Tax authorities, due to technological innovations, have become increasingly better in executing their tax audit. The probability that the Tax Authorities will issue additional assessments and penalties in the near future because errors in indirect tax are detected, increases by the day. Tax authorities collect and analyze already indirect tax data (e.g. SAF-T for VAT). The focus is not only about timely and accurate VAT reporting but as well whether on high risk areas an effective tax control framework is in place. Tax risk management methods are assessed.
More revenue, greater efficiency and improved compliance
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.
Tax authority approaches are changing
Mandatory data filing gives 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?
What is in the data — any tax liabilities?
A checklist for submitting data to the tax authorities
Have you analyzed the data and performed a tax risk assessment?
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 audit methods of the tax authorities?
If not impacting the present does the company show an 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 unforeseen risks or mitigate this risk is it not necessary to perform a data analysis prior to submitting data, as an internal pre-audit?
Benchmarking provides objective evidence. It can show whether or not you have achieved your objective set such as a 'mature' tax function' or make visible what needs to be done to make that happen. It might provide the extra arguments to realize change and get buy-in.
Benchmarking yourself against your peers
Survey findings of Big4 and technology firms including anticipate e-audits (slide 15)
The slide deck starts with a trend overview of the author and subsequently relevant tax survey findings were gathered that relate to these trends spotted. The complete overview is relevant from a priotization and tax strategy perspective.
Real-time data analytics for tax planning and compliance purposes
Data analysis as a pre-audit should be aimed at detecting and correcting inconsistencies and evaluating tax falls within the company’s risk appetite. More importantly, if similar data requests are becoming a common practice of the tax authorities:
- Is it from a tax strategy perspective not important to set up a continuous monitoring process that on a real-time basis verifies and remediates data quality and data consistency?
- Is the mandatory data request approach of e.g. 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?
Other questions are:
- What is the current status in the European Union or beyond?
- What is next: providing transactional data realtime or within a very limited timeframe (e.g. 72 hours)?
- Is data shared across borders (for example BEPS, Accounting Directive; etc.
- What is the impact on a company's 'Audit Defense' strategy?)
What is next real-time tax collection?
In Brazil companies are already obliged to submit invoices to the government prior to sending them to clients. In China the tax authorities have already monthly access to transactional data.
See also chapters: Tax Transparency, Enhanced Relationships, Spreadsheets and Compliance, Mandatory electronic audit files a worldwide trend and Audit Defense strategy, and SAF-T Poland and SAP solution
OECD, European Parliament and current state Europe and beyond
The OECD’s Committee on Fiscal Affairs (CFA) recently approved two notes arising from work to develop a set of guidance on business accounting system data requirements for tax audit purposes, and associated practical implementation issues for software developers.
The set of guidance was prepared by a task group consisting of representatives of national revenue authorities, the Business Applications Software Developers Association (BASDA), accounting bodies, and other interested parties. The aims of the guidance are to simplify tax compliance and tax audit requirements as they relate to information required for tax purposes from business and accounting systems. This guidance should encourage voluntary compliance by businesses that will also add to profitability by encouraging better internal control procedures.
The guidance should also help promote compliance with new legislation on accounting standards such as Sarbanes Oxley and IFRS (International Financial Reporting Standards). The application of standards through software development also provides both public and private auditors with a reference point.
Guidance Note: Guidance on Tax Compliance for Business and Accounting Software
This guidance note describes the processes needed in business and accounting software to attain a sufficient level of reliability for electronic records kept in support of tax returns during the retention period prescribed by tax legislation in individual countries.
Collection and assessment of taxpayer data
The principles outlined cover:
- Integration of effective tax protection controls;
- Production of audit trails;
- Enabling audit automation;
- Production of SAF-T
- Allowing users to file returns electronically;
- Archive procedures to ensure integrity and readability; and
- Provision of comprehensive documentation.
Communication from the Commission to the European Parliament and the Council An Action Plan to strengthen the fight against tax fraud and tax evasion
On 2nd March 2012, the European Council called on the Council and the Commission to rapidly develop concrete ways to improve the fight against tax fraud and tax evasion, including in relation to third countries and to report by June 2012.
In April the European Parliament adopted a resolution echoing the urgent need for action in this area.
Future work on these actions will be guided by the need to reduce costs and complexity of tax systems for both the taxpayers and the tax administrations.
For taxpayers, decreasing costs and complexity would encourage better tax compliance. For tax administrations, the development and full use of automated tools and risk management techniques would release human and budgetary resources to concentrate on achieving targeted objectives.
The Commission will also continue to promote the most effective use by all Member States of practical IT tools for all taxes. It will also promote a more joined-up approach between direct and indirect taxes and between taxation and customs by making appropriate use of the FISCALIS and CUSTOMS programmes to enhance communication and promote a more systematic sharing of best practices and tools, where appropriate. This can help to improve the efficiency of audits and controls and reduce the burden on taxpayers.
All the actions proposed to be taken up by the Commission in this document are consistent and compatible with the current Multi-annual Financial Framework 2007- 2013 and the new Multi-annual Financial Framework 2014-2020.
European Commission looking to develop EU SAF-T
31. Develop an EU Standard Audit File for Tax (SAF-T) The use of an EU standard audit file for tax (SAF-T), along the lines of what is already in force or under development in certain Member States, would both facilitate voluntary compliance from taxable persons and facilitate tax audits. A pilot project is currently under development in the specific context of the mini One Stop Shop for telecommunications, broadcasting and electronic services. Its further development should be envisaged.
Presidency paper – VAT-fraud
VAT fraud spotted within days - No substantial change at tax authorities
Data system tested for Benelux countries will be rolled out within 1 year according to current EU Chairman Wiebes. The big data analysis started 1.5 years ago in the Benelux and that participation has already increased to 10 EU Member States amongs others Romania that faces substantial VAT fraud. (source: FD - in Dutch).
Austria applies for pilot project against VAT fraud
Pilot project for "reverse charging" on intercompany business
Finance Minister Dr. Hans Jörg Schelling aims in future to take stronger action against VAT fraud. The Finance Minister's plan would be to transfer settlement of value added tax to the "reverse charge" system, which is less vulnerable to fraud.
Since value added tax is subject to EU law, the European Commission must consent to any system change. Finance Minister Schelling will file the relevant application at the meeting of euro Finance Ministers. "As a result of organised carousel fraud, across Europe, EUR 17 billion is lost in tax revenue; in Austria alone, the figure is around EUR 500 million. This cannot be allowed to continue," stressed Schelling.
The core of the plan would be reversal of value added tax liability ("reverse charging"). At present, fraudsters are able to send goods in a circuit between several countries. The sales tax is then invoiced by the supplier and the recipient of the goods can obtain reimbursement of the money from the tax office by way of input tax deduction. However, the supplier ends up not paying the tax to the tax authority and files for bankruptcy. As a result, the revenue authority ends up bearing the costs.
Through the "reverse charge" system, this problem would be solved, since the tax liability passes to the recipient of the goods and input tax deduction no longer applies.
"We have already converted to the reverse charge system several sectors that are particularly vulnerable to fraud. However, this is not enough, since the various EU countries are adopting different approaches in this regard. What we don't want is for a hotchpotch to emerge," adds Schelling. "The aim is therefore now to launch a pilot project and to transfer all business between companies to the reverse charge process,". Schelling now hopes to get the green light from the Commission for the field trial.
SAF-T and Poland
From 1st July 2016 onwards it is required to provide SAFT-PL files in XML format on request of the PL Tax authorities. Filing SAF-T will be mandatory for large taxpayers: employ more than 250 people or 50 million EUR sales revenue. Per 1st July 2018 this extended to taxpayers with more than 9 employees or 2 million EUR sales revenue.
See Chapter: SAF-T Poland and SAP solution
BEPS has an Indirect Tax impact too
Let's highlight action 13: Country-by country reporting (CbCR)
Action 13 – country-by country reporting (CbCR)
Action 13 provides a template for multinationals to report on an annual basis and for each tax jurisdiction in which they operate revenue figures and other key figures. The data of these reports give direct tax authorities the possibility to audit the amount of direct tax paid. However for indirect tax authorities it is useful data as well. From a custom perspective it could be supportive during auditing the valuation of the transactions when customs duties are due and for VAT cross border intercompany transactions have always qualified as a high risk area.
The SAF-T standard, originally created by the OECD, is intended to give tax authorities easy access to the relevant data in an easily readable format for bot corporate income tax as VAT. This leads to much more efficient and effective tax inspections. Data analytics will become the most efficient and effective way of future tax auditing.
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.