Tax audits via data analytics 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.
External demands for tax-related information and transparency
From OECD country-by country reporting and its Common Reporting Standard to the U.S. Foreign Account Tax Compliance Act (FATCA) to other legislation, governments across the globe are demanding unprecedented amounts of information.
Standard audit files and e-audits
Easy access in readible format 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. This leads to much more efficient and effective tax inspections.
The legal requirements of the file are in line with the obligation of using certified billing and logistic software that prevent changes on documents already issued.
Tax authority approaches are changing
Besides Portugal similar obligations exist already in Austria, Canada France, (voluntary basis), Luxembourg and Singapore. In Belgium, Croatia, Finland, Germany, Lithuania, Malta, Spain, Slovak Republic, Slovenia, and UK discussions on SAF-T are already taking place. Countries like Sweden and Netherlands have their own e-audit file standard.
What is next real-time tax collection?
Somehow related to SAF-T is the new mandatory electronic Tax Balance sheet requirement in Germany. From January 1, 2014 it is mandatory to send Tax Balances electronically.
We see now also 'real time VAT ledgers in Hungary':
Following the changes announced on ERP and invoicing software requirements in Hungary, the Hungarian government announced that businesses issuing invoices using an invoicing software will be required to provide real time data regarding these invoices. It is already our present and not longer science fiction. The combi 'Artificial Intelegence' and tax might be a next step, but than again data analytics with IT Tax Accountancy people could do the exercise already in an effective and efficient way.
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
E-audit trends 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.
E-audits starts at slide 15 of the PowerPoint.
Simplify tax compliance and tax audits 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.
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.
SAF-T and fight against tax fraud and tax evasion
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 Multiannual Financial Framework 2007- 2013 and the new Multiannual Financial Framework 2014-2020.
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).
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.
BEPS has an Indirect Tax impact too
Let's highlight action 13:
- Country-by country reporting (CbC)
Action 13 – country-by country reporting (CbC)
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.
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.