We are in a transitional phase. We are coming from a cessation of economic activity and an obligatory home quarantine, as a result of state measures to prevent or limit the proliferation of COVID-19 infection; and we are currently undergoing a resumption of economic activity in phases, which seek to gradually move towards a new economic normality.
As a result of the COVID-19 pandemic, the State has had to face a significant increase in public expenditure, as well as a significant decrease in public tax revenue. Therefore, it is no secret that the economic reopening brings with it the resumption of the activities of the Tax Administration’s auditing departments, where collection via informal tax assessment will be a priority issue. In fact, we have had the opportunity to observe that audit plans have restarted quite dynamically.
The resumption of tax controls is a clear example that this new normality is accompanied by the usual challenges, but with new difficulties, because companies must make a great effort to recover economic stability, lost or punished by the closure of operations due to the pandemic, but with the limitations imposed by measures to prevent the spread of coronavirus, such as quantitative restrictions on human resources and care in the disinfection of common areas within the company.
In addition to this, companies must manage efforts to meet the various tax controls, because to make sure compliance with tax obligations, the Tax Administration has broad powers of audit, inspection, investigation and control. The most important of these powers is the development of tax audits, which includes the exercise of a series of powers that allow establishing the real tax situation of taxpayers, that is, whether they have duly complied with their tax obligations.
Therefore, the initiation of an audit should not be taken lightly by companies, since a passive or negligent attitude towards the Treasury may result in the informal determination of original or complementary tax rates and in the imposition of administrative fines. For this reason, we must ask ourselves if we will be prepared to face a tax audit, with the limitations derived from this new normality, for which we proceed to review some of the most important aspects to be considered.
a. Beginning of an Audit
The audit procedure begins with notification of the Self-Designation, which establishes the tax auditors who will carry out the audit; the tax under investigation; and the year or periods to be verified. This is important because it will allow the taxpayer to determine the scope of the investigation and the information that will be involved in it, and thus begin its collection and organization.
b. Information requirements and development of the audit
In the course of the audit, tax auditors may carry out inspections; require taxpayers to show the company’s formal accounting, VAT books, and supporting documentation (Tax Credit Vouchers, invoices, contracts, etc.); provide copies of such documentation; and require taxpayers to provide all necessary explanations and justifications.
The way in which information requirements are answered will largely determine the results of the audit. Therefore, it is essential that these requests are dealt with in an efficient and effective manner, since answering something different from what is required would be equivalent to not having complied with the request; likewise, responding incompletely or outside the time limit would be equivalent to the same result. Therefore, the taxpayer must carry out an adequate management of the resources available to him, in order to be able to meet in time and form what is requested by the auditors, bearing in mind that his defense strategy before an eventual informal determination of taxes and imposition of sanctions, begins in the present stage.
It is important that from the audit stage the taxpayer is accompanied by a technical team (tax legal advisor and accounting professional) that advises him and allows him to identify what information is being requested by the auditors; what documentation contains such information; what is the best way to present the information for better understanding by the auditors, as well as to anticipate possible contingencies associated with the information provided, in relation to the tax situation of the company.
Once the above has been clarified, the taxpayer must verify whether he has the necessary human resources to meet the aforementioned requirements in the time allowed, given the quantitative limitations of the human resource due to the pandemic, or whether he must request an additional period of time to do so. It must also establish if it has the necessary prevention measures to collect the information and display it to the auditors, without sacrificing its probative value.
c. Taxpayers’ defense
At the end of the audit stage, if the tax auditor has identified non-compliance with tax obligations, he shall record it in the corresponding Audit Report, which the Tax Administration shall notify to the taxpayer being audited, together with the Order granting the term to exercise the Right to Hearing and Provision of Evidence.
This is the strictly contradictory stage of the procedure for the informal determination of the tax, which requires a technical-legal defense, which ideally should be exercised by a lawyer specializing in the field, and often with the collaboration of a professional accountant for the provision of suitable evidence of discharge; however, we reiterate that any defense strategy begins in the audit, as this is the stage where the auditor conducts its investigation and where there are more opportunities to dispel any objections.
Many times it is not possible to dismiss the findings of the investigation before the Tax Administration, either in the inspection or in the contradictory stage of the informal determination procedure, either because opposing criteria are handled between the Tax Administration and the taxpayer, with respect to the tax treatment of a certain operation, or with respect to the evidential value of some document or information.
In this case, the Tax Administration will issue a resolution determining original or complementary tax installments, and probably imposing sanctions. In view of this, the taxpayer must, together with his legal advisor -and if necessary, an accounting professional- formulate the most appropriate defense strategy, which will be carried out through access to administrative resources in tax matters, and the mechanisms to challenge judicial matters.
Thus, we can see that facing a tax audit is not an easy task, so it cannot be taken lightly, nor be entrusted to a single person in the company; on the contrary, it will require the joint effort of a team made up of legal advisors, accounting professionals and the taxpayer himself, in order to avoid as many contingencies as possible, on which we reiterate that this work can become much more complex, if we also have to deal with the limitations of this new normality.