This post is a complement to my 5 April Pre-Audit Strategies blog. Pre-audit strategies are addressed, the audit is conducted, ultimate settlement is achieved and workpapers are returned to the files. Post-audit tax strategies can be utilized to address learnings for future audits, critique the pre-audit strategy approach, and form Best Practices to minimize global risks.
The following ideas should be beneficial in a post-audit tax strategy review:
- List all items in the pre-audit strategy checklist, using my prior blog as a reference along with your ideas. Based on hindsight, provide a rating of 1 to 5 for each strategy with comments.
- Revise the global checklist, if applicable, for future audits.
- Cross-reference the pre-audit checklist against the top risks encountered / not initially settled in the audit for correlation. Are there items that should have been performed before commencement of the audit that were not foreseen at the time?
- Review utilization of tax counsel in the audit to address significant risks; were they involved, should they have been involved earlier, was counsel appropriate for the risks being contested, what learnings can be gained?
- Were audit meetings negotiated efficiently using the appropriate individuals? Should there have been additional training to address significant tax risks, educate the auditor in the company’s transfer pricing methodology, etc.?
- Should a company overview have been provided, if applicable, to provide context for the auditor prior to requests for data?
- Conduct a 360 feedback with everyone involved in the audit to gain efficiencies in the ways of working.
- Were there basic misunderstandings between the auditor and the company that could have been addressed differently?
- Assess the consistency of audit responses with other audits being conducted globally; are they globally consistent to form a uniform basis for discussions between tax authorities sharing information?
- Are there new risks identified that should be included in the global Tax Risk Framework?
- Were audit defense mechanisms reviewed timely to plan effectively?
- For US multinational companies, were memorandums prepared for foreign audits to obtain additional assurance for receiving the benefit of a Foreign Tax Credit? Foreign counsel should be proactive in this effort from the beginning of the audit, outlining cost/benefit relationships, practical appeal opportunities, probability of success for alternative appeals, etc. This memorandum should be discussed early in the audit to align expectations.
- Review precedents established for future years, and applicability for post-audit years.
- Review tax reserves established for the audit years, and all open years.
- Provide a brief memoranda to the audit participants and senior management, summarizing the audit and successful interaction of internal and external resources.
- Were Double Tax Treaty, bilateral and/ or multilateral defenses used? Review their effectiveness, or choice not to use.
- Review the interaction of internal and external resources; who was in control of the strategy?
- In today’s environment of increased collaboration between the tax authorities and multinational companies, should an enhanced collaborative tax return / audit strategy be considered to provide timely certainty?
- Develop a post-audit tax checklist as a learning tool for individuals engaged in tax audits.
The above points should form a foundation to engage in this beneficial exercise, highlighting learnings and opportunities, while adopting a Best Practices approach.
I look forward to your valuable comments.
Comments on: "Post-Audit Strategies: Best Practices" (2)
some other points from a more operating point of view.
1) Double tax treaty: if you use it, have you all the essential documentation ready to be provided to your Tax Agency in case of audit?
Did you apply a privilaged WHT tax based on the above tax treaties? Did you requested and received all the certificates (not existing PE, shareholder participation, etc) to be provided in order to use the treaty?
Is the accountancy and bookeeping treatment the correct one following your domestic tax law?
2) TP: Mapping all the agreements, the invoices for the relevant costs and in particular the possible duplication of them in several wording contracts.
It should be possibile than a service received by your holding company was not described in the trademark agreement in the right way, and it seems very similar to the one provided following the cost sharing service one. This should be considered as a cost duplication and assessed as a wrong deduction for corporate income tax perspective.
3) Foreign VAT representatives: if your parent or related companies have opened in your country a vat representative or a VAT identification as far as foreigners companies, check out which kind of contracts with local contractors and clients are in force, in order to avoid the PE issue following the double convention treaty with your own country.
Considering also the application of the local VAT, if any: if doubtful or incorrect, you should evaluate the recovering of the tax considering the audit implications, which will follows the refund application request.
4) If some employees detachments occur, evaluate the risk as far as the recharge of the costs (TP and VAT implications) with particular attention to social security contribution and labour tax law treatment.
Thank you Alex for your valuable comments and additional Best Practice points for consideration.