VAT Managers Need to Prepare For Audits and the Expansion of SAF-T Rules
So far companies have not been confronted often with an audit by the tax inspector – the average business gets an on-site visit for a VAT audit once in every 5-7 years. With the advent of SAF-T reporting and E-Audits for VAT, this will radically change.
According to data from the European Commission, the number of VAT registered businesses has grown exponentially. An increasing number of foreign companies have local inventory, or make substantial sales to individuals, registrations are required and returns need to be audited. More recently, the increase of self-employed individuals that require VAT registrations have put pressure on the tax authorities’ audit resources.
However even now, the frequency of tax audits has not decreased significantly. Inspectors have improved their audit efficiency, particularly over the last years, where statistical analyses, big data and cross-border mutual assistance have made the auditor’s life much easier.
Auditors used to be very selective in their tax audits, looking at particularly sensitive industries, at businesses with VAT returns that consistently claimed VAT refunds or simply at companies that made the headlines in the local newspapers. In the current audit environment, companies should expect that every VAT filing will receive some sort of scrutiny.
A well-known check is where the customer VAT identification numbers on the company’s EC sales list will be matched against the foreign tax offices’ tax payer data. Also, the detailed statistical analysis of a VAT return will identify sales or purchase numbers that differ from the company’s typical routine may raise questions. Benchmarks are used for specific industries, the size of the business, seasonal sales and a vast number of other performance indicators.
The European Commission has taken on an active role in improving the quality of VAT audits. They will put in minimum quality standard for audits, train auditors and create a platform to share VAT knowledge. They will even go as far as visiting the tax authorities’ offices, audit the auditors and come up with non-binding recommendations.
Next year, the Commission will announce further plans to improve the cooperation between the 28 EU tax authorities. Also, the Commission is actively involved in discussions with non-EU tax authorities, such as Switzerland, Norway and the United States, to further expand and automate the process of data sharing. Although the Commission’s main focus is on fighting organized crime and addressing VAT fraud, in the near future bona fide businesses that trade across borders should expect an increase in trade-related queries from their own tax inspector – or from tax inspectors abroad.
For non-resident companies that are selling online downloads to individuals in the EU, such scrutiny is already going on. We have seen that tax inspectors in EU countries send messages to non-EU online sellers, asking for trade data and inviting the companies to register for VAT and account for VAT on the sales made to EU individuals. With the new VAT rules for online sales to individuals within the EU, we expect that tax inspectors will start using their intra-EU assistance network to ask colleagues in other EU countries for data on online sellers as well.
With 2016’s year-end approaching rapidly, businesses should be extra sensitive for issues that may raise audit triggers. For example, now is the time to put in corrections in the input tax taken for goods and services that have been purchased in 2016 for personal use of employees, vendors and customers.
Even for sales that are typically zero-rated, like cross-border supplies of services to businesses and sales of goods, care should be taken that the correct values are reported and that eventual transfer pricing-related changes are reflected in the final VAT return. Similarly, for purchases where the reverse charge applies, now is the time to ensure that the reported reverse charge reconcile with the purchases and payments.
Some countries, such as Germany, used to allow a separate VAT filing to rehash at year-end all VAT corrections that were required. Now this separate filing is no longer available, but it would still be appropriate to use the last VAT return as a means to correct previous errors. It will be important, however, to list and disclose these corrections in an accompanying letter or message to the tax inspector, so that he can recognize the corrections and ask further questions where he feels necessary.
In 2017 we expect that tax authorities will dramatically expand the scope of the data that they require companies to submit. The so-called SAF-T (Standard Audit File for Tax) rules that have been introduced by Poland in 2016 will likely be mirrored by other countries. France, for example is working on their own template of tax data submission that may be rolled out further to a broad set of companies and industries in the course of 2017.
Large businesses should expect a further draw on their IT resources for addressing these strict requirements: the initial setup of the interface and collecting the data from the various resources in the company and subsequently the maintenance of the interface.
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