Going dutch

There’s a hard lesson for us all that’s emerging from the current global financial crisis. Staying competitive in today’s volatile and fast-changing business world requires the striking of the right balance between risk and reward. To achieve and retain their potential, companies need fast, easy access to the information and people that can help them make the right decisions.

“That’s why we have invested in global industry centres around the world,” says Caroline van Noordenne, Partner Multinational Corporate Tax at Ernst & Young in the Netherlands, adding, “These serve as virtual hubs for sharing industry-focused knowledge and experience.

“Our commitment of time and resources means that we can anticipate market trends, identify implications and develop clear points of view on relevant industry issues. Our multi-disciplinary teams help clients to fully assess their tax strategies and exposures while also assisting them with international tax issues – from forward planning, through reporting to the maintenance of effective relationships with the tax authorities.

“Our talented and highly experienced people draw on their global insights and perspectives to help clients build pro-active and integrated global tax strategies that address the tax issues of today’s businesses and help them achieve sustainable growth.

“The challenges presented in the minefield of current tax systems are formidable. We believe a good starting point for getting things right is for each company to carefully and comprehensively formulate a formal tax strategy. To some, this might seem just another bit of paper but it needs to be seen as much more than that if your tax function is to add real value to the business.”

In response to increased scrutiny from the revenue authorities and other regulators, leading companies now view a tax strategy as a dynamic framework that is shaped by internal and external drivers. These companies use their tax strategy to define how the business can operate in the most effective manner, which these days is about so much more than a lower effective tax rate.

A workable tax strategy needs to be as comprehensive as possible and should cover a number of key elements. The starting point is to define objectives for the tax function that are aligned to the company’s overall business strategy and there should be a governance and risk management model to enable those objectives to be achieved.

The roles and responsibilities for tax matters in the tax department, in finance and in the business, right across its key jurisdictions, need to be clearly defined. So too should be relationships with the revenue authorities, external advisers
and other relevant third parties.

A data and systems’ supply chain needs to be created to support the tax function. Of course, writing this all down into a strategy document is one thing, but it’s in subsequently putting it into practice for the long term that many companies fall down. “Yet the benefits are manifold,” says Caroline van Noordenne, “A robust, board-approved tax strategy will fully respond to tax authorities’ expectations when it comes to matters of governance.

Clarified tax planning
“It will create clarity about the company’s tax risk appetite, which will facilitate identification of tax-planning opportunities that are appropriate to the business’s wider commercial objectives and will give a consistent and efficient review and evaluation of tax-related matters.”

Moreover, it will pinpoint improvements that can be made in tax-related systems, processes and controls, identify clearly where additional tax resources or funding may be required and monitor and strengthen governance procedures in decentralised and overseas jurisdictions, as well as raising the profile of tax concerns among key business and financial stakeholders.

Adds van Noordenne: “Here at Ernst & Young we can use our holistic approach to tax strategies to tailor our advice to a client’s needs by focusing not only on the strategy document but on the implementation and improvement of its provisions across the operation. “Given the kaleidoscopic array of factors, from globalisation, ever-tougher regulatory pressure, increased demands for transparency, tight resource pools, shorter financial close cycles, advances in technology, ever-greater tax complexity and sensitivity to risk, the demands and expectations surrounding tax function performance have increased beyond all measure and critically affect all phases of the corporate tax-life cycle.

“Consequently, corporate leaders are redefining the role of the tax function. They now expect bottom-line contributions, timely decision-making support and accurate tax reporting, combined with greater operational efficiency and more effective tax-risk management.

“Ernst & Young’s Tax Accounting & Risk Advisory Services (TARAS) practices, which are networked throughout the world, have highly qualified tax function professionals who work with clients to implement the people, process and technology changes that are required in order to create a more effective and sustainable tax function for the future.”

Ernst & Young, a dynamic firm that now employs more than 130,000 people globally, continually introduces more and more refined services.

A recent development in Ernst & Young’s offerings in the Netherlands is the introduction of an efficient statistical sampling technique that provides a clear insight into potential VAT and wage tax and national insurance contribution risks faced by a business. This responds to developments that the Dutch Supreme Court formally approved – the Dutch tax authorities audit method/technique known as the ‘guldensteekproef’, or literally translated, ‘golden random sample’.

Ernst & Young is highly familiar with the parameters used by the Dutch authorities and is able to perform a similar random survey to provide clients with an estimate of their VAT and/or wage tax and national insurance contributions exposure risk. The sampling also fits into other recent developments around horizontal monitoring, and as an annual check, can also contribute to the enhanced monitoring of the tax control framework; but more on this later.

Its operation is simple. The client provides Ernst & Young with the relevant data either as files or, using easy-to-follow instructions from Ernst & Young, by means of a standard functionality of the ERP system. An Ernst & Young auditor then ‘draws’ the random sample and asks the client to provide specific invoices from their records. Ernst & Young’s Indirect Tax/Human Capital team will then review the invoices and determine the extent of the potential VAT and/or wage tax assessment by using the same VAT auditing techniques that are employed by the Dutch tax authorities.

If required, the firm assists the client in discussions with the tax authorities on the outcome of the sampling, as well as setting up and improving the client’s control framework and risk management strategy relating to VAT and wage tax/national insurance contributions. Using this sampling technique on a regular basis enables the client to monitor VAT, wage tax and national insurance contribution risks on a structural basis. Furthermore, Ernst & Young Indirect Tax/Human Capital has been able to get the Dutch tax authorities to accept that self-initiative by the client constitutes horizontal monitoring.

Better monitoring
Observes Caroline van Noordenne: “Some of our clients have now concluded agreements with the tax authorities that recognise that the use of this statistical sampling technique is part of their tax control framework and they now have periodical meetings with them to discuss the outcome. This allows time-consuming VAT and wage audits to be minimised while at the same time strengthening the client’s ongoing working relationship with the tax people.”

An annual statistical audit can contribute to better monitoring of the tax control framework. In particular, the sampling method can be used to check whether or not the internal procedures that should have been implemented are in fact being carried out. Importantly, carrying out a statistical audit provides the opportunity for the client to agree with the tax authorities that no penalties will be levied, provided that any errors identified are corrected on a voluntary and proactive basis. Back in April of 2005, the Dutch tax administration initiated a pilot horizontal monitoring scheme that involved 20 of the country’s largest corporate taxpayers.

The aim of horizontal monitoring is to improve the relationship between the tax authorities and corporate taxpayers, based on trust and transparency, with the spin-off benefit of increased efficiency for both sides in the tax process. Soon after the pilot scheme’s introduction, a further 20 very large enterprises began to take part and responses to the programme were generally very positive, with 94 percent of the participating companies signalling to the Dutch Ministry of Finance that they were very satisfied with the horizontal monitoring regime and agreeing to continue their commitment.

This reaction led to a further 1,500 very large companies being approached to participate in horizontal monitoring. Horizontal monitoring can be characterised as a form of voluntary disclosure under which the taxpayer promises to actively notify the tax administration of any issues that have a possible significant tax risk and to disclose all the facts and circumstances surrounding these issues without hesitation or reservation. In return, the tax administration promises that, having received disclosure, it will provide timely advice on the matters concerned, taking into account real commercial deadlines for doing so.

Additionally, the taxpayer agrees to file its tax returns within an agreed time-frame and the tax authorities undertake to impose tax assessments as soon as possible after receipt of the return and to do so in consultation with the taxpayer wherever possible.

The objectives of a compliance agreement are to create a collaborative approach that will make more efficient and less costly use of the resources of both the taxpayer and the authorities. It will reduce tax uncertainty and at the same time discourage the use of aggressive tax-planning schemes that would otherwise end up being challenged as part of the regular tax audit process. Its over∞riding aim is to create real trust and openness between the taxpayer and the revenue authorities, for everyone’s benefit.

Less rigorous audits
Companies taking part in the horizontal monitoring regime should face far fewer and less rigorous tax audits since all the relevant facts and circumstances have been discussed upfront. This is a major advantage for taxpayers, since tax audits are not only extremely time-consuming but usually take place years after the relevant facts and circumstances took place – a factor that bears the strong risk that the relevant information, and the people involved, are no longer available.
The two parties formalise their responsibilities and obligations by entering into a so-called ‘handhavingscovenant’ or compliance agreement.

A horizontal compliance agreement may cover all taxes and is forward-ooking rather than being retroactive. It generally applies from the date of signing and it is important to understand that it is a purely voluntary agreement from which either side can withdraw at any time.

Concluding a compliance agreement is a move that is usually combined with a separate settlement agreement covering previous fiscal years that allows a catch-up so that everything starts with a clean slate. A compliance agreement does not change the Revenue’s nor the taxpayer’s rights, responsibilities or power but, instead, is aimed at facilitating more transparent control over compliance with the relevant laws and regulations.The parties may still end up agreeing to disagree and in such cases they are still free to seek judgement from the tax courts.

Companies like to be in control of their own destinies and do not like being confronted with surprises. Building a tax control framework that is embedded in the organisation to ensure the proper implementation and documentation of the company’s tax strategy and its risk management processes and controls results in an increasingly sophisticated and efficient way in which the company manages its tax risk and liaises with the authorities.

“The availability of an enhanced relationship with the tax authorities, as also envisaged by the OECD, has the potential of further accelerating the trend towards horizontal monitoring,” comments Caroline van Noordennne. “However, there is at present a stumbling block where SMEs are concerned. They are excluded from the regime for now because their sheer weight of numbers would at present overwhelm the system.

However, the tax administration has concluded compliance agreements with representative associations in certain specific business sectors and the member companies of such associations can voluntarily join such a sector compliance agreement.”

The motto of the Dutch Revenue is to help taxpayers who are prepared to work openly and cooperatively to pay the right amount of tax at the right moment.

Accordingly, the taxpayer shares knowledge of business, business developments and emerging tax risks in real time and before returns are filed while the revenue people work with the taxpayer to focus only on important issues and to resolve these before the returns are filed.

The taxpayer is responsible for operating a well-embedded tax control framework and for actively reporting in advance all significant potential future tax risks. It is also incumbent on the taxpayer to disclose all circumstances and facts regarding these issues, without hesitation or reservation; to inform the Dutch Revenue of the company’s view on the tax implications of facts and circumstances and reporting positions taken; to not only allow but to encourage free and open dialogue between relevant staff and the revenue; to provide any requested information as completely and quickly as possible and to file tax returns promptly.

Timely advice
In return, the revenue undertakes to provide timely advice on disclosed significant reporting positions; to periodically discuss the tax risks that the revenue has itself identified; to inform the taxpayer of relevant information relating to tax risks that have been highlighted by the taxpayer; to explain fully why certain information has been requested; to consult with the taxpayer on deadlines for responding to such requests; to impose tax assessments as soon as possible after receipt of the return and, where possible, in consultation with the taxpayer, and to indicate in advance which specific risks it will focus on in any tax audit.

Says Caroline van Noordenne: “We assist our clients in the entire process on the way to securing a horizontal monitoring compliance agreement, both the trajectory preparing for horizontal monitoring and the discussions with the tax authorities themselves. This includes discussing, assessing, designing and documenting the tax function and tax control framework, undertaking risk assessments, carrying out tax controversy reviews and statistical sampling and negotiating closure of open tax years and the content of the compliance agreement itself.”

“Ernst & Young in the Netherlands offers a full range of tax services. Given the current challenging business environment, executives are seeking to align their global tax position with their overall business strategy in order to maintain a competitive edge and provide best value to their shareholders.

“Ernst & Young International Tax Services helps clients manage their tax requirements by leveraging its integrated global network of dedicated international tax professionals, working together to manage global tax risks, meet cross∞border reporting obligations and deal with transfer pricing issues. Multi∞ disciplinary teams help clients to assess their tax strategies and exposures, assisting with international tax issues – from forward planning through reporting to maintaining effective relationships with the tax authorities.

“Our highly talented people draw on their global insights and perspectives to help clients build proactive and integrated global tax strategies that address the tax risks of today’s business environment and achieve sustainable growth. It’s how Ernst & Young makes the difference.”