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International Tax Avoidance and Evasion
1 - Opening and Introduction
Ankara, 7-11 May 2007
MULTILATERAL TAX NETWORK
Large Taxpayer Units15. Horizontal Monitoring
The Netherlands
Nairobi, 14 – 18 February 2011
Centre for Tax Policy and Administration
Organisation for Economic Co-operation and Development
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The Netherlands
• 16 million inhabitants• 1.200.000 small businesses• 11.000 medium sized businesses
(MSB) • 1.500 very large businesses (VLB)• import/export country• large service industry:
financial centre in Europe• tax-treaties
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Objective Netherlands tax authorities
• Our mandate is to execute laws and regulations effectively and efficiently
• Our objective is to ensure the willingness of taxpayers to observe, maintain and reinforce legal obligations (compliance)Compliance is – Reporting relevant facts correctly, on time and in full – Paying the correct amount on time
• The intensity of our supervision is determined by willingness and ability to comply with law and regulations
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Promotion of compliance
• Basis is trust and sharing reponsibility
• Service oriented
• Respectful conduct
• If necessary: corrective action
• Last resort: criminal court
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Development
• Expert- or knowledge groups: – Coordination group Very Large businesses– Coordination group Transfer pricing– Coordination group Group financing and Tax havens– Expert group EDP/Statistical Audit– Expert group International Fiscal Affairs– Working group Tax control framework– etc
• Intervision between account teams:– learn from each other– best and worst practices
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Account management MSB and VLB
• MSB and VLB:– Individual approach– Preferred supervision method: horizontal monitoring
• Multidisciplinary account team chaired by account manager (client coordinator)
• Up-to-date client profile and assessment of tax compliance risks, includes:
– Knowledge of ‘tone at the top’ and core business of a company– Knowledge of tax strategy and (tax) risk management process– Understanding of the tax function and tax control framework
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The account team
• Account manager/ client coordinator• Auditor• Specialist corporate income tax• Specialist VAT• Specialist payroll taxes• Specialist income tax• EDP/ statistical auditor• Tax collector• Manager
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Client coordinator/ account manager
• Plays a crucial role in integrated and multidisciplinary approach
• Is responsible for an adequate and actual picture of the group entity
• Chairs a team of specialists• Manages communication NTCA and taxpayer• Responsible for developing and maintaining a strategic
individual supervision plan– long term strategy– short term strategy (next year)
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Tax compliance risks
• Distinction in various risks – formal (e.g. late filing/payment)– interpretation (technical)– operational/internal process– tax planning, tax evasion versus tax fraud
• Special tax risks– CIT:
• transfer pricing• financing arrangements• tax havens
– VAT• distinction non – exempt activities
– Wage tax: • salary split• stock options• excessive wages
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Tax risk management VLB’s
• Identification and understanding of tax risks in real time
• Transparancy (voluntary reporting) about relevant tax risks requires – an appropriate ´Tone at the top’ – a Tax Control Framework
• Covering of selected risk– desk review– on site visit– (preliminary) meeting with VLB leading to an advance ruling etc. – integral or partial tax audit (sampling techniques)
• Interpretation risk: Agree to disagree
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Strategic individual supervision plan
• Account manager is responsible for customised strategic individual supervision plan– Determination of compliance risks – Registration in specific database (ATK)– Assessment of time required and financial risk involved
• Includes understanding of existence, set-up and operation of TCF and level of in-control
• Sharing of risks and experience through ATK database
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IT Platform: ATK
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What is the purpose of horizontal monitoring?
• To stimulate and maintain tax compliance– focus on the willingness and ability to comply– influence behaviour
• To understand the business– including all work that has already been done by the internal and/or
external auditors– including all legislation e.g. corporate governance and accounting
principles
• To solve tax issues ‘in real time’– instead of having conflicts about tax issues from the past– more efficient for both parties
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In the old days...
External observations• Much controversion in the
relation• Target on general risks
(many fishing expeditions)• Problems with slow working
knowledge and expert groups
Internal observations• Large backlog: a lot of ´old´
tax returns and appeals were still pending
• Problems with companies delaying and frustrating the fact finding process
• Scandals led to the idea that “companies cannot be trusted” (Enron, Worldcom, Ahold)
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What can we learn?
• We need to focus on the future– For businesses: to keep up and be in control of changes in
environment, society, laws and regulations etc– For the NTCA: to keep up and understand the facts and
figures of the business, as they are happening in real time
• What was important yesterday, may not be important tomorrow– What are the underlying procedures and processes?– What is the underlying culture?
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How does horizontal monitoring work in practice?
• A joint process with the company• Step-by-step model• Each step leads to an evaluation:
• The profundity of each step depends on the actual knowledge about the company
GO NO GO??
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The horizontal monitoring-process step by step
Time
Up-to-date client profile
Analysis & Improvement Tax Controls (TCF)Introduction to
HM
Resolution of pending tax issues
Compliance-scanForm and intensity of supervision adjusted
Phase 1: Client profile
Phase 2: Is horizontal monitoring possible? Phases 3/4: View on Tax Controls
Phase 5:Supervision adjusted
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Transparancy, Trust and Understanding
Intensity of attention (focus)
Attitude/ b
ehaviour
In control o
n tax
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Double focus
1. Attitude / behaviour: “tone at the top”– Is the management of the company willing to be
compliant with regard to tax?– Is the company willing to be transparant towards the
NTCA about relevant material tax issues?
2. In control on tax– Is the company able to be in control with regard to
its material tax issues?– Does the company have an adequate ‘Tax Control
Framework’ or is it willing to work on it?
Intensity of attention (focus)
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Step 0Up-to-date client profile
• Responsibility step 0: – account team NTCA
• Starting point horizontal monitoring-process• All national taxes• Scope is ‘group entity’:
– all group companies in the Netherlands
– manager-shareholders
Up-to-date client profile
Phase 1: Client profile
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Step 1 Introduction to horizontal monitoring
• Responsibility step 1:– Account team NTCA– Management NTCA– Management LB
• Mutual ‘exploration’• Responsibilities and expectations• Tone at the top
Introduction to HM
Phase 2: Is horizontal monitoring possible?
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(Dis)AdvantagesAdvantages• No fact finding in the past: current
and future issues• Certainty tax position: no surprises• Quick decisions• Reduction of administrative burden /
costs• Support ‘in-control’ statement and
reputation: shareholder value• Effective and efficient supervision• No duplication of work done by
others (e.g. internal and/or external auditors)
Disadvantages• Voluntary openness on
tax risks• Possible: (Higher)
costs initially for developing tax control framework
• Culture change• Time
pressure/resources
Introduction to HM
Phase 2: Is horizontal monitoring possible?
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Step 2
Compliance scan • Responsibility step 2:
– Account team NTCA– LB
• Intensity based on completeness client profile• Teamwork together with LB• Themes
– strategic goals LB– internal control – IT– tax function (including tax advisory)– external supervision (e.g. audit annual accounts)
• Coherent with analysis and improvement tax controls (step 5)
Compliance-scan
Phase 2: Is horizontal monitoring possible?
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Tax audit
Businessprocess
Internal control
Internal audit
External audit
Tax audit
Peeling the onion
SOX-audit
in control statement (SOX)
Audit annual accounts
SAS70 (TPM)
Other techniques
COSO
Tax Assurance
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Possible conclusions compliance scan
The VLB/MSB:• is willing to be
transparant• is willing to be in
control• is able to be in
control
The VLB/MSB• is willing to be
transparant• can be expected
to be in control• is willing to work
onimprovements
The VLB/MSB:• is not prepared
to invest inimprovementsof its controlframework(doesnot wantto be further incontrol on tax)
The VLB/MSB:• is not willing to
be transparant
Phase 2b. Horizontal monitoring notpossible
Phase 2a. Horizontal monitoring possible
Step 2: Compliance scan
(intensiity depending on completeness client profile)
Agreement aboutimprovements
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Step 3Resolution of pending tax issues
• Responsibility step 3– Account team NTCA– LB
• Large backlog• Problem solving attitude• ‘Agree to disagree’• Adjustments and fines
Resolution of pending tax issues
Phase 2: Is horizontal monitoring possible?
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Step 4Milestone: Compliance agreement
• Responsibility step 4:– Management and account team NTCA– Management LB
• Agreement between company and NTCA• Focus on attitude, behaviour and tax control• Transparancy, trust and understanding • Within boundaries of law, regulation and jurisprudence• All taxes and tax collection• Roles and responsibilities are clear
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Step 5 Analysis & Improvement Tax Controls (TCF)
Business process
Risk analysis/control procedures
Application ofprocedures
Testing ofprocedures
Evaluate and re-design
PLAN
ACT
CHECK
DO
Analysis & Improvement Tax Controls (TCF)
Phases 3/4: View on Tax Controls
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Tax Control Framework
• The degree to which a business is in-control determines to a large extent the form and intensiveness of the additiontal monitoring carried out.
• Understanding of existence, set-up and operation of TCF• TCF should provide reliable tax information and as a
consequence correct tax position and timely and correct tax returns and payments
Analysis & Improvement Tax Controls (TCF)
Phases 3/4: View on Tax Controls
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Tax Control Framework (2008)
• Memorandum• No blue print• Principle based
and not rule based• Attention for soft controls• Form and intensity of
the supervision by NTCA is based on the extent to whicha large business is in control
Analysis & Improvement Tax Controls (TCF)
Phases 3/4: View on Tax Controls
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Step 6Form and intensity of supervision adjusted
Actual information..• Strategic individual supervision
plan (Up to date client profile) • Information from third parties• Processing of tax returns• State of Tax Control Framework
Form and intensity of supervision adjusted
Phase 5:Supervision adjusted
.. Leads to • Review of work done by or on
behalf of the LB– Cooperation with internal and
external auditors• Completeness information in tax
return• Statistical sampling method• Correctness information in tax
return
Less frequent audits
More efficient and less time consuming audits
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To support our officers
• Guidebook• Summary of background
horizontal monitoring• Outline step-by-step
model• Publication on the
website of NTCA expected October 2010
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Overview: Dutch approach LB
• The NTCA manages risk in the large business area on an individual basis.
• The approach is to build on corporate governance and financial reporting rules requiring that companies continuously monitor their own risk, including their tax risks.
• The degree to which a business is in control determines to a large extent the form and intensiveness of the additional monitoring.
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Overview: Dutch approach LB (2)
• Horizontal monitoring requires that the NTCA have a clear understanding of the existence, set-up and operation of internal controls concerning tax.
• If a (Tax) Control Framework is solid, the monitoring focuses on the effect of internal control measures and preliminary discussions on current tax issues.
• The tax returns will not contain any new information requiring immediate attention.
• For each LB a strategic individual supervision plan is in operation
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Thank you for your attention !Thank you for your attention !
