Coordinated and simultaneous tax audits
The increase in companies operating across borders means a growing cooperation between national tax authorities will be unavoidable in the future. Specifically, coordinated tax audits are increasingly under discussion. A pilot study with the goal to strengthen the cooperation between the tax authorities is currently in progress at European level within the framework of the Fiscalis Program, which will end in 2020 (EU Regulation No. 1286/2013, dated 11 December 2013).
The main objective of coordinated tax audits is to achieve a mutually agreed determination of cross-border cases during the audit with the participation of foreign tax auditors. This should result in the avoidance of international tax conflicts (untaxed income “white income” or double taxation issues).
Coordinated tax audits must be distinguished. On the one side, the term “coordinated tax audit” includes simultaneous tax audits. Simultaneous tax audits refer to tax audits that are con-ducted simultaneously but also independently by the tax authorities involved in their own territory. The subsequent exchange of information is based on international agreements and European tax law such as Art. 26 OECD-Model Tax Convention or Sec. 10-12 EU-Administrative Cooperation Law. Hence, the simultaneous tax audits represent a kind of multilateral exchange of information.
Joint tax audits
The term “coordinated tax audit” includes so-called joint tax audits. Joint tax audits are bilateral or multilateral tax audits that are conducted at the same time and together with foreign tax authorities. The tax audit team consists of domestic and foreign tax auditors who are equally authorised to conduct investigations in their own and in foreign territory. The joint tax audit is primarily conducted on the same legal basis as a simultaneous tax audit.
During a joint tax audit, the competencies of domestic tax auditors on foreign territories are limited to their respective domestic legal provisions. Consequently, the domestic legal provisions restrict the competencies of foreign tax auditors on domestic territories if the foreign legislation provides for more extensive investigation competencies. In case of joint tax audits with EU member states, foreign auditors are granted a passive right of investigation, which includes their presence during the tax audit period in the offices of the domestic tax authorities and during official investigations.
Cross-border legal issues
Due to the lack of uniform legal provisions for conducting joint tax audits in several countries, there are currently various open legal questions.
Because of the internationally staffed tax audit team, tax-relevant information is already disclosed in the course of the investigations. Against this background, it must be checked which information is legally allowed to be disclosed to the foreign tax authorities. The legal basis for the information disclosure has to be clear and precisely arranged (Federal Constitutional Court Decision 1550/03). Whether the applicable Art. 26 OECD-Model Tax Convention serves this purpose seems questionable, especially since it hardly refers to the conduction of joint tax audits.
In the context of the information disclosure it must be ascertained that the tax secrecy is guaranteed in the foreign country. Also, concerns regarding data protection seem appropriate, since currently there is no obligation to agree on a mutual data protection during joint tax audits.
The final, and probably most significant, issue with the current lacking uniform provisions for joint tax audits is the non-binding coordination of the involved tax authorities regarding the drawn legal consequences of the jointly determined case. An obligation to avoid international tax conflicts (e.g. double taxation) can only be found in the regulations concerning mutual agreement and arbitration procedures (Art. 25 OECD-Model Tax Convention). If the joint tax audit does not lead to a mutually agreed determination but rather to international taxation conflicts, the taxpayer is only left with the option to initiate a mutual agreement procedure following the joint tax audit. This is contrary to the purpose of a fast determination of the case within a joint tax audit due to the usually long duration periods of mutual agreement and arbitration procedures.
Uniform legally binding provisions for all countries to conduct joint tax audits should be introduced in the near future. Joint tax audits can be advantageous, especially for multinational companies due to the shorter duration because of the combination of multiple international tax audits. This can lead to a time-efficient investigation of the case, less administrative effort and a faster achievement of legal certainty.