Joint audits - an efficient alternative to avoid double taxation

Collaboration among tax authorities around the globe and transparency obligations are increasing. In addition to traditional information exchange under tax treaties and agreements, many countries including Romania now engage in other collaborative activities in the transfer pricing area, including bilateral advance pricing agreements, exchange of information at EU level, and multilateral tax information exchange programs.

2018-03-23 11:04:29

At EU level, tax administrations are encouraged to engage in simultaneous tax audits, in which two or more countries examine a taxpayer simultaneously, each in its own territory. This would be relevant when there is a common or related interest and a view to exchange the information that tax authorities obtain.

Distinctly, one emerging audit trend is the pursuit of so-called joint audits, in which an individual or business is subject to a coordinated audit using a single audit team comprised of representatives from two or more jurisdictions. Joint audits represent the latest instrument to enhance administrative cooperation in tax matters between fiscal authorities of different countries.
This article aims at discussing in more detail this last type of cross-border tax audit while trying to forsee the possible state of play in Romania and what are the chances for using this instrument to avoid double taxation and burdensome mutual agreement procedure.

What is a joint audit

The definition of joint audits, as well as their objectives can be found in the 2010 OECD Joint Audit Report, which was commissioned by the OECD Forum on Tax Administration. Based on the definition of paragraph 7 of the OECD Joint Audit Report, joint audits are where:

- two or more countries join together to form a single audit team to examine an issue(s) / transaction(s) of one or more related taxable persons (both legal entities and individuals) with cross-border business activities, perhaps including cross-border transactions involving related affiliated companies organized in the participating countries and in which the countries have a common or complementary interest;
- the taxpayer jointly makes presentations and shares information with the countries; and
- the joint audit team will include Competent Authority representatives, joint audit team leaders and examiners from each country.

Objectives of the joint audits

The main objectives of the joint audits are, among others, (i) to reduce taxpayer burden of multiple countries conducting audits of similar interests and/or transactions, (ii) to improve the case-selection of tax audits by mutual risk identification and analyses; (iii) to accelerate the Mutual Agreement procedure by early involvement of the Competent Authority, where double taxation is involved; (iv) to reach a joint/mutual agreement on the audit results to avoid double taxation, as applicable, as well as (v) to reduce compliance costs through the resolution of tax issues in a timely and effective manner.
Steps of the joint audit process

The joint audit process involves similar steps to a traditional domestic audit, but must be done in a collaborative manner. The participating countries are jointly responsible for organizing and managing the audit and jointly request data and information from the taxpayer within their respective legal frameworks.

According to the 2010 OECD Joint Audit Report, the procedural steps for administrative cooperation are the following:

Step 1 - Signing of a letter of intent between the heads of tax administrations of the two countries
Step 2 - Identification and creation of the joint audit team
Step 3 - Attribution of the powers of Competent Authority for the exchange of information and conteramponeous designation of an official, so called Joint Audit Coordinator for the coordination of the joint audit activities. The Joint Audit Coordinator is the first contact point for joint audit activities
Step 4 - Starting of the joint audit
Step 5 - Termination of the joint audit
Step 6 - Writing up of a Report of Assessment in English, useful for the purposes of the respective national rules
Step 7 - Exchange of the documents under number 6 above in case of potential discussion during a MAP, if necessary

Joint audits at EU level. Pilot project

At the EU level, the 2012 EU Communication 722/2012 on the fight against tax fraud and tax evasion provides the legal framework of joint audits. This Communication recommends (i) to enhance the administrative cooperation by promoting the use of simultaneous controls and the presence of foreign officials for audits and tax compliance in the short term and (ii) in the long term, to introduce a methodology for joint audits by dedicated teams of trained auditors.

It is worth noting that a pilot project is ongoing in the EU between Italy and Germany, both tax authorities wanting to reinforce the administrative cooperation in cross-border transactions. To this aim, in 2013 they set up a joint audit team and signed a memorandum of understanding for the implementation of such simultaneous and joint audits. The process is in the stage where tax authorities of both states have set up the agenda for cross-border joint audits in 2016 and 2017, aiming to improve the effectiveness of such instruments and to reduce the number of mutual agreement cases. It is yet to be seen what the outcome of this project will be and what impact will have going forward.
The state of play in Romania
In Romania, the Fiscal Procedural Code only provides for the possibility of conducting simultaneously tax controls, without any reference to joint audits between tax authorities of different jurisdictions.
As outlined in the beginning of this article, simultaneous tax audits differ from joint audits. In simultaneous tax examinations the tax inspectors of two or more countries independently and simultaneously carry out coordinated audits / investigations, each in their own territory (i.e. not a single audit team). Another option under the Romanian legislation, yet less efficient, would be domestic audit with exchange of information. Such option would not imply neither the presence of tax authorities in the other country, nor any alignment on the scope and years under analysis.
In the absence of a legal framework allowing joint audits to take place in Romania, it is difficult to foresee that such audits will take place in the short to medium term. This is due to the context of complex operative difficulties that could arise from different procedures and rules followed by the various tax inspectors involved in the examination (interviews of taxpayers, analysis of documents).
However, depending on the outcome of the Pilot Project performed by the Italian and German Tax Administrations and provided the same focus at international level on administrative cooperation, we may expect that joint audits will be seen more and more in the future as an effective tool to avoid double taxation and reduce taxpayers' burdens.
Until then, Romanian taxpayers can make use of simultaneous tax audits provided for in the local legislation and take advantage this way of the possibility to avoid double taxation through cross-border cooperation.

Authors: Daniela Dinu (photo), Corporate Tax Director, PwC Romania and Estera Antonescu - Senior Associate Corporate Tax, PwC Romania