EU joint tax audits

In the proposal package released by the EU Commission on amendments to the Directive 2011/16/EU on Administrative Cooperation in the Field of Taxation (the DAC) on 15 July, a new Section IIa (and Article 12a) will be added to the DAC (subject to EU Parliament and Council vote) setting out a clear framework for the conduct of joint audits between two or more EU Member States. The Member States involved can coordinate the tax examination of a case relating to one or more taxpayers where there is a common or related interest to them.

The benefits of joint audits highlighted in the proposal package include a basis to offer legal certainty to taxpayers through clear procedural rules. The underlying aim is to mitigate the risk of double taxation (potentially minimising the need for further steps such as Mutual Agreement Procedure (MAP)) and create more efficiency (achieving this aim with minimum resources and time). However, increasing collaboration between tax authorities and the impact of transparency in all information submitted through the DAC will require careful tax risk management from taxpayers.

Background

Chapter III of the Directive 2011/16/EU on Administrative Cooperation in the Field of Taxation (the DAC) outlines the current forms of administrative cooperation between tax authorities in conducting intra-EU cross border tax audits. These include:

• Allowing tax administrations in Member States to agree that foreign officials can be present in administrative offices of another Member State and participate in administrative enquiries, interviewing individuals and examining records (Article 11).

• Simultaneous controls involving two or more Member States agreeing to conduct an audit, in parallel and each in their own territory, of one or more related taxpayers which are of common or complimentary interest to their respective tax administrations (eg entities of the same Multinational Enterprise (MNE) Group with economic activities in different Member States) (Article 12). The main aim is to exchange information obtained.

These provisions are the combined basis of any joint or co-ordinated tax audits undertaken by Member States currently and there is no explicit legal basis in the DAC for conducting joint or simultaneous tax examinations. Additional complexity also arises in the implementation of these articles in domestic Member State legislation which varies and also impacts their effectiveness.

Proposed provisions

A joint audit is defined as "an administrative enquiry which is jointly conducted by the competent authorities (CA) of two or more Member States in a pre-agreed and coordinated manner" (new Article 12a(1)). It can be initiated by either the CA of one Member State requesting the CA of another to jointly conduct an audit or a person (including a natural and legal person) requesting a CA of two or more Member States to jointly conduct an audit.

In both circumstances, the CA(s) of the Member State(s) must respond within 30 days from the receipt of the request. The request can be rejected if the audit enquiry or communication of information would breach the legislation of either CA or there exists any other reason which justifies rejection. However, the exchange of information between CAs related to a commercial, industrial or professional secret or to a commercial process, or of information whose disclosure would be contrary to public policy should not be refused in the context of an audit but remain confidential among the CAs. It is not to be disclosed to third parties.

The audit will be conducted in accordance with procedural agreements in the Member States where the actions of an audit take place. The evidence collected will be mutually recognised by all CAs of the participating Member States and practical aspects, including managing the linguistics of different Member States, need to be agreed between participating Member States.

The participating CAs of the Member States will agree the facts and circumstances of the case and reach an agreement on how to interpret the tax position of the audited person(s). The conclusions of the audit will be presented in a final report and should have equivalent legal value to relevant national instruments issued as a result of the audit in each participating Member State. The audited person(s) will be notified of the outcome within 30 days after the final report is issued.

To implement the outcome of the final report, Member States must provide a legal basis for performing any necessary corresponding adjustment.

Impact of including the new Article on Joint Audits in the DAC

Reports published by the OECD on joint audits¹ and the EU Joint Transfer Pricing Forum (EUJTPF)² in the last couple of years demonstrate the case for an effective framework for joint or simultaneous audits both from a taxpayer and tax authority perspective designed and operated in a clear, consistent and efficient manner.

In some Member States, the addition of this new article may lead to a more concrete basis extending powers beyond information exchange through simultaneous audits with greater cross-border collaboration between CAs of Member States. The DAC also continues to expand its scope (introducing reporting obligations for digital platform operators under DAC 7) and use (proposal to allow information exchange under the DAC to be used for administration, assessment and enforcement of VAT and other indirect tax) of information included within mandatory information exchange. Combined, these aspects give tax authorities another mechanism to tackle tax avoidance, double and no taxation.

From a taxpayer perspective, the framework provides transparency on how joint audits can be initiated and undertaken (subject to domestic implementation and guidance). Joint audits do not replace domestic procedures or the need for MAP but may help the taxpayer reach agreement with tax authorities of more than one Member State without leading to double taxation and with the benefit of potential certainty of their tax position in those Member States going forward. In-house tax teams will need to strategically consider the options available to tax authorities in initiating an audit and the practical and domestic procedural aspects of negotiating and settling their tax position.

The changes to the DAC will not apply directly to the UK assuming the Brexit transition period ends on 31 December 2020 as expected. However, in the longer term, there remains the possibility that the UK may reach some form of joint agreement with the EU on tax co-operation which may incorporate some aspects of the DAC. Certainly, the UK has, in many ways, been at the forefront of efforts to increase tax transparency and share information globally in recent years and it would be surprising if the UK did not seek to replace international agreements providing for international tax co-operation with new agreements post-Brexit.

¹ The OECD published a report "Joint Audit 2019 - Enhancing Tax Cooperation and Improving Tax Certainty" 28 March 2019, outlining challenges and opportunities as well as best practices for the conduct of joint audits for direct tax issues.

² EU Joint Transfer Pricing Forum (EUJTPF) - A Coordinated Approach to Transfer Pricing Controls Within the EU, October 2018