Large Taxpayer Units 15. Horizontal Monitoring The Netherlands

1. Large Taxpayer Units15. Horizontal MonitoringThe Netherlands Nairobi, 14 – 18 February 2011 Organisation for Economic Co-operation and Development MULTILATERAL TAX NETWORK International Tax Avoidance and Evasion Ankara, 7-11 May 2007 1 - Opening and Introduction 1 Centre for Tax Policy and Administration

2. The Netherlands 16 million inhabitants 1.200.000 small businesses 11.000 medium sized businesses (MSB) 1.500 very large businesses (VLB) import/export country large service industry:financial centre in Europe tax-treaties

3. Objective Netherlands tax authorities Our mandate is to execute laws and regulations effectively and efficiently Our objective is to ensure the willingness of taxpayers to observe, maintain and reinforce legal obligations (compliance)Compliance is Reporting relevant facts correctly, on time and in full Paying the correct amount on time The intensity of our supervision is determined by willingness and ability to comply with law and regulations

4. Promotion of compliance Basis is trust and sharing reponsibility Service oriented Respectful conduct If necessary: corrective action Last resort: criminal court

5. Development • Expert- or knowledge groups: • Coordination group Very Large businesses • Coordination group Transfer pricing • Coordination group Group financing and Tax havens • Expert group EDP/Statistical Audit • Expert group International Fiscal Affairs • Working group Tax control framework • etc • Intervision between account teams: • learn from each other • best and worst practices

6. Account management MSB and VLB MSB and VLB: Individual approach Preferred supervision method: horizontal monitoring Multidisciplinary account team chaired by account manager (client coordinator) Up-to-date client profile and assessment of tax compliance risks, includes: Knowledge of ‘tone at the top’ and core business of a company Knowledge of tax strategy and (tax) risk management process Understanding of the tax function and tax control framework

7. The account team Account manager/ client coordinator Auditor Specialist corporate income tax Specialist VAT Specialist payroll taxes Specialist income tax EDP/ statistical auditor Tax collector Manager

8. Client coordinator/ account manager • Plays a crucial role in integrated and multidisciplinary approach • Is responsible for an adequate and actual picture of the group entity • Chairs a team of specialists • Manages communication NTCA and taxpayer • Responsible for developing and maintaining a strategic individual supervision plan • long term strategy • short term strategy (next year)

9. Tax compliance risks Distinction in various risks formal (e.g. late filing/payment) interpretation (technical) operational/internal process tax planning, tax evasion versus tax fraud Special tax risks CIT: transfer pricing financing arrangements tax havens VAT distinction non – exempt activities Wage tax: salary split stock options excessive wages

10. Tax risk management VLB’s Identification and understanding of tax risks in real time Transparancy (voluntary reporting) about relevant tax risks requires an appropriate ´Tone at the top’ a Tax Control Framework Covering of selected risk desk review on site visit (preliminary) meeting with VLB leading to an advance ruling etc. integral or partial tax audit (sampling techniques) Interpretation risk: Agree to disagree

11. Strategic individual supervision plan Account manager is responsible for customised strategic individual supervision plan Determination of compliance risks Registration in specific database (ATK) Assessment of time required and financial risk involved Includes understanding of existence, set-up and operation of TCF and level of in-control Sharing of risks and experience through ATK database

12. IT Platform: ATK

13. What is the purpose of horizontal monitoring? To stimulate and maintain tax compliance focus on the willingness and ability to comply influence behaviour To understand the business including all work that has already been done by the internal and/or external auditors including all legislation e.g. corporate governance and accounting principles To solve tax issues ‘in real time’ instead of having conflicts about tax issues from the past more efficient for both parties

14. In the old days... External observations Much controversion in the relation Target on general risks (many fishing expeditions) Problems with slow working knowledge and expert groups Internal observations Large backlog: a lot of ´old´ tax returns and appeals were still pending Problems with companies delaying and frustrating the fact finding process Scandals led to the idea that “companies cannot be trusted” (Enron, Worldcom, Ahold)

15. What can we learn? We need to focus on the future For businesses: to keep up and be in control of changes in environment, society, laws and regulations etc For the NTCA: to keep up and understand the facts and figures of the business, as they are happening in real time What was important yesterday, may not be important tomorrow What are the underlying procedures and processes? What is the underlying culture?

16. How does horizontal monitoring work in practice? A joint process with the company Step-by-step model Each step leads to an evaluation: The profundity of each step depends on the actual knowledge about the company GO ?? NO GO

17. The horizontal monitoring-process step by step Intensity of attention (focus) Attitude/ behaviour Compli ance agreemenet In control on tax Time Phase 1: Client profile Phase 2: Is horizontal monitoring possible? Phases 3/4: View on Tax Controls Phase 5: Supervision adjusted Up-to-date client profile Introduction to HM Compliance-scan Analysis & Improvement Tax Controls (TCF) Form and intensity of supervision adjusted Resolution of pending tax issues - Transparancy, Trust and Understanding

18. Double focus Attitude / behaviour: “tone at the top” Is the management of the company willing to be compliant with regard to tax? Is the company willing to be transparant towards the NTCA about relevant material tax issues? In control on tax Is the company able to be in control with regard to its material tax issues? Does the company have an adequate ‘Tax Control Framework’ or is it willing to work on it? Intensity of attention (focus)

19. Step 0Up-to-date client profile Responsibility step 0: account team NTCA Starting point horizontal monitoring-process All national taxes Scope is ‘group entity’: all group companies in the Netherlands manager-shareholders Phase 1: Client profile Up-to-date client profile

20. Step 1 Introduction to horizontal monitoring Responsibility step 1: Account team NTCA Management NTCA Management LB Mutual ‘exploration’ Responsibilities and expectations Tone at the top Phase 2: Is horizontal monitoring possible? Introduction to HM

21. (Dis)Advantages Advantages No fact finding in the past: current and future issues Certainty tax position: no surprises Quick decisions Reduction of administrative burden / costs Support ‘in-control’ statement and reputation: shareholder value Effective and efficient supervision No duplication of work done by others (e.g. internal and/or external auditors) Disadvantages Voluntary openness on tax risks Possible: (Higher) costs initially for developing tax control framework Culture change Time pressure/resources Phase 2: Is horizontal monitoring possible? Introduction to HM

22. Step 2Compliance scan Responsibility step 2: Account team NTCA LB Intensity based on completeness client profile Teamwork together with LB Themes strategic goals LB internal control IT tax function (including tax advisory) external supervision (e.g. audit annual accounts) Coherent with analysis and improvement tax controls (step 5) Phase 2: Is horizontal monitoring possible? Compliance-scan

23. Peeling the onion SAS70 (TPM) Audit annual accounts SOX-audit Tax audit External audit Tax Assurance Internal audit in control statement (SOX) Business process Tax audit Internal control Other techniques COSO

24. Possible conclusions compliance scan

25. Step 3Resolution of pending tax issues Responsibility step 3 Account team NTCA LB Large backlog Problem solving attitude ‘Agree to disagree’ Adjustments and fines Phase 2: Is horizontal monitoring possible? Resolution of pending tax issues

26. Step 4Milestone: Compliance agreement Responsibility step 4: Management and account team NTCA Management LB Agreement between company and NTCA Focus on attitude, behaviour and tax control Transparancy, trust and understanding Within boundaries of law, regulation and jurisprudence All taxes and tax collection Roles and responsibilities are clear Compli ance agreemenet

27. Step 5 Analysis & Improvement Tax Controls (TCF) Phases 3/4: View on Tax Controls Analysis & Improvement Tax Controls (TCF) Evaluate and re-design Business process Risk analysis/control procedures ACT PLAN CHECK DO Testing of procedures Application of procedures

28. Tax Control Framework Phases 3/4: View on Tax Controls Analysis & Improvement Tax Controls (TCF) The degree to which a business is in-control determines to a large extent the form and intensiveness of the additiontal monitoring carried out. Understanding of existence, set-up and operation of TCF TCF should provide reliable tax information and as a consequence correct tax position and timely and correct tax returns and payments

29. Tax Control Framework (2008) Phases 3/4: View on Tax Controls Analysis & Improvement Tax Controls (TCF) Memorandum No blue print Principle based and not rule based Attention for soft controls Form and intensity of the supervision by NTCA is based on the extent to whicha large business is in control

30. Actual information.. Strategic individual supervision plan (Up to date client profile) Information from third parties Processing of tax returns State of Tax Control Framework .. Leads to Review of work done by or on behalf of the LB Cooperation with internal and external auditors Completeness information in tax return Statistical sampling method Correctness information in tax return Phase 5: Supervision adjusted Step 6Form and intensity of supervision adjusted Form and intensity of supervision adjusted Lessfrequent audits More efficient and less time consuming audits

31. To support our officers Guidebook Summary of background horizontal monitoring Outline step-by-step model Publication on the website of NTCA expected October 2010

32. Overview: Dutch approach LB The NTCA manages risk in the large business area on an individual basis. The approach is to build on corporate governance and financial reporting rules requiring that companies continuously monitor their own risk, including their tax risks. The degree to which a business is in control determines to a large extent the form and intensiveness of the additional monitoring.

33. Overview: Dutch approach LB (2) Horizontal monitoring requires that the NTCA have a clear understanding of the existence, set-up and operation of internal controls concerning tax. If a (Tax) Control Framework is solid, the monitoring focuses on the effect of internal control measures and preliminary discussions on current tax issues. The tax returns will not contain any new information requiring immediate attention. For each LB a strategic individual supervision plan is in operation

34. Thank you for your attention !