procedures performed by external auditors will increase because they will have to spend less time on assessing risks in the tax chapter in the fields of, for instance, indirect taxes, payroll tax and national insurance contributions.
- Less "vertical" audits and lower costs to be incurred on using business resources for such audits
- Lower penalties
At first sight, it all seems a somewhat strange trend: businesses and their advisers taking over specific supervisory and audit tasks from the tax authorities, even though most organizations are audited by the Tax Office only once every approximately five years.
However, the above does make clear that the concept of horizontal supervision, pursuant to which work is performed on a real-time basis and tax risks can be controlled, can offer many businesses interesting benefits.
Subsequently, the next logical step would be for businesses to perform their own audit samples and data analyses based on that concept, rather than having the tax authorities do so. In other words, the performance of audit samples and data analyses by businesses (or having such performed by third parties) is a wonderful way of keeping the tax authorities at a distance without this adversely affecting the relationship with the Tax Office.
What's more, it is our experience that the relationship with the tax authorities will only improve. What else do businesses want?
