Tax implications of inspections


Tax experts at a company never look forward to tax inspections, especially when it is a comprehensive audit by the tax authority. The tax authority may focus either on a specific tax type or on the payment of a tax liability, but during a comprehensive tax inspection all tax types can be subject to a detailed review. Of course, the tax types inspected in most detail are value added tax and corporate tax, but transfer pricing documentation has also been subject to more audits recently along with the EKAER reporting obligation and the data export function of invoicing programmes.

Frequency of inspections

The frequency of tax authority inspections is greatly influenced by the industry the company operates in and its tax capacity. Every year the tax authority publishes information on its inspection guidelines for the given year, describing the principles guiding the audits and highlighting which industries will receive special attention. (In 2017, among others, the sharing economy, waste management and the use of online electronic cash registers were the key goals.) Inspections are probably more frequent in the case of taxpayers with a larger tax capacity, particularly if there is a significant change in their tax capacity. We frequently meet tax inspectors as well if we regularly claim back relatively high amounts from the tax authority (e.g. if a company reclaims significant VAT owing to its business).

What to look out for during inspections?

Depending on the quantity of documents, tax inspectors may take a look at accounting receipts and supporting documents either in detail or on a test basis, but they also frequently examine contracts and their economic content.

The various tax types and audits require different review practices, but generally speaking the calculations supporting declared tax must be transparent and traceable during inspections; this greatly assists the tax authority, and consequently, our own lives too.

Inspections of VAT obligations primarily include unjustified VAT reclaims, the legitimacy of VAT-free invoicing, and supporting accounting records for intra-Community and export sales. Additionally, it is also checked whether incoming invoices comply with legal requirements and permit the deduction of VAT. Reviewing compliance with the EKAER reporting obligation is closely related to VAT reviews.

Checking corporate tax calculations is often related to a detailed audit of the various tax-base adjustment items and tax allowances. Transparent and clear calculations are important in this case too, since the amount of the individual adjustment items and tax allowances often cannot be supported by invoices or other tangible documents.

Transfer prices applied for related companies and the supporting documentation are also targeted by comprehensive tax inspections, and this is a “lucrative” area for the tax authority from the perspective of penalties. The information included in transfer pricing documentation often includes subjective factors, making it easy for the tax authority to reach findings. This is why it is important during inspections that you can confidently justify the information included in the transfer pricing documentation and the reason for choosing the information.

What should you look out for?

It is important to prepare calculations and documentation supporting tax liabilities in a manner that is clear not only for you but for outsiders too. Although tax inspectors always start the audit by mapping out the company’s activity, it is not certain that they will immediately know how to manage transactions in a company or industry-specific way. It is worth maintaining a good relationship with the tax inspectors since this can also influence the outcome of the review.

And even if you agree with their findings it is worth commenting on the tax authority’s inspection report because you can perhaps share a mitigating circumstance with the tax authority that they are not aware of. If you disagree with any of the tax authority’s findings but feel you cannot advocate your position confidently, it is definitely advisable to involve a tax consultant or a tax lawyer in the procedure.

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