Tax audit is a process where tax authorities, based on their own fact finding, check taxes filled by taxpayers, examine accounting books and documentation, as well as review legal interpretations that are relevant for the purpose of making the final tax assessment. If an additional amount of tax or refund arises as compared with the taxpayers’ assessment, tax authorities issue a notice to the taxpayer.
In the current framework, audits usually happen after a taxpayer files its annual tax return. A large number of countries do not currently provide any time limits for audits, which makes the process time consuming and uncertain. As it can be seen in the timeline bellow, the overall process of auditing an intercompany transaction can take up to 12 years (based on Transfer Pricing Associates' professional experience).
Source: Transfer Pricing Associates
It is already perceived that many tax authorities worldwide are moving towards ‘natural systems’ models that integrate tax compliance into natural business processes and real-time transactions. As discussed in our previous articles Tax Administrations Raise the Playing Field with Technological Solutions and Tax Technology - Electronic Invoicing in South America, there is a trend that filling will become real-time, decreasing drastically the time of the assessment by the tax authority and increasing compliance.
Additionally, the experience of the Brazilian SPED system has shown a clear disruptive movement from the end of the old models of tax returns to a new paradigm of real-time data analytics. Moreover, the Australian Tax Office has set up the International Dealing Schedule that makes the Country-by-Country Report (“CbCR”) data more searchable. The tool is able to analyze free text and non-standard data sets.
Besides, Advanced Price Agreements (“APAs”) might be endangered with the advent of the International Compliance Assurance Programme (“ICAP”). ICAP is a voluntary programme that will use CbCRs and other information to facilitate open and co-operative multilateral engagements between MNE groups and tax administrations, with a view to providing early tax certainty and assurance. To summarize, ICAP aims to provide an MNE a multi-jurisdictional risk assessment. At the current stage, the programme is a pilot and has been adopted by Australia, Canada, Italy, Japan, the Netherlands, Spain, the United Kingdom and the United States.
As discussed, tax authorities are heading towards real time assessments with the help of technology. The post-BEPS era and the call for transparency are main reasons behind it. Therefore, we believe that the traditional post-transactions tax returns will be substituted by the potential anticipation of it through a real time audit. Instead of filling at the year-end, a real time access will allow tax administrations to control compliance at the time the transaction is taking place. In the timeline below, you can find what we believe can be the future of the assessment process.
Source: Transfer Pricing Associates
The framework exposed above exemplifies some of the systems that are already in place or being developed across the globe. It is important for taxpayers to understand that digitalization has a huge impact on the tax sphere and that changes may also impact the way tax administrations perform their routinely audit processes.
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