How can taxpayers prepare for joint audits?

Danielle Cunniffe Partner, PwC Ireland (Republic of) 15 November, 2023

Finance (No.2) Bill 2023 introduces a legal framework for joint audits in Ireland

Finance (No. 2) Bill 2023 transposes Article 12a of EU Directive 2021/514, also known as DAC7 (the “Directive"). For the first time, it provides a legal basis for Irish Revenue and other EU tax authorities to conduct joint audits in Ireland. Joint audits will be a game-changer for both tax authorities and taxpayers.

Taxpayers must ensure they are ready for increased cross-border interventions, which will present various procedural complexities and require a review of how the organisation currently manages tax controversy. As a result, access to cross-border tax controversy experts is more important than ever.

Irish Revenue will have to facilitate other EU member states in conducting joint audits for periods beginning on or after 1 January 2024.

What is driving joint audits?

A joint audit is an administrative enquiry conducted by Irish Revenue and the competent authority (typically the tax authority) of another EU member state linked to one or more persons of common or complementary interest to the two tax authorities. All companies could be subject to a joint audit but, typically, this will be companies with a global footprint where the Irish company is the entrepreneur or an Irish PLC.

Joint audits are part of the further evolution of continued cooperation among tax authorities in the EU. Tax authorities are increasingly coming together to make enquiries on a mutual area of identified tax risk. By coordinating in this manner, it’s envisaged that the joint audit process will be more efficient and conclude in a timelier manner.

With the increasing exchange of information among tax authorities and a large swathe of data becoming available to tax authorities as a result of Country-by-Country Reporting (CbCR), it can be expected that EU tax authorities will use this new legal framework to carry out joint audits.

How will joint audits work?

The legislation allows Revenue to authorise a foreign tax official to be a ‘nominated officer’. The nominated officer can accompany Revenue officers during the joint audit, interview individuals and examine records. Revenue must appoint an authorised officer to supervise and coordinate the joint audit.

Revenue must respond to any request from an EU member state tax authority within 60 days. Revenue can reject the request where there are justified grounds for doing so. Neither the legislation nor the Directive indicate what those justified grounds might be. It remains to be seen whether, for example, a lack of resources on the part of Irish Revenue might justify a refusal to agree to such a request.

Revenue and the other foreign tax authority must endeavour to agree on:

the relevant facts and circumstances; and
the tax position of the taxpayer based on the results of the joint audit.

On conclusion of the joint audit, Revenue’s authorised officer and the nominated officer must prepare a final report detailing their findings and the issues on which they agree. A copy of this final report must be furnished to the taxpayer within 60 days of its issue.

Are taxpayers’ rights different under a joint audit?

The applicable procedural law for all officials involved in a joint audit is the law of the country in which the audit takes place. This means that, with respect to rights concerning complaints, reviews and appeals, a taxpayer subject to a joint audit has the same rights and obligations as they would in the case of an audit carried out by Revenue only.

The nominated officer cannot perform any function that exceeds the scope of their functions under the laws of the member state that requested the joint audit. Accordingly, the nominated officer must comply with whichever are the stricter of the rules and limits imposed by Irish law or by the laws of the requesting member state.

The nominated officer will be furnished with a written authorisation by Revenue, which must be produced to the taxpayer on request.

As part of joint audits, a taxpayer’s right to assert privilege over professional advice of a confidential nature given by a professional to a client, legal professional privilege, and privilege over medical information is expressly recognised.

What will be the outcome of a joint audit?

While the Irish and foreign tax authorities will endeavour to agree on the facts and issues arising from a joint audit and set this out in the final report, they are not obligated to agree on the issues raised during a joint audit. Also, there is no obligation for the tax authorities to include in the final joint audit report the points on which the tax authorities did not agree.

This may mean that, at the end of a joint audit, both tax authorities may still need to consider the issues raised during the joint audit further at a domestic level.

If either tax authority decides that an underpayment of tax has occurred for the relevant period, following the conclusion of the joint audit, the relevant tax authority will issue a separate assessment in its respective jurisdiction.

What will this mean for my business?

These provisions provide a legal framework for joint audits for the first time in Ireland. This is likely to lead to an increase in cross-border audit activity. It remains to be seen how such joint audits will run and further guidance is expected from Revenue.

Taxpayers must prepare now for this significant shift in how EU member states will collaborate in future to manage tax audit activity.

At the time of writing, the Finance (No.2) Bill is currently at Committee Stage and is due to be signed into law in December 2023.

Key actions businesses can take today

The key to managing joint audits is to ensure that your business is managing cross-border tax risk in a coordinated manner. This can be achieved in several ways.

Existing audit activity: A review of existing audit activity across EU jurisdictions should be undertaken to establish whether any of the facts would lend themselves to a joint audit request by another member state to Irish Revenue.
Understand your rights and obligations: At the outset of a joint audit, careful consideration should be given to the powers of the foreign nominated officer. This would involve a review of the authorisation provided by Irish Revenue to the nominated officer and the duration of the authorisation to ensure that the correct process is followed during the audit. It would also involve considering any requests for records under the joint audit to ensure they comply with the stricter of the rules and limits imposed by Irish law or the laws of the requesting member state.
Tax Control Framework: In anticipation of joint audits, there will be more scrutiny on underlying data and the requirement for consistency across jurisdictions. Establishing a Tax Control Framework (TCF) is crucial to the management of tax risk globally. Key areas to consider when developing a TCF include tax governance; adequacy of, and expertise within, the tax function; and operational controls and procedures to manage risks across various tax heads and jurisdictions. Across jurisdictions, the ability to demonstrate good governance will mitigate higher penalties and possible criminal sanctions.
Business Defence Files: A Business Defence File can be a live file created at the time of a transaction as a contemporaneous record, ensuring tax risks are addressed and efficiency is achieved. It can also be created after a transaction has occurred. Such a file can help prevent tax risks emerging from a transaction that could be subject to later challenge by a tax authority. It can also help defend a tax position taken should it become the subject of a joint audit or other scrutiny from a tax authority in future. Business Defence Files created after the fact are important to ensure consistency in facts provided in responses to one or more tax authorities under an audit or joint audit.
Tax Controversy Function: As audits become more frequent and complex, we see a growing trend of individuals being assigned a tax controversy role either as a dedicated role in the tax function or for certain high-value transactions. This ensures that all tax risks and possible challenges from tax authorities are considered and mitigated contemporaneously. More generally, in our experience, a tax controversy function can support the business in managing tax audits globally, monitor audit activity to assess emerging trends in tax controversies and support the mitigation of tax risk.

We are here to help you

Our Tax Risk & Controversy team helps companies deal with all aspects of the tax dispute life cycle, from tax risk management and prevention to Revenue interventions, appeals and Mutual Agreement Procedures. We help our clients prepare for joint audits by upskilling the tax team, building business defence files, and understanding the taxpayer’s rights and obligations in a joint audit. To discuss your concerns about tax governance, tax transparency, Revenue audits, tax appeals and any other tax risk issues your business might face, contact any member of our team.