On 15 July 2020, the European Commission (“Commission”) released an ambitious tax package for fair and simple taxation to support the recovery of the EU from COVID-19 and long term-growth.
The tax package contains three separate but complementary initiatives consisting in a legislative proposal to amend the Directive 2011/16/EU on administrative cooperation in the field of taxation (“DAC 7”), a Tax Action Plan which includes 25 distinct actions, and a Communication on Tax Good Governance in the EU and beyond.
The proposed DAC 7 will amend the existing provision on exchange of information and administrative cooperation as well as extend the scope of application of the mandatory automatic exchange of information to digital platform operators.
LED Taxand summarize here below the proposed rules concerning administrative cooperation.
- Enhancing Administrative Cooperation
DAC 7 will strengthen Administrative Cooperation through the clarification and improvement of existing rules relating to the presence of officials of a Member State during an inquiry in another Member State, simultaneous controls, and joint audits.
a. Presence of officials of a Member State during an inquiry in another Member State
The proposed amendment will introduce an obligation on the requested competent authority to respond within 30 days to a request for the presence of an official of another Member State during an enquiry as well as the possibility that individuals interviews took place and records are examined without the limitations of national law of the requested Member State. The new Directive will also include the option to participate in administrative inquiries using electronic means of communication.
It is worth noticing that Italy already implemented in its legislative framework a provision that allows – under authorization – the presence in Italy of officials of another Member State (article 31–bis of the Presidential Decree 600/1973).
b. Simultaneous control
According to article 12 of the Directive 2011/16/EU, simultaneous controls consist in two or more Member States agreeing to audit, in parallel and each in their own territory, one or more taxpayers which are of common or complementary interest to their respective tax administrations. The main aim is to exchange the obtained information.
The DAC 7 Proposal amends article 12(3) of the Directive 2011/16/EU in order to provide for a deadline of 30 days within which the requested authorities have to respond to the proposal for a simultaneous control.
c. Joint audit
As of today, there is no explicit legal base for conducting joint audits. Such activities are currently conducted based on the combined provisions of Directive 2011/16/EU regarding the presence of foreign officials in the territory of other Member States and on simultaneous controls. The DAC 7 Proposal introduces an explicit and clear legal framework for conducting joint audits between two or more Member States.
According to the proposed legal framework, joint audits are defined as administrative inquiries jointly conducted by the tax administrations of two or more EU countries that proceed, in a pre-agreed and co-ordinated manner, to examine a case linked to one or more persons of common or complementary interest to their respective Member States.
It is worth noticing that the request to conduct a joint audit can be either be made by the competent authority of a Member State or directly by the taxpayer. As for the other two forms of administrative cooperation, responses to requests should be provided within 30 days from the receipt of the request. The rejections of the request should be duly motivated by the competent authority of a Member State.
In addition, the proposed article 12a (6) clarifies that joint audits shall be carried out in accordance with the procedural arrangements that are applicable in the EU country where the actions related to the audit takes place. The same article also specifies that evidence collected in the context of the procedure in one Member State (pursuant to its law) shall be mutually recognized by the competent authorities of the other Member State(s) which participate in the joint audit.
In order to ensure that the outcome of a joint audit can be implemented in the participating Member States, the proposed Directive states that the tax administration of the participating Member States shall agree on the facts and circumstances of the case and endeavour to reach an agreement on how to interpret the tax position of the audited taxable person. The conclusion of the joint procedure shall be incorporated in a final report that shall have equivalent legal value to the relevant national instruments that are issued as a result of an audit in the participating Member States. The final report shall be notified to the taxpayer within 30 days from the issuance of the document.
For implementing the conclusion reached in the final report, Member States shall provide the legal framework for performing a corresponding adjustment. In case of transfer pricing audit, Italy already implemented such possibility in article 31-quarter of the Presidential Decree 600/1973.
Finally, another important aspect concerns the linguistic arrangements. In this respect, the proposed Directive clarifies that the language used for conducting a joint audit shall be agreed by the Member States involved.
- Implication for taxpayer
As anticipated, the proposed DAC 7 is aimed at developing a harmonized tax framework across the EU to increase tax transparency as a means of ensuring tax compliance and improving effectiveness and cooperation in tax audits on cross-border matters.
Taxpayers should closely monitor the development of the legal framework related to administrative cooperation within the EU, including on joint audits since it can be an instrument that can reduce the cases of double taxation and the number of mutual agreement procedures and disputes on cross-border tax matters. Thus, resulting in a reduction of costs and administrative burden for both taxpayers and tax administration.
- Next steps
The proposed amendment to Directive on administrative cooperation will follow the ordinary legislative procedure. This involves consultation of the European Parliament and requires final decision of the Council, requiring unanimity among all 27 EU Member States. Negotiations in the EU Council have already initiated, and it is expected to conclude by the year-end.
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LED Taxand together with the other members of the Taxand international network can provide assistance to multinational groups during simultaneous controlsand joint audits.
If further information is required, please refer to your LED Taxand contact or to gpetraroli@led_taxand.it, email@example.com, firstname.lastname@example.org or email@example.com.
The information provided in this newsletter cannot be regarded as legal advice. LED Taxand cannot accept any liability for the consequences of making use of this publication without their cooperation.