Large Taxpayer Units 15. Horizontal Monitoring The Netherlands

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Large Taxpayer Units15. Horizontal
MonitoringThe Netherlands
Organisation for Economic Co-operation and
Development
MULTILATERAL TAX NETWORK
International Tax Avoidance and Evasion

• Nairobi, 14 18 February 2011

Ankara, 7-11 May 2007
1 - Opening and Introduction
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Centre for Tax Policy and Administration
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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 industryfinancial 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 VLBs

• 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
Intensity of attention (focus)
Attitude/ behaviour
Compli ance agreemenet
In control on tax
Time
Phase 1 Client profile
Phase 2 Is horizontal monitoring possible?
Phases 3/4 View on Tax Controls
Phase 5 Supervision adjusted
Up-to-date client profile
Analysis Improvement Tax Controls (TCF)
Introduction to HM
Compliance-scan
Form and intensity of supervision adjusted
Resolution of pending tax issues
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Transparancy, Trust and Understanding
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Double focus
Intensity of attention (focus)

• 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?
• 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?

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Step 0Up-to-date client profile
Phase 1 Client profile
Up-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

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Step 1 Introduction to horizontal monitoring
Phase 2 Is horizontal monitoring possible?
Introduction to HM

• Responsibility step 1
• Account team NTCA
• Management NTCA
• Management LB
• Mutual exploration
• Responsibilities and expectations
• Tone at the top

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(Dis)Advantages
Phase 2 Is horizontal monitoring possible?
Introduction to HM

• Advantages
• 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

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Step 2Compliance scan
Phase 2 Is horizontal monitoring possible?
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)

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Peeling the onion
SAS70 (TPM)
Audit annual accounts
SOX-audit
Tax audit
External audit
Tax Assurance
Internal audit
in control statement (SOX)
Business process
Tax audit
Internal control
Other techniques
COSO
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Possible conclusions compliance scan
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Step 3Resolution of pending tax issues
Phase 2 Is horizontal monitoring possible?
Resolution of pending tax issues

• Responsibility step 3
• Account team NTCA
• LB
• Large backlog
• Problem solving attitude
• Agree to disagree
• Adjustments and fines

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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

Compli ance agreemenet
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Step 5 Analysis Improvement Tax Controls (TCF)
Phases 3/4 View on Tax Controls
Analysis Improvement Tax Controls (TCF)
Business process
Risk analysis/control procedures
Evaluate and re-design
ACT
PLAN
CHECK
DO
Application of procedures
Testing of procedures
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Tax Control Framework
Phases 3/4 View on Tax Controls
Analysis Improvement Tax Controls (TCF)

• 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

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Tax Control Framework (2008)
Phases 3/4 View on Tax Controls
Analysis Improvement Tax Controls (TCF)

• 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

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Step 6Form and intensity of supervision adjusted
Phase 5 Supervision adjusted
Form 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

• .. 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 !