The risks associated with these taxes.
The question that businesses are therefore increasingly asking themselves is: Are we managing the risks associated with our tax positions? And even if businesses don’t ask themselves this question, risk management is something that the Dutch Tax and Customs Administration expects. Especially now given its new approach to audits. To clarify its audit approach, the Dutch Tax and Customs Administration has published a brochure entitled ‘The Audit Approach of the Dutch Tax and Customs Administration’ (Controleaanpak Belastingdienst; CAB). The brochure emphasizes the preference for random statistical sampling not only as a means of verification, but also as a way for organizations to apply a self-monitoring approach. Random samples are not only used for the technical examination of tax issues (for example, payroll tax and social security contributions and VAT), but also to assess the quality of the tax processes and control measures (the Tax Control Framework; TCF). To manage tax risks, control measures need to be developed and implemented. These measures must prevent, detect and correct any departures from tax procedures. The challenge lies in establishing whether these control measures are (or have been) effective.
In case the Dutch Tax and Customs Administration has notified you that it intends to conduct an audit,
we recommend that you make arrangements with them in advance on how this will be conducted, in particular if it will involve integrated random sampling. Such an audit entails the random sampling of multiple taxes, as well as the examination of incoming and outgoing cash flows. Outgoing cash flows may involve consolidated entries in the accounts. In that case, agreement must be reached with the Dutch Tax and Customs Administration about which items are to be included in the random sample. With regard to incoming cash flows, it is advisable, for example, to reach agreement on the composition of the sampling population and the minimum evidence needed to demonstrate that export is involved.
With regard to the random sampling of both cash flows, please ensure that you are clear on which period is to serve as the ‘in scope’ period for the entire audit, the period covered by the random sampling and how the extrapolation to the in scope audit period will be applied. In the CAB, the Dutch Tax and Customs Administration states that it does not intend to carry out more work than is necessary, thereby implying that its starting point for the random sampling is that no mistakes will be accepted. This is referred to as an ‘expectation of zero value’. The CAB also describes the situations in which taxpayers are eligible for a reduction in the size of the random sample.
The above makes clear why you should take the initiative and monitor the tax return process by way of random sampling.
Integrated random sampling, which requires only minimum effort, produces a properly substantiated value assessment about the quality of your filed tax returns. Any omissions that occurred during the audit can then be included in your favor. It also enables you to detect any discrepancies in your internal tax management at an early stage and take the necessary corrective measures. In addition, any conclusions on the issues identified can be discussed in advance with the Dutch Tax and Customs Administration as you will have the correct information at hand. All of this can take place without a covenant. The CAB states that the Dutch Tax and Customs Administration will scale its auditing activities back to 100% if the organization itself, or an external expert, has conducted random sampling using the same scope and precision as the random sampling performed by the Dutch Tax and Customs Administration. In that case, the Dutch Tax and Customs Administration will limit its auditing activities to 10% of the randomly selected files. A file consists of the invoice and the other necessary evidentiary documents.
Random statistical sampling requires a structured and documented approach, with the participation of various specialists.
It is well advised to follow a set plan when performing random statistical sampling, in which is outlined who will be responsible for what task. For example providing the digital information and gathering the evidentiary documents. The evaluation will not only bring to light any discrepancies as well as their possible size, but also enables their nature and what causes them to be examined, which, in turn, enables specific corrective measures to be taken. The basic assumption is that the auditing conducted by the Dutch Tax and Customs Administration can rely on the activities performed and that it can agree with the conclusions of the random statistical sampling.