Simultaneous inspections: A form of cooperation between tax administrations that should be enhanced

The purpose of this comment is to refer to simultaneous audits, one of the forms of international cooperation between tax administrations (TAs) that I believe should be enhanced.

This is because today more than ever, the TAs need the cooperation of management, because many of the causes of tax evasion is directly linked to the globalization of economic activities and new ways of doing business in the digital economy, such as electronic commerce, digital platforms or collaborative, digital currencies and new forms of market goods and services, which increase the difficulties of tax and tax control.

To this is added the presence of multinational companies with aggressive tax planning, tax havens and /or jurisdictions of zero or low taxation or non-cooperating jurisdictions, and the always complex issue of controlling transfer prices.

1. SIMULTANEOUS INSPECTIONS, SOME CONCEPTS, AND BENEFITS OF THEIR APPLICATION.

The CIAT Manual for the implementation and practice of the exchange of tax information[1] states that a simultaneous audit constitutes an agreement between countries to audit simultaneously and independently, each in its territory, the tax situation of taxpayers on whom they have a common or related interest, with a view to exchanging any relevant information that they thus come to obtain.

In this Manual there is a very useful module to guide in a practical way the officials involved in carrying out simultaneous tax audits, which is intended to serve as a guide to the TAs and complement, rather than replace, any other procedures that may have in operation.

A simultaneous audit is a fact-gathering tool for auditors that allows them to obtain existing documents abroad in a timelier manner.

Differences in limitation periods between countries are an important practical consideration for Case Selection.

It is important to hold bilateral personal meetings between the tax inspectors of each country, to discuss aspects of mutual concern, which allows the auditors to achieve a more complete development of the issues.

This also enables both TAs to better understand the overall activities of taxpayers.

The main benefits of simultaneous inspections include:

  • They are effective in cases of suspected international tax evasion and evasion.
  • They can relate to both direct and indirect taxes.
  • They help to reveal the exploitation or abuse of existing laws and procedures in individual countries.
  • They ensure high levels of efficiency in the exchange of information between tax jurisdictions.
  • They allow a general review of all relevant business activities.
  • They can reduce the burden of compliance for taxpayers by coordinating consultations with tax authorities in different states and avoiding duplication.
  • They can play an important role in avoiding double taxation and thus preventing the need to subsequently resort to a mutual agreement procedure under a provision like Article 25 of the OECD Model Tax Convention.
  • They facilitate the exchange of information between the TAs, although the simultaneous monitoring itself is not considered an exchange of information.

Regarding the legal basis for simultaneous inspections, the cited CIAT Manual states that it will be based on one of the following:

  • Information exchange article of a bilateral tax agreement such as one based on Article 26 of the OECD Model Tax Agreement.
  • Article 8 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (whose protocol was amended in 2010 to allow the entry of countries not members of the Council of Europe or OECD).[2]
  • Article 12 of the Nordic Convention on mutual assistance in tax matters.
  • Article 8b of EU Council Directive 77/799 / EEC on Mutual Assistance.[3]
  • Article 12 of the EU Council Regulation on administrative cooperation in the field of VAT 1798/2003.
  • CIAT model of Information Exchange.

The Model Tax Code of CIAT (2015)[4] in his article 106, with respect to the simultaneous inspections, says that in the framework and with the conditions of the Conventions of International Law Tax or National Agreements, inter-agency, you will be able to perform simultaneous audits either with other States, each TA acting in the territory corresponding to their jurisdiction, in the terms provided for in an Agreement, or with another or other TA in the country, in the terms provided for in a National Inter-agency Agreement.

The TA may also participate, together with the authorities of the other states or officials of the other TAs of the country, in the simultaneous audits carried out, in accordance with the provisions of the conventions of international tax law or the National Inter-Agency agreements.

As we see, the figure of simultaneous inspections extends to the domestic level, within the framework of domestic administrative cooperation between the TA and other TAs in the country.

For its part, Article 12 of Council Directive 2011/16 / EU of 15 February 2011[5] on administrative cooperation in the field of taxation regarding simultaneous controls states that the Competent Authority of each member state:

  • Will independently determine the persons it intends to propose to be the subject of simultaneous control.
  • It shall notify the competent authorities of the other member states concerned of the cases in respect of which it proposes simultaneous controls, giving reasons for its proposal.
  • It shall specify the period during which such controls shall be carried out.
  • It will decide whether to participate in those concurrent inspections.
  • It shall appoint a representative who shall be responsible for supervising and coordinating the control..

2. PRACTICAL APPLICATION.RECENT REPORT ON THE TOPIC.

The above-mentioned CIAT Manual[6] states that it is key to define the objectives of simultaneous audits, assign responsibilities to the various stakeholders, and provides very interesting guidelines for the initial selection of cases, including conducting preliminary audits, contact with taxpayers, initial planning, additional audits, and completion of cases, also including feedback to the process for improvement.

It says that the TAs in the Nordic countries have been working with simultaneous tax audits for several years and have achieved positive results in both direct taxes and VAT.

Within the OECD there is also a joint audit implementation package that includes relevant templates and model agreements that can facilitate and expedite any practical aspect of conducting a joint audit which is constantly updated[7].

A recent report by the European Court of Auditors[8] states that the system of exchange of tax information can work well, provided that the data is accurate, comprehensive, and exchanged in a timely manner. Unfortunately, this is not always so, the auditors criticize.

In addition, the information exchanged is generally underutilized, resulting in insufficient taxation. However, the auditors found that on-demand exchanges of information, as well as spontaneous exchanges, work effectively.

Similarly, simultaneous controls on taxpayers by two or more member states for the common or complementary interest have proven to be an effective tool for assessing the taxation of cross-border transactions.

The Special Report of the European Court of Auditors[9] “Exchange of tax information in the EU: solid foundations with a lack of implementation with respect to simultaneous controls” is said to be an effective tool.

Simultaneous controls coordinated by two or more member states in relation to taxpayers “of common or complementary interest” may be more effective than controls carried out by a single member state.

Between 2014 and 2018, the Member States initiated 660 simultaneous controls in relation to inspections in the areas of direct and indirect taxation or direct taxation combined with VAT.

5 simultaneous controls initiated by each member state visited and 5 controls in which they had participated (in both cases, unless less available) were examined.

Overall, the controls were very effective in terms of:

  • supplementary tax settlements.
  • exchanges of good practices in the evaluation of business structures.
  • early detection of fraud systems, before they can be expanded to several member states.

It was concluded that taken together, simultaneous controls proved to be an effective tool. Even those member states that had participated in very few controls valued them very positively as an instrument for the exchange of information, experience, and good practices.

3. FINAL IDEAS

To meet the challenges of globalization and address the business models that have been developed to adapt to new economic realities, TAs must strengthen their cooperation and be open to experimenting with new forms of collaboration such as simultaneous audits.

I am convinced that today more than ever that, to fight fraud, tax administrations (TAs) must continue to make progress in cooperation at international and domestic level.

It is vital to use all the tools available for administrative cooperation in the best possible way, since there are multiple forms of cooperation both internal and international, some of which are more developed than others.

It is highly recommended, in these simultaneous audits as in all forms of collaboration, to adopt a cooperative approach based on dialogue and trust, which is characterized, inter alia, by communication between the TAs and taxpayers, always respecting their rights and guarantees.

The recent reports of countries that are conducting more simultaneous audits are auspicious in this regard, which is why I believe that in many other countries their implementation should be enhanced.

In short, the primary objective of this article was to comment on simultaneous audits understanding that it is a topic that countries must explore more thoroughly to be more efficient in the collection of taxes. What do you think?

[1] CIAT Manual for Implementing and Carrying Out Information Exchange
[2] https://www.oecd.org/ctp/exchange-of-tax-information/ESP-Amended-Convention.pdf
[3] Today replaced by Council Directive 2011/16 / EU of 15 February 2011 on administrative cooperation in the field of taxation.
[4] CIAT Tax Procedure Code Model: The Ibero-american approach / 2015
[5] https://eur-lex.europa.eu/legal-content/ES/ALL/?uri=CELEX:32011L0016
[6] See quote 1.
[7] http://www.oecd.org/tax/forum-on-tax-administration/publications-and-products/joint-audit-2019-implementation-package.pdf
[8] https://www.eca.europa.eu/Lists/News/NEWS2101_26/INSR_Exchange_tax_inform_ES.pdf
[9] https://www.eca.europa.eu/Lists/ECADocuments/SR21 /SR_Exchange_tax_inform_ES.pdf

Disclaimer. Readers are informed that the views, thoughts, and opinions expressed in the text belong solely to the author, and not necessarily to the author's employer, organization, committee or other group the author might be associated with, nor to the Executive Secretariat of CIAT. The author is also responsible for the precision and accuracy of data and sources.

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