I. Introduction
The world is becoming more globalised than ever. There has never been such level of international trade and investment. With international transactions in full upswing, cross-border tax procedures and cooperation between tax authorities are on the rise.
In this article we list five key points that companies should consider if they are subject to a cross-border tax procedure such as a tax audit, a request for tax information or a tax collection procedure.
II. Key points
- Seek qualified professional assistance
Taxes are complex and require professional expertise. For the great majority of companies, analysing whether a cross-border tax investigation procedure complies with the law is beyond their area of competence. In-house finance and tax teams usually focus on complying with the several ongoing tax obligations imposed on the company, and they do so remarkably. However, a cross-border tax investigation is a one-time, unique event which must be carefully considered.
When choosing which professional to hire, it is important someone who is versed with tax procedures and cross-border tax investigations. Before engaging a professional, do not hesitate in asking for a preliminary call. In the call, test both their knowledge and previous experience on international tax audits, information requests, disputes and the like. Ask them about their credentials, their previous cases, what difficulties they faced and how they solved them, and what practical challenges they envisage in your case. If they have previous experience, the conversation should flow naturally.
- Ask yourself the five main questions
Tax authorities cannot conduct tax audits in any way they see fit. They are subject to the law. As such, they must observe the tax procedures rules set out in their domestic legislation and, if applicable, international treaties.
In this respect, a company which is subject to an international tax procedure should consider the following five questions:
- Who. It is important to review whether the tax authority in the origin country and the destination country have the necessary powers to undertake the tax procedure. These limitations are usually found in international tax treaties (such as double tax treaties to prevent double taxation, bilateral or multilateral treaties for the exchange of tax information, and bilateral or multilateral treaties on tax mutual assistance) and, within the context of the European Union, in several EU Directives. Limitations may also be found in the domestic legislation. For instance in Spain, on 25 May 2022 the Central Economic-Administrative Tribunal ruled that in the absence of an international treaty, the Spanish tax authorities can only request tax information from a legal or natural person which falls under any of the following scenarios: is tax resident or has a domicile in Spain, operates in Spain through a permanent establishment, has been incorporated under Spanish law, or owns real estate in Spain.
- What. The cross-border tax procedure must relate to a tax which is covered under a legal instrument, whether domestic or international. For instance, double tax treaties for the avoidance of double taxation tend to provide that requests for tax information are admissible if they relate to a tax which is regulated under such tax treaty or under domestic laws, provided that the taxation is not against such double tax treaty.
- How. The tax procedure must follow the legal avenues set out in the law. This includes aspects such as persons and place of notifications, content and service of any notices, the possibility and the deadlines to object, etc. In addition, in several countries the communications between lawyers and clients enjoys legal professional privilege, which means that they cannot be disclosed.
- To whom. In most cases, the taxpayer should be the subject of the tax procedure. However, sometimes the tax laws may impose a joint liability or a subsidiary liability on other persons, or even an obligation to disclose tax information on contractual counterparties, financial institutions, etc.
- Why. The tax authorities must conduct a tax audit based on previous indicia or reasonable suspicion of tax noncompliance. They cannot start a tax audit/request for information in a generic or indiscriminate manner, without having a clear goal on what they want to obtain, since this may amount to a fishing expedition. The line between these two concepts, however, is not always easily drawn. In the words of the OECD’s Commentaries to the Model Tax Convention, “the standard of ‘foreseeable relevance’ is intended to provide for exchange of information in tax matters to the widest possible extent and, at the same time, to clarify that Contracting States are not at liberty to engage in “fishing expeditions” or to request information that is unlikely to be relevant to the tax affairs of a given taxpayer.”
- Collect, review and prepare documentation
After reviewing themselves the above questions and if the tax procedure is considered lawful, companies should start gathering the information requested.
In our experience, the way in which information is collected and prepared for submission may make a difference. Naturally, companies should never forge or tamper with documents. However, there can be a great difference between submitting copies of, say, 2,000 invoices and 8 contracts without any explanation; or presenting an introductory letter which organises and explains the background, the company’s business, the main highlights of the information which is being submitted and how it links to the request, etc. It is important to hold the pen and tell your own story, highlighting the strengths of the file and reducing its weaknesses.
- If the tax procedure is unlawful and there are legal grounds, challenge it
In the realm of cross-border tax procedures, sometimes we see that companies forgo their legal rights because they are unaware of them, they consider that they will not be upheld in the origin or destination country, or for any other reason. This is far from true. We have assisted clients in tax disputes and some were successful. It is important to analyse each case individually, to check the merits and viability of a potential challenge.
- Seek to cooperate with the tax authorities
Regardless of the legal stand that a company takes towards the tax procedure – accepting or objecting against it -, companies should seek to cooperate with the tax authorities. Firstly, because not doing so may constitute a violation that may result in penalties in several countries. Secondly, because based on our experience, in practice cooperating increases the chances of a positive outcome. After all, there is a tax officer doing his or her job in the other origin country, probably hundreds or thousands of miles away, who will appreciate the effort. By “cooperating” we do not mean disclosing all the information requested by the tax authorities if there are legal grounds to not disclose it; but rather responding to emails, notices, calls, etc. and generally showing a helpful attitude throughout the procedure.
III. How can we help?
Our tax department is specialised on international taxation, including cross-border tax procedures. We have assisted several companies with reviewing any tax requests and notices, preparing and submitting documents, and discussing them with the tax authorities. We have also been successful in challenging some cases before the courts.
If your company is involved in a cross-border tax procedure and require expert assistance, do not hesitate to contact us.