ISSUE 26

TAX Tribune
Magazine of the Intra-European Organisation
of Tax Administrations

46 Technical
Articles
IOTA Website
IOTA
Membership
on 1 January
2010

In Focus...
IOTA Technical Activities
Programme 2009

e d i t o r i a l

Contents

Dear
Readers,

Introduction . . . . . . . . . . . . . . . . . . . . 2
The Fight against Fraud:
Successful Measures Adopted by
Tax Administrations to Tackle Tax
Fraud Taking into Account
Limitations Imposed by Data
Confidentiality

O
O

ur 26th issue of Tax Tribune

contains a variety of articles
on topics discussed during
the 2009 IOTA technical work programme. In a concise way, the tax
administration practitioners provide
you with information a variety of tax
administration issues, as well as
introducing you to some presentations delivered to the participants at
our 2009 events.

Demands for Multitasking

Enforcement (Austria) . . . . . . . . . 6
Automation of Functional
Activities of the Tax System
of Azerbaijan Republic. . . . . . . . . 9

Marek Welenczyk,
Executive Secretary of IOTA
and Editor-in-Chief
of the Tax Tribune

Hence you will find here selected

presentations on Fight against
Fraud,
Successful
Measures
Adopted by Tax Administrations to Tackle Tax Fraud Taking into Account
Limitations Imposed by Data Confidentiality delivered during the technical session of the 13th General Assembly held in Stockholm, Sweden, on 9-10 July 2009,
illustrating that tax administrations acknowledge the importance of tackling tax
fraud, and as tax fraud becomes ever more complex and continues to thrive in a
global context an effective fight back requires unity of purpose and actions that
transcend national barriers.
A considerable number of articles come from members of IOTA Area Groups: Taxpayer
Education and Services, Large Taxpayer Treatment and Audit, as well as Prevention and
Detection of VAT Fraud and Treatment of Specific Industries Construction Industry,
revealing the informative nature of this special type of IOTA event.
In addition, the participants of IOTA workshops describe the solutions and tools
applied in their tax administrations in the field of transfer pricing, taxation of financial instruments, VAT fraud cases, application of tax treaties, taxation of individuals,
e-audit, contact centres, training of tax administration personnel, audit techniques
for small and medium sized enterprises, benchmarking activities in the IOTA
Membership, the use of information in selecting taxpayers at risk, the economic crisis and its implications for tax administrations, and improving the quality of operations in tax administration units.
Therefore, without further ado, I offer you this latest edition of Tax Tribune hoping
that it will help you familiarise yourself with examples of the professional services and
products of IOTA that are an integral part of all IOTA events and thus encouraging
you to participate in our future work programme.

Marek Welenczyk,
Executive Secretary of IOTA

c o l u m n

Measures Adopted by France

to Combat Fraud, in
Compliance with the
Principle of Data Protection. . . . 11
The Fight against Tax Fraud
within the Context of Data
Confidentiality and the Secrecy
in Tax Matters (Germany) . . . . . 15
Tax Fraud Fighting Tools
in Slovak Republic . . . . . . . . . . . 18
Use of Information and Tax
Fraud Prevention Plan (Spain). . 21
What Affects the Outcome
of Audit Activities? (Sweden) . . 29
The Fight against Tax Fraud
and the Taxpayers Data
Confidentiality in Switzerland . . 32
Prevention and Detection
of VAT Fraud
Use of IT Forensics in the Fight
against Fraud (Denmark) . . . . . . 36
VAT Control System
in Lithuania . . . . . . . . . . . . . . . . 39
Actions of Polish Tax
Administration in Scope of
Monitoring E-commerce . . . . . . 46
Investigating Point of Sale
Systems (POS) from a Swedish
Point of View . . . . . . . . . . . . . . . 50
Project Lanyard Early
Identification of Missing
Trader Intra-Community,
(MTIC) Fraud (UK) . . . . . . . . . . 53

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Taxpayer Education and Services

Taxpayers Struggle with Articles and Paragraphs
or How to Make Our Internet Sites Understandable
and Useful (Bulgaria) . . . . . . . . . . . . . . . . . . . . . . . . . . 57
Improving the Channel Strategy in the Danish Tax
Administration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60
Current Channel Strategy of Providing Information
and Services Applied in Slovak Tax Administration . . 63
Large Taxpayer Treatment and Audit
The German Anti-Tax-Evasion Act of 2009 . . . . . . . . . 69
Promoting Cooperative Compliance From Theory
to Practice: The Experience of the Irish Large Cases
Divisions Food Industry Unit . . . . . . . . . . . . . . . . . . . 72
Electronic Service of Serbian LTU . . . . . . . . . . . . . . . . 76
Treatment of Construction Industry
Fight against Money Laundering in France . . . . . . . . . 79
Recent Changes in Fiscal Regulations Affecting the
Construction Industry in Hungary . . . . . . . . . . . . . . . . 83
Tax Activities within the Dutch Construction
Industry . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 87
Facilitators Makes Tax Evasion Easier (Sweden) . . . 94
Taxation of Individuals
Taxation of Foreign Entertainers and
Sportspeople in the UK . . . . . . . . . . . . . . . . . . . . . . . . 98

Contact Centres
Multichannel Services: Contact Centre Infofin Project in the Belgian Federal
Public Service Finance . . . . . . . . . . . . . . . . . . . . . . . . 126
The Contact Centre of the Finnish Tax Administration . . 129
Training Forum
Needs Analysis Process in Training (Austria) . . . . . . . 134
Audit Techniques for Small and Medium Enterprises
Methods of Validation (Germany) . . . . . . . . . . . . . . . 137
Selection and Audit Activities for Small and Medium
Enterprises (SMEs): IT Selection Tools and Audit
Techniques of the Italian Revenue Agency. . . . . . . . . 141
Benchmarking Activities in the IOTA Membership
Benchmarking: Practical Aspects (Estonia) . . . . . . . . 147
Benchmarking: Performance Comparisons between Tax
Administrations The Federal Experience in Germany. . 149
The Use of Information in Selecting Taxpayers at Risk
The Use of Information for the Purpose of Selecting
Taxpayers at Risk: State of the Art of the Case
Selection Procedure in Austria. . . . . . . . . . . . . . . . . . 152
Risk Analysis in the Irish Revenue Commissioners:
Equality across the Board Tackling Our
Non-Compliant Customers . . . . . . . . . . . . . . . . . . . . 154
Financial Instruments and Services

Transfer Pricing
Debt Push-Down to a Permanent Establishment - An
Approach to the Question in the Finnish Context . . . 102

Financing Transactions in Foreign Currencies, Combined

with Currency Rate SWAP Contracts in order to
Reduce Taxation: A Portuguese Approach . . . . . . . . . 158

Arms Length Royalty Rate (Norway). . . . . . . . . . . . . 106

Dividend Stripping A Swiss Experience . . . . . . . . . 161

VAT Fraud

The Economic Crisis and Its Implications for Tax

Administrations

Fraud in Construction Sector in Hungary . . . . . . . . . 109

Scrap Metal Sector in Slovakia . . . . . . . . . . . . . . . . . 112
Application of Tax Treaties
Tax Treaties and Their Implementation in
the Republic of Azerbaijan. . . . . . . . . . . . . . . . . . . . . 116
Application of Tax Treaties Article 15 Taxation
of Income from Employment Periods without
Obligation to Work (Denmark) . . . . . . . . . . . . . . . . . 119
E-Audit
E-Audit in the Czech Tax Administration . . . . . . . . . 122

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The Economic Crisis and Its Impact on the

Swedish Tax Agency. . . . . . . . . . . . . . . . . . . . . . . . . . 165
The Global Financial and Economic Crisis
Challenges and Responsibilities of the Tax
Administration (The FYROM) . . . . . . . . . . . . . . . . . . 170
Improving the Quality of Operations in Tax
Administration Units
Future Center De Werf(The Shipyard) of the
Dutch Tax and Customs Administration . . . . . . . . . . 174
Continuous Improvement as a Means towards
Predictable Quality (Norway) . . . . . . . . . . . . . . . . . . 176

i n t r o d u c t i o n

he Fight against Fraud:

Successful Measures
Adopted by Tax
Administrations to Tackle Tax
Fraud Taking into Account
Limitations Imposed by Data
Confidentiality

he 13th General Assembly of IOTA took place in Stockholm, Sweden on 9 - 10 July

2009. A total of 116 delegates representing 42 tax administrations and 11 international
and regional organisations (CATA, EU, GTZ, IBFD, IFA, IMF, ITIC, OECD, SOGEI
and USAID), 15 representatives of the central and local tax authorities of Sweden, and 6 support
staff members participated in the Assembly. The topic for discussion during the technical session
was The Fight against Fraud, Successful Measures Adopted by Tax Administrations to Tackle
Tax Fraud Taking into Account Limitations Imposed by Data Confidentiality.
Herwig HELLER from Austria looks at the advantages of multitasking enforcement.
From the Ministry of Taxes of the Republic of Azerbaijan Zaur FATIZADA explains how
Automated Tax Information System (AVIS) has assisted the fight against VAT fraud.
Franois TRECHOT from the French General Directorate of Public Finances relates the measures adopted by France to combat fraud through amongst other things the legal framework and
measures to improve the gathering of information.
4

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i n t r o d u c t i o n

Ernst CZAKERT provides an article how the fight against the VAT fraud in the German tax
administration is developed taking into consideration limitations imposed by data confidentiality.
From Slovakia Igor ULAJ reveals the tools used to fight fraud by the tax administration of the
Slovak Republic.
The use of information and the tax fraud prevention plan implemented by the Spanish tax
administration is explained by Vicente PEIRATS CUESTA and Ana ORTEGA GUO.
The ways that affect the outcome of audit activities like an attitude to tax of both citizens and the
staff of the tax administration are explained by Anette LANDN and Anders STRIDH from
Sweden.
Marco MOSCA examines how Switzerland is tackling tax fraud whilst respecting taxpayers
rights and confidentiality.
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Demands
for a Multitasking
Enforcement

Austria
Herwig HELLER
Head of Enforcement/Anti-Fraud,
Federal Ministry of Finance,
Department for Taxes and Customs
HINTERE ZOLLAMTSSTRASSE 2B,
A-1030 VIENNA,
(431) 51433 504080
TEL:
E-MAIL:
HERWIG.HELLER@BMF.GV.AT

Mr. HELLER has worked within the tax and customs administration for 28 years, now head of the Enforcement and
Anti-Fraud Unit within the Ministry of Finance since 1995.
He is deputy of the Director of the Management
Directorate. He holds a university degree in law from the
Alma Mater Rudolfina University in Vienna.

by Herwig HELLER

O
O

n 1 January 2003, within the Austrian Federal Ministry of Finance a

merger of the tax administration and the customs administration took
place. This resulted in a common management of the tax and customs
administration, organised as a Directorate within Department IV of the
Ministry of Finance, consisting of three divisions: Management, Organisation
and Anti-Fraud/Enforcement. Outside of these areas the tax and customs issues
are dealt with separately by the respective tax or customs divisions.
The term enforcement is commonly used for anti-fraud units, if the respective tax or customs administration includes an investigation service which is
empowered to execute police powers. In some countries (including Austria) it is
linked with the power to investigate criminal cases on behalf of the Public
Prosecutor. In Austria a Federal Tax Investigation Service exists and each of the
nine customs offices has a customs investigation branch at its disposal.
This paper is divided into two segments by distinguishing between regular tasks
of enforcement and additional tasks of enforcement due to the embedding of
the Enforcement Division into the Management Directorate. In the following
sequences the enforcements role within the tax sector is described since the
enforcement of the Austrian Tax and Customs Administration is in charge of
both customs fraud and employment fraud issues.

Regular Tasks
Regular tasks of enforcement are the planning and coordination of anti-fraud
measures as well as the strategic direction of the fields of activity of all antifraud units. This may include but is not limited to special control issues for tax
audit units with regard to VAT fraud or to include special tax measures with the
aim of encouraging investments by offering a tax bonus system as a main task
into the audit planning. Especially the taxation of cars is a difficult matter in
which a central anti-fraud expertise is necessary to support the tax offices.
With regard to risk analysis, the Enforcement Division is steering the Risk
Information and Analysis Centre (RIA) and supervises its work. The main task
of the RIA is analysing the code boxes of the tax declarations to filter out risk
indicators and to provide the results to the tax offices for their audit selections.
A forthcoming issue will be the cross-checking of pay-roll tax data and the
number of registrations of employees to the social insurance companies.

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Supervision is carried out in relation to the Tax
Investigation Service by selecting and determining the
main fields of investigative activities, including the co-ordination of big cases at international level. All the EU information systems like VIES, Eurocanet, Autocanet and the
forthcoming Eurofisc are used by the Enforcement
Division initially, before being released for the broader use
by the whole Austrian Tax and Customs Administration.
With a view to enhancing and speeding up the fight against
cross-border VAT fraud, the Central Liaison Office was
integrated into the Federal Tax Investigation Service in
2006 and the Enforcement Division took over responsibility for mutual assistance in relation to indirect taxes and the
decision making and guidance of multilateral controls insofar as the Austrian tax administration is involved.
The Enforcement Division takes care of international
working groups within the frame of the European Union,
the OECD, IOTA and the FATF. Most of the working
groups deal with VAT fraud, but other tasks like the links
between tax crime and money laundering, including special
typology studies reflecting different branches and sectors,
also fall within the competence of enforcement. Co-operation with Europol and Eurojust in international criminal
cases is lead by the Enforcement Division, notwithstanding
that the provision of information in specific cases has to be
done by the investigation teams responsible. The Austrian
Tax and Customs Administration takes part in two Analysis
Work Files (AWF): MTIC/Operation Beijing and Smoke
(cigarette smuggle). Since the Austrian tax administration
is bound by tax secrecy rules, participation can only take
place when a criminal investigation is carried out if the
public prosecutor authorises it.

Additional Tasks
As has already been mentioned, the regular tasks of
enforcement have been extended by their inclusion in the
Management Directorate. This has lead to a closer
involvement in the legislative processes. Enforcement is
now checking draft legislation in relation to potential fraud
risks, but based on experience and on information from
fraud cases. Existing legislation and procedures are also
checked for potential risks. Based on the analysis of information provided by fraud reports from the various tax
offices, a scenario report is compiled which may lead to
proposals for new anti-fraud legislation. Of course, it is for
the Minister of Finance to decide if a legislative proposal
will enter into the intra-governmental consultation process
before starting any parliamentary procedures. In many
cases data protection issues have to be matched with the
need for new anti-fraud legislation, since access to data is
very often the only means available to gather information
about ongoing unlawful tax avoidance schemes. An example of this approach is VAT fraud with metal scrap, where
it was evident from a number of anti-fraud reports that this
was an organised fraud. After a country-wide day of action

TAX TRIBUNE

by the tax offices a scenario report was drafted and presented to the minister. From this a political decision was
taken with the aim of introducing a reverse charge system
within this economic sector, following consultation with
the European Commission. Another example was the
preparation of a new law introducing a scrapping/environmental bonus scheme involving a new-for-old campaign
for private cars. The Enforcement Division, together with
the Ministry of Transport, developed a common system
involving the vehicle registration database, giving online
access to tax offices that could now prevent officially
scrapped vehicles being relicensed through identifying
them by their chassis numbers and blocking them. Other
proposed legislation was the legal obligation to provide
primary data on single business cash transactions or the
establishment of a cash control database and the provision
of information to the tax offices.
The Austrian Tax and Customs Administration is steered
by using the management-by-objectives process. The contribution of enforcement to this process are a number of
objectives such as the risk oriented selection of audit cases,
the amount of additional tax assessments or the number of
special controls (on-the-spot VAT controls, number of
controls of recently established companies and so-called
present observations of new companies with a higher risk
indicator). Together with the Management Division a risk
management concept was prepared. The core item is the
establishment of risk mapping, involving all processes and
all fields of activities or legal matters of the Austrian Tax
and Customs Administration. One of the outcomes has
been the development of proposals for specific aspects to
be considered within internal control systems and within
the framework of the quality management.
Compliance management is nowadays focussing more on
the service aspects of the business, but anti-fraud issues
must be considered as part of any compliance measures,
especially fostering the prevention of fraud. One of these
preventive measures is the quarterly action days, focussing
on one specific economic branch, e.g. construction or
restaurants. These are generally announced in advance and
afterwards the results are presented to the public. More
internal contributions are the development of the Standard
Audit File Tax (SAFT) and risk grading, both requiring a
large input from the Risk Information and Analysis Centre.
It is evident that management and enforcement often have
very different approaches to the same issue. There are,
worldwide, a number of new ideas to promote compliance
by investing in a customer relationship management and
by raising the mutual trust between business and tax. The
enforcement is not so fond of this philosophy, arguing that
compliance rates are decreasing, if the calculation of the
VAT gap or the increase in aggressive tax planning can be
believed. Finally, all the discussions need to end in a compromise which consists of a balanced approach, taking into
account both positions. Personally I am of the opinion that

a r t i c l e s
if somebody is in charge of anti-fraud who trusts nearly
every taxpayer, the Director General should replace
him/her. However, if you want a blue-eyed approach, look
for such a guy.
In respect of the tax offices, an information network was
developed within which risks, detected fraud reports and
audit methods could be communicated. In every tax office
an anti-fraud coordinator was established who is responsible for distributing information provided from a central
level as well as gathering local information and reporting it.

Marketing
Finally, the importance of marketing has to be stressed. In
Austria an annual anti-fraud report is published, using an
external version for the public and an internal version for
the Intranet of the tax administration and authorities with
whom a lot of co-operation takes place, such as the Interior
and Justice Ministries, the Federal Criminal Police Office
and all public prosecutors offices. Both versions do not
contain personal data. In relation to the Justice and the
Police this report has to aim at raising awareness of the difficult work of the tax officers in tax cases and to making
them understand that tax fraud is a severe form of crime.

Usually in summer the Minister of Finance or the

Secretary of State holds an anti-fraud press conference.
During the year minor press conferences or press statements from the Ministry of Finance give information about
the results of action days of the tax offices or about the
results of investigations in big fraud cases.
All these efforts and activities led to the establishment of
anti-fraud as the trademark of the Austrian Tax and
Customs Administration (and the Ministry of Finance)
accompanied by the dissemination of the slogans
Protection of the Compliant Society and Ensuring Fair
Competition as one of the overall goals of the tax administration.
Summing up all the described tasks of enforcement, it has
to be understood that enforcement/anti-fraud can be tackled in more ways than it was in the past and can successfully contribute to most of the strategic development and
management instruments. The results from enforcement
can also be valid instruments in raising public awareness
and acceptance of the tasks of tax administrations, which in
times of the financial crisis could be even more important,
when everybody is asking for cost cuts and reduction in the
number of personnel in public administrations.

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Automation
of Functional
Activities
of the Tax System
of Azerbaijan
Republic
by Zaur FATIZADA

Azerbaijan
Zaur FATIZADA
Head of Special Regime Tax Service
Department,
Ministry of Taxes
H.ALIYEV AVE. 105,
AZ 1079 BAKU,
(994) 12 430 29 47
TEL:
E-MAIL:
Z.FATIZADA@TAXES.GOV.AZ

Mr. FATIZADA joined the tax administration in 1994 as

a state tax inspector. He has worked as a head of several departments, but currently he works as a head of
Special Regime Tax Service Department. He graduated
from Azerbaijan State Economic Institute.

I
I

n this article we intend to explain about the automation of functional activities within the Ministry of Taxes of the Azerbaijan Republic. First of all we
would like to give some general information about the Azerbaijan Republic.
The population is 8.8 million and the total area of the country is 86,600 km. The
GDP was EUR 26.4 billion in 2007 and EUR 37.3 billion in 2008. The amount
of state budget revenues collected in 2008 was EUR 10.4 billion and expenditure
was EUR 10.3 billion.
By analyzing the GDP dynamics since 2001 we can say that this indicator has been
increasing rapidly in Azerbaijan. Real growth of GDP was 11% in 2003, 10% in
2004, 26% in 2005, 35% in 2006, 25 % in 2007; 10.8 % in 2008 and 6.1% during
the first nine months of 2009. The dynamics of real GDP is less in 2009 when
compared with previous years, but considering the world financial crises and negative dynamics of GDP in some countries, we can say that the Azerbaijan economy is robust against any crises.
Also we would like to tell you about the amount and share of individual taxes in
the overall budget. You can see this in Table 1.

Table 1

Automated Tax Information System

(AVIS)
Having described the Azerbaijan economy overall, we can now go back to the main
topic of the article.

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a r t i c l e s
The Ministry of Taxes (MOT) uses strategic management as
the management style. We determine our strategic goals for
the short and the long term and then prepare work plans to
carry them out. One of our main goals is the development of a
computer database that meets the requirements of a modern
system. To meet that need a special program; Automated Tax
Information System (AVIS) was created and has been used
since February 2006 in Azerbaijan. AVIS gives us lots of advantages, but its main advantages are:
Online services to taxpayers;
Automation of working processes;
Using a single information database.
AVIS works on the base, the corporative network, which
covers all territories of the Azerbaijan Republic. This corporative network has 13 local centres.
The main subsystems of AVIS are the following:
Electronic document circulation;
Human resources;
Receipt of tax returns and desk audits;
Data logging results of elimination of tax debts;
Maintenance and use of taxpayers files;
Taxpayer risk assessment for tax audit purposes;
Performance measurement of functional activities and
staff;
Services to be carried out for taxpayers through the
Internet;
Exchange of information with state agencies and other
bodies;
Other.
The implementation of AVIS gives us the opportunity to
improve processes because with its support we were able to
measure all the processes used within the MOT.
For automation of functional processes we also use a special
webpage (www.taxes.gov.az) managed by the Internet Tax
Department. With the help of this website taxpayers have the
following facilities:
Direct contact with the Minister of Taxes;
Direct contact with Internal Security Department;
Forum and question-answer section;
Information about legislation and last amendments;
Other information and statistics;
Online services (e-returns and others).
Using the Internet Tax Department; taxpayers may send their
returns in electronic format. They also have access to information about debts they may have to the budget by looking at their
personal account anytime. The Ministry of Taxes uses special
software (BTP) to prevent possible mathematical errors made
during the completion of returns. After completing their return
it is possible to save them in electronic format and print it.
Currently the proportion of separate types of return submission
are as follows: e-returns (72.8%), submitted by post (16.6%),
personally submitted (7.1%), processed by bar-code (3.2%).
Due to the advertising carried out by the Tax Service Division,
the share of tax returns submitted in electronic form increases
every month. We can see these dynamics in Diagram 1.

10

Diagram 1. Dynamics of E-return Submission

Submission of returns in electronic form is very useful for taxpayers. Analyses show that it allows them to save 24 days during a year.
AVIS gives us the ability to identify more mismatches and to
increase the efficiency of control procedures. Due to AVIS
more than 300 automatic control procedures have been implemented in the MOT.
With AVIS we can control VAT more efficiently and carry out
crosschecks. The mechanism of crosschecks on VAT is
described in Diagram 2.

Diagram 2. Crosscheck Minimum Turnover

To enhance VAT control we also use a single VAT deposit

account. The single VAT deposit account is the special treasury
account set up to receive and to transfer to the state budget
VAT amounts. Taxpayers must transfer the VAT amount,
which is part of the purchased goods price, to the taxpayers
sub-account (single VAT deposit account), through their own
bank account by payment order or by using the Internet Tax
Department. The single VAT deposit account gives us the ability to control VAT step by step. We can see real positive results
from implementing this system from the following information. If the amount of evaded VAT was EUR 150.6 million in
2005, it was EUR 129.7 million in 2006; EUR 110.7 million in
2007, and EUR 89.7 million in 2008. Starting from 2005 the
number of taxpayers evading VAT also decreases. If it was
1,969 in 2005, in 2006, 2007 and 2008 the number of taxpayers evading VAT was 1,650; 1,245 and 960 accordingly.
Enhancing the control over VAT helped us to increase VAT
revenues. In comparison with 2007, the growth of VAT payments was 74.7%, reduction of VAT debts was 25% and
growth of VAT taxable turnover was 14.9%.
In summary we can say that the automation of working
processes is necessary for the improvement of functional activities. It gives great advantages and is very important for continuous development.

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Measures Adopted
by France to
Combat Fraud, in
Compliance with
the Principle of
Data Protection
by Franois TRECHOT

France
Franois TRECHOT
Investigation Team Manager, General
Directorate of Public Finances
6BIS RUE COURTOIS,
93695 PANTIN CEDEX,
TEL:
(33) 1 49 91 81 23
E-MAIL:
FRANCOIS.TRECHOT@DGFIP.FINANCES.GOUV.FR

Mr. TRECHOT is an Investigation Team manager. He

works for the French National Tax Investigation
Department (DNEF), where he is in charge of international investigations, in particular regarding VAT
carousels.

T
T

he combating of tax and social security fraud is a priority for the

French government and tax authorities. Still working within a strict
legal framework (particularly in terms of data protection of the taxpayer), recent measures have however allowed a reinforcement of procedures
and the improved gathering of information, with the creation of dedicated
structures, both on a national and international level.
New key initiatives specifically target overseas activities taking place in tax
havens (countries which have entered into an administrative assistance convention with France allowing access to bank information) with extension of recovery periods and increased stipulated fines. The 2008 amending finance law reinforced the authorities powers for obtaining information both in terms of rapidity and by giving access to data held by electronic communications operators
(Internet and telecoms). The National Fraud Prevention Delegation (DNLF)
was created to improve tax recovery within France and a special onus was placed
upon international cooperation, through the creation of the Eurofisc project of
cross-boundary information sharing.

The Legal Framework

Description of the right to information
The French taxation system is essentially based on the declarations made by
taxpayers. These declarations are inspected by the tax authorities on the basis
of the powers conferred on them by law. When it inspects the tax status of a taxpayer who is subject, for tax purposes, to accounting obligations, the authorities
must be able to have access to all the documents held by the said taxpayer.
Pursuant to the Tax Procedures Guide, the right to information is the right of
the tax authorities to obtain knowledge and, if necessary, take copies of documents held by third parties (private businesses, authorities, various establishments and organisations, etc).
The information obtained on this occasion may be used for the tax basis and the
verification of all taxes and dues payable, either by the natural or legal person
concerned, or by third parties to this person.
The right to information is in principle exercised in situ, in the place where the documents forming the subject of the proceedings are held. It concerns documents or
instruments for which the obligation of preservation is stipulated in the Tax
Procedures Guide, regardless of the medium on which this information is held.

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11

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The possibilities allowed to access information
The bank account database
The automated bank account database management processing system, known as FICOBA, contains the references of
bank accounts opened in France, and the information for identifying establishments and account holders, whether resident in
France or not (350 million accounts, 110 million natural persons and 10 million legal persons). The financial transactions
(debits and credits) which affect these accounts are not traced.
The General Directorate of Public Finance (DGFiP) restricts
itself to passive management of the information.
The purpose of this database is to list accounts and make it
possible to identify, verify and recover taxes. The application is accessible to authorised officers through the DGFiP
Intranet portal.
The right to information towards banks
The information held and managed by the banks is covered
by banking secrecy. However, this rule may be waived in
favour of tax authority officers, particularly when the rightof-discovery procedure is implemented.
The Tax Procedures Guide allows, in principle, the obtaining of all the accounting records held by credit institutions
(account statements, copies of cheques, lending operations,
etc.) This article is used essentially during an accounting
audit, an examination of personal tax status or the investigation of a declaration of estate.
Special right to information on transfers of funds
abroad
To prevent the liberalisation of capital movements from
being a source of tax evasion, the Tax Procedures Guide
stipulates that the tax authority has a specific right to information with regard to credit institutions, allowing it to
obtain various items of information on transfers of capital
abroad made by certain categories of persons established or
domiciled in France (all transfers of capital abroad made by
natural persons, associations and companies without commercial form, domiciled or established in France).

Limits related to privacy

Medical confidentiality
Persons conducting medical or paramedical activity are not
subject to the right to information. This means that no
connection must be possible between the patients names
and information, even in summary form or encoded,
regarding the type of treatment administered.
Professional secrecy of lawyers
Regarding lawyers, the scope of the right to information is
restricted to the clients identity, the amount, the date and form of
the transfer, as well as the documents appended to this transfer.
To guarantee respect for professional secrecy, searches and
seizures on a lawyers professional premises must be made
in the presence of the president of the bar or his/her

12

deputy. The tax officers, or failing them, the LEO, are

responsible for requesting the latters presence.

Strengthening Actions
Serious tax fraud (adopted in 2007)
To reinforce the means available to the authorities to prevent tax fraud by taxpayers conducting a professional activity, the 2007 amending finance law introduced a flagrant
tax evasion procedure that allows the authorities to sanction the taxpayer quickly and effectively and to secure the
recovery, before the expiry of any declaration requirement.
Flagrant evasion concerns taxpayers engaged in a trade
or profession,
Its implementation must be justified by one of the following four situations:
Either the taxpayer is engaged in an undeclared
activity; or
The taxpayer issues false invoices or books them as
expenses or participates in carousel VAT fraud; or
The taxpayer is performing operations without issuing invoices and without booking them in accounts,
or he/she is using permissive accounting software,
when the facts are such that the accounting has no
evidentiary weight; or
The taxpayer is using undeclared labour.
Flagrant tax evasion concerns only the current period,
that is, the period for which no declaration requirement is due. The facts constituting a situation of flagrant tax evasion must therefore be ascertained for the
current period.
To implement the flagrant tax evasion procedure, the
authorities must provide evidence of circumstances
liable to jeopardise the recovery of a fiscal debt.
The flagrant tax evasion procedure is not an
autonomous procedure. It can only be implemented in
the framework of procedures listed restrictively by law:
right of search and seizure, right of investigation, VAT
audit, VAT investigation of taxpayers subject to the
simplified tax system and unannounced audit.
When these conditions are met, tax officers of at least
inspector grade are entitled to draw up a report establishing the situation of flagrant tax evasion.
Effects of the flagrant tax evasion procedure
After drawing up the report of flagrant tax evasion, the
authorities may carry out attachments and apply a fine on
the taxpayer and their prerogatives in the case of investigation are reinforced.
Seizure of assets can be carried out immediately without
prior authorisation by the judge, in an amount whose
upper limit is determined depending on the type of debt:
income tax, corporate tax or VAT, and cumulatively for
direct tax and VAT.
A fine of EUR 5,000 can be applied, increased to EUR
10,000 or EUR 20,000 on the taxpayer depending on the

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amount of the taxpayers turnover, excluding tax or his/her
gross revenues.
Finally, the report of flagrant tax evasion operates on the
taxation systems and the authorities right of investigation
(exclusion from the VAT base exemption system and the
simplified VAT taxation system, launch of a new accounting audit for a period and a tax already controlled, increase
of recovery time granted to the authorities from three to
six years for direct taxes, corporate tax and VAT, for the
period prior to the report of flagrant tax evasion, etc.)
In order to respect the rights of the defence, the flagrant
tax evasion procedure is accompanied by specific guarantees and rights to appeal in favour of the taxpayer who can,
in particular, apply for a summary judgement against the
flagrant tax evasion procedure conducted and the attachments carried out.

Reinforcement of the search and seizure procedure

(adopted in 2008)

In the areas of income tax and corporate tax, the period during which the authorities can remedy omissions or insufficient taxation (right of recovery) is generally set at three
years. However, in order to reinforce the prevention of tax
fraud practised through tax havens, the 2008 amending
finance law increased to ten years the recovery period in case
of failure to meet the following declaration requirements:
Declaration of an entity benefiting from a privileged
tax system;
Bank accounts opened, used or closed abroad;
Life insurance policies taken out with insurance organisations established abroad.
In order to target the measure on tax havens (territories
that cooperate little or not at all with France), this extension does not apply to cases in which the assets and/or the
entities are located in a state or territory with which France
has entered into an administrative assistance convention
allowing access to bank information.

The tax authorities have a search and seizure procedure

which is exclusively intended for the search for proofs of
tax fraud and only concerns trade taxes (VAT, corporate
tax, and tax on industrial and commercial, agricultural or
non-commercial profits).
This is an exceptional procedure, which is subject by law to
authorisation by the judicial authority in the person of the
custodial judge of the High Court in whose jurisdiction the
premises to be searched are located.
The 2008 amending finance law modified the Tax
Procedures Guide, granting, on the one hand, new powers
of investigation to the tax authorities and, on the other,
strengthening the conditions for enforceability of information should the taxpayer hinder the restitution of the documents seized.
The tax authorities new prerogatives are of two kinds: the
possibility of obtaining information and proofs from the
occupier of the premises, his/her representative and, if he/she
is present, from the taxpayer mentioned in paragraph I of
Article L. 16 B of the Tax Procedures Guide, or from the presumed perpetrator of the actions investigated, and the possibility of asking these persons to prove their identity and their
address on this occasion, it being specified that these new prerogatives of the authorities are regulated by the law which
stipulates the conditions for their implementation.
Moreover, the 2008 amending finance law introduced in
Article L. 16 B of the Tax Procedures Guide the special
conditions for enforceability of information should the taxpayer hinder the restitution of the documents seized.

Improved Obtaining of Information

Provisions to prevent tax fraud via tax havens

(adopted in 2008)

Increased penalties for failure to declare a bank

account or life insurance policy abroad

These new provisions allowed for an extension of the

recovery period to ten years for territories with which
France has not signed an agreement allowing access to
bank information.

In the context of international tax fraud prevention, the

2008 amending finance law increased the amount of the
fines stipulated in case of failure to declare accounts and
life insurance policies held abroad.

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Right to information with regard

to Internet operators
The 2008 amending finance law introduced a right to
information with respect to Internet and telephone operators, designed to give the tax authorities additional means
to combat tax fraud by taxpayers carrying on an undeclared
or partially declared commercial activity through the
Internet causing prejudice to the public Treasury and to
professionals who meet their declaration requirements.
This right to information may be exercised by the authorities officers in charge of establishing the tax base and
investigating tax, as well as by the authorities officers in
charge of the recovery of taxes and duties as stipulated in
the General Tax Code.
In this context the tax authorities can require communication of the identity of the persons selling goods or services
on online brokerage sites, as well as the list of sales or services sold, the type of goods or services sold and the price
of these sales or these services, so as to investigate any
undisclosed activities or declared activities.
Finally, the Tax Procedures Guide gives the tax authorities the
right to obtain knowledge of the data processed and kept by electronic communications operators (Internet service providers and
telephone service providers) and by the operators services like
Internet service providers (ISP) in which the telecommunications aspect is auxiliary and Internet service providers in a very
broad sense, including boxes (Internet, landline telephone and
television) or Internet on mobile telephones.

13

a r t i c l e s
The amount of the fine for failure to declare accounts
opened, used or closed abroad is increased from EUR
750 to EUR 1,500 per undeclared account. The same
applies to zero-rate repayable advances not declared by
financial institutions.
The amount of the fine is increased to EUR 10,000 per
undeclared bank account when the declaration requirement concerns a state or territory which has not
entered into an administrative assistance convention
with France to combat fraud and tax evasion allowing
access to bank information.
The upper limit of the applicable fine for failure to
declare life insurance policies taken out abroad, when
the taxpayer provides evidence that the Treasury has
not sustained any prejudice, is increased from EUR
750 to EUR 1,500.

assessment, the monitoring of its development and

fraud typology;
To help guarantee the collection of public revenues and
the payment of social security benefits;
To contribute to the implementation of a national policy of prevention and communication;
To define guidelines for enhanced cooperation with
foreign organisations and authorities;
To steer the activity of the operational committees for
the prevention of illegal labour and the local fraud prevention committees;
To propose any reform serving to improve fraud prevention, in particular to reinforce the prerogatives of
the officers concerned, the tools available to the
departments, the methods of investigation, and the
effectiveness of sanctions.

Creation of Dedicated Structures

The Eurofisc project

National Fraud Prevention Delegation

The prevention of international VAT fraud, and particularly of carousels, requires close and enhanced cooperation
between the Member States of the European Union. In
2008, France suggested to its partners that a structure
called Eurofisc be set up at Community level and, in
October of the same year, the European ECOFIN adopted its guidelines.
This structure will be an official network for rapid multilateral communication of targeted information on risky operators
and coordination of investigations of participating Member
States. In the longer term Eurofisc will also be able to coordinate tax investigations of these operators and develop a common risk analysis capacity based on national tax data.
Eurofisc will be the first essential step towards the setup of
more integrated and more ambitious enhanced cooperation in
the field of taxation on the model of existing organisations in
the fields of policing and law (Europol and Eurojust).

Public finance fraud detection is a priority for the French

government. In order to achieve it, the National Fraud
Prevention Delegation (DNLF) was created in April 2008.
Attached to the Budget Minister by delegation of the
Prime Minister, its tasks are:
To ensure the effectiveness and coordination of the
actions conducted in the field of fraud prevention, on
the one hand between the state departments concerned, and on the other hand between these departments and the social security organisations, the unemployment insurance management organisations, the
Employees Supplementary Pension Association and
the General Association of Managerial Staff Pension
institutions;
To improve the identification of cases of fraud affecting
public finance, and particularly to improve the existing

14

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a r t i c l e s

The Fight against

Tax Fraud within
the Context
of Data
Confidentiality
and the Secrecy
in Tax Matters
by Ernst CZAKERT

Germany
Ernst CZAKERT
Head of Division,
Tax Department of the German
Federal Ministry of Finance
WILHELMSTRASSE 97,
D-10116 BERLIN,
(49) 30 2242 1930
TEL:
E-MAIL:
ERNST.CZAKERT@BMF.BUND.DE

Mr. CZAKERT is responsible for international cooperation of tax administrations and for international information exchange. He worked as head of division in the
field of tax treaties, direct taxation within the EU and
proceedings of the European Court of Justice. During
his career in the Federal Ministry of Finance he has
been deputy head of division in various areas of
responsibility, especially in the Customs Department.

T
T

Introduction
his article gives a brief overview of the fight against tax fraud and the
effects of data confidentiality and secrecy in tax matters in the practical work of the German tax administration. Therefore, it is necessary
to explain about the importance of tackling tax fraud and for a better understanding, to give some information about the overall situation in Germany.
That means the organisation of the tax administration in Germany and the different responsibilities of the federal government and the federal lnder. The
fight against fraud is framed by the rules of data confidentiality and the obligation to observe the rules of tax secrecy. It is the intention of this article to give
an overview of the basic legal rules which exist within this area in Germany.

Constitution of the Federal State

The Federal Republic of Germany consists of 16 lnder (federal states) which
are responsible for the administration of tax. The federal government makes the
tax law and pays attention to the uniform application of the law. In 2006 about
107,000 tax officers worked for the tax administration and collected about EUR
500 billion revenue that is about EUR 4.7 million for every tax officer.
The main taxes are the wage tax, which is the income tax for employees and
which is collected directly at source in a way that the employer is obliged to pay
over the tax to the tax office, the value added tax (VAT) and then the mineral
oil duty, the trade tax, the import turnover tax, the corporation tax, the assessed
income tax, the solidarity surcharge and the real property tax. All other taxes are
only in the one-digit range of millions of EUR, but together they contribute to
the revenue with an amount of over EUR 50 billion.

Loss of Revenue because of Tax Fraud (in the VAT Sector)

Tax fraud results in a considerable loss of revenue. The exact amount of the
loss of revenue is not easy to estimate, but as regards the scope of tax fraud in
Germany there are figures available from the institute in Munich which are
based on a macro-economic approach. For 2008 the estimated loss was EUR
17 billion, that is 9% of the theoretical amount of VAT revenue (VAT plus

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15

a r t i c l e s
import turnover tax). Within these figures the amount of
tax losses based on insolvencies is also included, therefore
the loss based on fraud is obviously less, but at least EUR
15 billion is caused by VAT tax fraud.
Tax fraud is not only reprehensible because of the loss of
revenue; it also creates a barrier for just and fair taxation of
all taxpayers. If there are fraudsters who do not accept the
rules, they undermine the trust in the legal system of a state
and that is not only unacceptable from a moral point of
view but it is also unacceptable from a legal perspective.
The Federal Constitutional Court in Germany decided
that the tax law must be administered in a consistent way
otherwise the law will be unconstitutional.

Fight against Tax Fraud

Therefore, an efficient fight against tax fraud is a legal
obligation of the state. That means in Germany the obligation of the federal government and the federal lnder.
According to Article 108 (2) of the German Basic Law,
most of the main taxes in Germany, for example, VAT,
income tax and corporate tax, are administered by the
revenue authorities of the German lnder. However,
according to Article 108 (3) of the Basic Law they act on
a federal commission. Thus the fight against tax fraud is a
common problem for both the federal government and
the lnder.
To fulfil its legal obligation to administer the tax, the lnder
installed 8 regional finance offices and 645 tax offices (including branches). At the regional and local level the federal government has its own administrative structure for only customs and excise duties. Only the Federal Central Tax Office,
which is the responsibility of the federal government has
administrative competences in the other areas of taxation. It
is the Central Liaison Office in Germany for the information
exchange with other Member States of the European Union
(EU) as well as with all other states in the world.
The Federal Central Tax Office is responsible for activities
that can not be fulfilled at the level of the lnder, in particular maintaining relationships with other countries.
The Federal Central Tax Office is responsible for:
Providing administrative mutual assistance to national
and foreign authorities in serving and enforcing notices
of tax assessment;
Establishing mutual agreement procedures and agreements on transfer prices;
Providing central information services on tax matters
abroad to support the German revenue authorities
process tax cases from all over the world;
Dealing with withholding tax relief for foreign artists
and sportsmen;
Issuing national VAT identification numbers and confirming those from abroad for Intra-Community trade;
Collecting recapitulative statements on IntraCommunity transactions and forwarding these to the
other EU Member States.

16

Tax Secrecy and Data Protection

For all these activities tax administrations must collect, use
and store data about taxpayers, companies and other so
called personal data. In Germany this data is under the special protection of the Basic Law.
In a 1983 case against a Government Census Law, the
Federal Constitutional Court of Germany formally
acknowledged an individuals right of informational selfdetermination which is limited by the predominant public interest. The central part of the verdict stated, Who
can not certainly overlook which information related to
him or her is known to certain segments of his/her social
environment, and who is not able to assess to a certain
degree the knowledge of his/her potential communication
partners, can be essentially hindered in his/her capability to
plan and to decide. The right of informational self-determination stands against a societal order and its underlying
legal order in which citizens could not know any longer
who what and when in what situations knows about them.
This landmark court decision derived the right of informational self-determination directly from Article 1 (1)
and 2 (1) of the Basic Law, which declare that personal
rights to freedom are inviolable.
In the Federal Data Protection Law Germany has implemented the principles of the court decision. The protection of personal data is limited only by a predominant
public interest which is necessary to allow the collection,
processing and use of personal data.
The general purpose of this law is to protect the individual
against violations of his/her personal rights by handling personrelated data. The law covers collection, processing and use of
personal data collected by public, federal and state authorities,
and by non-public offices. The main rule is that personal data
can be collected only on the basis of a legal provision.
Another important part in the German tax law is the principle of tax secrecy. It is implemented in Section 30 of the
German Fiscal Code. It means that tax officials are obliged
not to reveal particulars about the identity and personal
circumstances of taxpayers, or about any of the various
aspects governing their tax liability, except in certain strictly limited circumstances.
The reason for this is the obligation of a taxpayer to disclose in a tax procedure all information which is necessary
for the correct assessment of the tax. Unlike in a criminal
investigation the taxpayer does not have the privilege to
refuse to give evidence. Therefore he/she must be assured
that the information he/she is obliged to disclose will be
used by the tax administration for no other purposes than
the correct assessment of tax.
Within these boundaries the tax administration has the right
first, to get all the necessary information for a correct tax
assessment - and second, to cooperate with other tax administrations, especially in foreign countries, in the area of taxation.
All activities must be based on the law which describes in detail
for which purposes data can be collected and exchanged.

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a r t i c l e s

Example
VAT fraud particularly, within the EU, shows a lot of different, sophisticated fraud patterns. Supplies that are
exempt from tax, goods that do not exist, goods that remain
in another country or the actual purchaser is not the recipient of the invoice. Then we have the problem of carousel
and chain transactions in connection with a missing trader.
All these routes are taken by fraudsters to avoid taxation or
to claim incorrect input VAT.
To avoid or to investigate these kinds of fraud the key factor is the exchange of information between the tax administrations involved.
This means the exchange of information on a national level
and exchange of information within the EU. All must be
based on legal rules.
In the VAT sector and it is to underline that within the
EU the VAT is a harmonised tax - these rules are the
German Turnover Tax Law, the German Fiscal Code, the
Council Directive on the common system of value added
tax and the Council Regulation on administrative cooperation in the field of value added tax. These rules fulfil the

TAX TRIBUNE

legal requirements for the protection of data confidentiality and tax secrecy. They also allow the Intra-Community
exchange of VAT registration numbers, the collection of
basic data about VAT registered traders and other basic
data on a national level. It allows the exchange of this data
between different tax offices, to store the data in a centralised database and to provide the information, on the
basis of a query, to another Member State of the EU. This
is the basis of the VAT Information Exchange System
(VIES) with the elements to verify the VAT registration
number and to exchange the data on recapitulative statements within the EU.
This was a short overview about the complex interaction
between the fight against tax fraud on one side and the protection of the personal rights of the taxpayer on the other,
with the legal instruments, data confidentiality and tax
secrecy. To improve the fight against tax fraud and tax
avoidance it is essential to reach a higher standard for
information exchange and therefore it is also essential to
have the same or equal standard in data protection and tax
secrecy.

17

a r t i c l e s

Tax Fraud
Fighting Tools
in Slovak Republic

Slovakia
Igor ULAJ
Director General,
Tax Directorate of SR

NOV ULICA 13,

975 04 BANSK BYSTRICA,
(421) 48 4393101
TEL:
E-MAIL:
IGOR.SULAJ@DRSR.SK

Mr. ULAJ holds a degree in economics. His career started at Matej Bel University in Bansk Bystrica, Slovak
Republic, as a lecturer. In 1986 - 1992 he worked at different economic positions of heavy industry companies.
In 1992 2006 performed tax advising activities. Since
2006 he has been appointed to the position of Director
General of the Tax Directorate of the Slovak Republic.

by Igor ULAJ

G
G

lobalisation of world trade, removal of barriers to free transfer of capital,

labour, goods and services in EU, removal of physical control at country
borders within EU, the common system of VAT, and the different tax systems within EU and OECD, these all allow for the occurrence of tax fraud and evasion from tax liability.
The fight against VAT fraud became one of the most important targets of all countries, within and outside the EU, based on the principle of global thinking and local
acting. International cooperation is essential in this respect, as fraud does not
respect state borders. Slovak Republic (SR) should be a part of these efforts.

Some Facts about Slovak Republic

Established on 1 January 1993;
Area: 49,035 km2;
Population: 5,404,784 (as of 30 August 2008);
Capital: Bratislava;
Number of regions: 8;
Number of districts: 79.

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a r t i c l e s
Tax administration of the Slovak Republic
The location of the Tax Directorate is in Bansk Bystrica.
Some of its activities are carried out through 8 regional
offices. At the local level there are 102 tax offices and the Tax
Office for Large Taxpayers in Bratislava.

Statistical data about taxes managed by tax

administration

a period of 5 years back is based on the submitted tax returns

- the yearly aggregate figure included in tax returns with 10
risk criteria, or monthly/quarterly tax returns with 6 risk criteria, and selection of these for tax audit. In operation: since 1
January 2008.
The risk sectors are, for example, intermediates, publicity related activity, market research, high turnover and no employees,
repeatedly submitted additional tax returns (2 times or more per
calendar year), high turnover and low tax liability, etc.

Deregistration of Taxpayer from VAT

The collection of consumption taxes is the competence of the

customs authority.

Tax Administration Strategic Plan

In December 2007 the management of the Tax Directorate of
SR approved the document Tax Audit Strategic Plan for
2008 2010, which defined the key objectives based on the
vision of the organisation, which is: Collection of taxes is the
means, satisfied citizen is the target. One of the most important
aims coming from the Program Declaration of the
Government of the SR of August 2006 was the reduction of
tax and customs duties evasions or committing tax fraud by
identifying risky taxpayers and taking actions against them,
and suppressing the grey economy.

Tax Audit in 2009 Targeted at Risky

Taxpayers
Tax audit objectives were targeted at the fight against tax fraud:
to identify, reveal and sanction evaders and fraudsters.
Tax audit main indicators are: the number of frauds found, the
effectiveness of tax audit, number of test purchases (cash registers), etc.
Further activities: the identification of buffer companies, margin schemes, transfers assessment, etc.
Tools: internal databases for tax auditors (legislation, methodology, manuals).

Risk Analysis in Tax Administration

ISK 1 the selection of taxpayers for tax audit is in operation
since 2003, it assists auditors to prepare for an effective audit,
based on approximately 400 criteria, and these may be further
specified or combined.
The software has been designed for the use by the tax audit
department manager, departments of tax audit with Tax
Directorate regional offices, staff of Department of the Tax
Audit Strategy of the Tax Directorate.
The risk analysis system for VAT (SAR) serves for evaluation
of the risk degree of VAT payers. This evaluation is made for

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Pre-registration and registration level, recommended steps: only

fully completed VAT application forms should be accepted,
carrying out local investigation in order to verify the company
location, increased attention to high risk categories, for example, a single person Ltd. company, change of the executive officer or domicile, company representative foreign citizen, etc.
Post-registration level: possible deregistration of taxpayer from
VAT. Legal base is the 81 Section 4 Item b) of Value Added
Tax Act according to which the tax office is authorised to
determine the last fiscal period and cancel ex officio the VAT
registration, on the grounds that there is no substantiation for
such registration.
The tax office will undertake the necessary steps, for example,
issue the notice for the taxpayer to come to the tax office, to
submit the required documents, etc. in order to ensure that
the taxpayer has provided proof of carrying out an economic
activity. If the taxpayer does not submit documents or fails to
come, it means he/she did not document the carrying-out of
economic activity and therefore the company is not regarded
to be a taxable person and consequently there is no reason for
registration.
The next step is the stating of last taxable period (month or
quarter) and starting from the next taxable period he/she is no
longer a VAT taxpayer. This is also shown in the VIES system.

Local Investigation Focused on Buffer

Companies
Identifying of buffer companies (started in April 2007) is the
measure to find new fraudulent chains without any goods or services. Thanks to the special role of buffers re-invoicing the
same goods with a small profit there is the possibility to select
these companies from the database upon the submitted VAT tax
returns.
The Tax Directorate makes such selections based on criteria:
monthly turnover (tax base) higher than EUR 666,000 and
profit margin in range of 0.0% - 1.0%. The local investigations are carried out by local tax offices at these selected tax
subjects (asking for the lists of input and output invoices).
The results on average were the finding of around 25% of them
as missing traders (MT) (no documents, no company seat, and no
company representative). These MT can be deregistered from
VAT ex officio. Some of the companies, around 8%, were rapidly
changing seats and representatives and nearly all claimed their
documents were stolen. Around 20% were out of fraudulent

19

a r t i c l e s
schemes. The rest (around 50%) of companies that submitted
required lists of supply and customer invoices, were part-buffers
of fraudulent chains with various goods and services.
By the mapping of their business partners the chain could
be extended to the next level of operators and thus start targeted tax inspections. This is a very time and labour intensive process. In general, based upon these selection criteria,
the number of buffer companies has decreased in the last
period.

Suggested Legislation Changes

There were several chains mapped with ferrous and non-ferrous
scrap (Fe, Cu, Al, Zn) with over 170 taxpayers registered in
Slovakia during years 2006-2008: 54 missing traders, 80
buffers, 37 brokers. These 54 missing traders have issued
invoices for buffers in a total value of VAT over EUR 54 million. The mapped chains of 43 Slovak taxpayers with gold and
investment gold resulted in the issuing of invoices by missing
traders in an amount of VAT of over EUR 19 million.
A series of tax inspections were carried out at selected businesses with scrap but due to the huge, sophisticated and multinational character of these chains there was still problem to
prove the non-existence of goods or the invoicing of the same
goods (carousel).
The cooperation with police bodies seemed to be a partial
solution to the problem. The largest chain with copper scrap
in Slovakia was stopped after the police investigation action in
2006 resulted in the seizure of computers, money, book keeping and the arresting of people involved.
Due to the significant tax evasion, the application of the EC
Council Directive No. 2006/112/ES was established in Slovak
VAT law. It was stated that the person liable for paying VAT
at domestic supplies is the recipient of the supply of scrap (
199 Section 1d) and the supply of gold ( 198, 344 356). The
targeted reverse charge in the VAT act came into power on 1
April 2009. This legislation change was the most effective
way to fight against fraud with scrap and gold.
According to first evaluation, during the first two months
April and May 2009 in the enlarged scale of major Slovak brokers dealing in the business processing the scrap, the VAT
repayment claims have decreased by more than EUR 18 million in comparison with the previous periods. On the other
hand, some of the largest operators changed to other commodities, namely Zinc and copper products cathodes.

Training by Tax School

Tax Directorate of SR carries out educational activities in a specialized tax school, on three levels: training of newly recruited
personnel, specialised training, and management training.
Within the fight against tax fraud, the Tax Directorate of SR
expanded the educational plan to include complementary training Fighting Tax Fraud, in 2008, which involved presenta-

20

tion of general information and practical examples from the

area of anti-fraud oriented activities, which are: ways of
detecting carousel fraud, the most frequent mistakes made by
tax offices, case studies on coordinating tax audits, and importance of international exchange of information.
Training to the end of year 2008 was focused on tax audit
department managers of tax offices. Since the response of the
participants was positive, training continued from April 2009,
and the target group was extended to tax auditors. The lecturers are the separate Tax Directorate units officers involved
to a great extent in the fight against tax fraud (Tax Audit
Division, Division of International Information Exchange and
Division of Risk Management).

Cooperation with Police

Tax administration and police bodies have taken steps in
mutual cooperation, both in separate procedural code, namely Administration of Taxes and Fees Act (Act No. 511/1992
Coll. as amended), and Code of Criminal Procedure (Act No.
301/2005 Coll. as amended). The criminal proceeding on
operative/investigators level may run concurrently and independently from tax proceeding.
The Slovak tax administration is not authorised to carry out
criminal investigations. The tax administration notifies the
police in cases of any fraudulent activities of a company. The
police ask for tax inspections, local investigations, copies of tax
returns and other documents, etc. The tax offices can ask the
police for help in finding and handing over representatives of
MT companies, etc.

International Administrative Cooperation

In the fight against tax fraud and evasion all forms of international administrative cooperation are regarded as essential
tool to fight tax fraud within the legal framework given by
Council Directive No. 77/799/EEC on Mutual Assistance in
Direct Taxes and Council Decree No. 1798/2003 on
Cooperation in VAT.
In order to increase effectiveness, the Slovak tax administration supports the trends leading to speeding of information
exchange cutting down the times necessary for submitting
recapitulative statements. We also see as important the appropriate use of SCAC forms by asking appropriate questions and
the willingness to answer to these.

Perspective
The applying of these tools moves the tax administration
ahead when it comes to the possibilities of fighting tax fraud.
By the systematic use of risk analysis, mapping the trends in
tax fraud schemes, training the staff, legislation changes, close
cooperation with the police corps, and international cooperation, the tax administration is constantly updating its measures
to reduce losses from missing trader fraud.

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a r t i c l e s

Use of
Information
and Tax Fraud
Prevention
Plan

Spain
Vicente PEIRATS CUESTA
Head of the Coordination Unit for
International Relations,
Spanish Tax Agency - AEAT
C/ SAN ENRIQUE, 26 D. 310,
28020 MADRID,
(34) 91 583 12 42
TEL:
E-MAIL:
VICENTE.PEIRATS@CORREO.AEAT.ES

Mr. PEIRATS has a Ph. Degree in Mathematics and he

started his professional career at the Madrid
Complutense University. In the last twenty years, he has
occupied different positions in the Spanish public
administration in the fields of statistics, information
technology and internal audit (Institute of Statistics INE,
Tax Agency AEAT and Social Security TGSS). He has
also published several specialised papers.

Ana ORTEGA GUO

Chief Officer Coordination Unit for
International Relations,
Spanish Tax Agency - AEAT
C/ SAN ENRIQUE, 26 D. 108,
28020 MADRID,
TEL:
(34) 91 583 88 59
ANA .ORTEGA@CORREO.AEAT.ES
E-MAIL:

Ms. ORTEGA has been working in the Spanish Tax

Agency since 1995. Until 2006 she worked in the Tax
Auditing Service of the Regional Office of Madrid: four
years in the selection area, five years dealing with
appeals and the last two years in a Regional Auditing
Unit. From July 2006 she works in the International
Division. She holds a Bachelors Degree in Law and a
Diploma in Economics.

by Vicente
PEIRATS CUESTA
Ana
ORTEGA GUO

I
I

t was a strategic decision of the Spanish Tax Agency (AEAT) to use information
in a massive and systematic way. That is why information is a critical resource for
us. Our organisation is highly computerised, not only because of our IT infrastructure, but also and more importantly, because we have lots of information. The performance of the AEAT in order to gather information is supported by our legislation,
but the AEATs authority also has constitutional and legal limits. This article explains
what the AEATs powers and limits are when gathering information from taxpayers
as well as the importance of information in its strategy to fight against fraud as set out
in the Tax Fraud Prevention Plan of 2005 and its update of 2008.

Strategic Guidelines in the Spanish Tax Agency

Since 1978, Spain has faced a complete tax reform and has built up a modern tax
system. The core taxes are personal income tax, corporate income tax and VAT,
which was established in 1986 when the country entered the European Union.

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21

a r t i c l e s
The main management decisions were taken in the eighties: the creation of a unique Tax Identification Number
(TIN) for financial and economic organisations, a withholding procedure for personal income tax, a joint venture
with the banking sector for the filing and collection of
taxes, all managed by a relatively small-sized administration with well trained staff who have adopted a systematic
approach to the use of information from the new information systems and technologies.
In a course of a few years, the tax burden and the tax revenues
had tripled, starting from a tax liability of 13% of the GDP.
At the beginning of the nineties, the reforms were completed by the formation of the Spanish Tax Agency
(AEAT), a body which exists under public law with a legal
framework that confers on it a certain degree of autonomy
in budgetary, financial and staffing issues. The Tax
Agencys mission, as defined by the law, is the effective
implementation of the Spanish tax and customs systems.
Its strategic objective is to increase voluntary compliance in
relation to tax debts by the following two essential and
complementary guidelines:
Providing information and assistance to the taxpayer;
Improved tax controls for the fight against tax fraud.

The information is verified and correlated by the

AEAT management services and then processed, allocating the information to each potential taxpayer;
Before the end of the first quarter of the year, the information is available to be sent directly to the taxpayers
in the form of a tax data certificate or, if possible, to
prepare and distribute a draft version of the personal
income tax returns (pre-filled tax return).
Additional information and some improvements have
been included in the procedure since the first campaign
in which the pre-filled form was used, e.g. the ability for
the taxpayers to now partially modify the data received
from AEAT.
On receipt of the pre-filled return taxpayers can contact
the Tax Agency by a variety of ways (the Internet, ordinary
mail, phone, SMS messages, local offices, etc.). In general,
the capture and control of this kind of information is
quicker, easier and cheaper for both parties, which results
in the provision of a better tax service.
As a result, in the last income tax campaign over 19 million
returns have been submitted using both pre-filled returns
(12.7 million) or by the tax data certificate (6.5 million).

Strategic Use of Information

Today, more than 20 years after the establishment of the
first general databases, the
use of information is a
strategic and vital resource
for the organisation. Both
internal and external tax
procedures are now heavily reliant upon computerised systems. The organisation makes significant
use of the information
available from these IT
systems for tax control and
taxpayer services purposes.
Nowadays, the Internet is our most important communication channel and the Tax Agencys Communication Plan is
founded on our website.
Some figures reveal the importance placed on the information available from within the Tax Agency: the consolidated database includes 49 million taxpayers and more than
3,500 million data entries.
The most commonly referred to example of the use of
information in the Spanish Tax Agency is the pre-filled
personal income tax return. The procedure in more detail
is as follows:
Withholders and other third parties are obliged to
declare the relevant tax details of their operations during a fiscal year, using a standard return, during the
first month of the following year;

22

Legal Support and Legal Limits

According to the nomenclature of the most commonly
used reference models for the control and management of
information systems, the massive use of information by
AEAT provides management with an effective and efficient
system, but requires, on the other hand, a high level of data
quality and information security, as well as enforcing strict
confidentiality policies.
In Spain, different laws and regulations support and permit
the procedures applied by the Tax Agency in order to
obtain, process and disclose information. They also impose
specific legal limits to protect the rights of the citizen. Our
main legislation regarding this issue comes from the following laws and regulations:
Spanish Constitution, of 6th December 1998;
The Personal Data Protection Law LPD (Law
15/1999, of 13th December 1999);

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a r t i c l e s
The Regulation in Development of the Law 15/1999
(RD 1720/2007, of 21st December 2007);
The General Tax Act LGT (Law 53/2003, of 17th
December 2003);
The Regulation on Tax Application Procedures (RD
1065/2007, of 27th July 2007).
The legislation includes general principles, which must
be respected by the Tax Agency:
Constitutional rights to the honour and to the familiar
and personal intimacy;
The confidentiality of tax data;
The duty of data secrecy, imposed on both the AEATs
officials and the withholders;
The right of citizens to access, rectify or cancel their
personal data (habeas data).

representatives of the different business areas of the organisation.

The Security Document defines the use and availability of
the Tax Agencys information system, including the disposal of hardware, corporate e-mail and the conditions under
which data access is permitted to the employees. It also
establishes the minimum performance standards for subsystems devoted to the control of access to information.
Access is monitored using risk and random techniques and
the accuracy of the selected events are audited by controllers and security officers. The system is further supervised by inspectors of the Internal Audit Service.
The Security Document is reviewed periodically. It is published on the corporate Intranet and individually communicated to all new Tax Agency employees.

Legal limits to the disclosure of information

Rights of taxpayers

The use of information collected by the Tax Agency is therefore limited to those procedures relating to the needs of the
tax system, with a few exceptions established by the laws.
In particular, tax data should not be disclosed by the Tax Agency
to anyone without reference to the specific regulations.
The disclosure of tax data can be done occasionally or on a
regular basis. In this last case the Tax Agency signs a formal
agreement for the exchange of information with the other
entity, establishing, if necessary, a bilateral steering committee for the follow-up of the exchanges.
Moreover, the consent of the taxpayer is a requirement for
the disclosure of data by the Tax Agency to other authorities who are not dealing with taxes, even when this forms
part of their normal duties. As an example, consent is
required to hand over tax information to another administration even when it is to ensure that the taxpayer does not
substitute a tax certificate issued by the AEAT to the other
administration (e.g., to ask for grants).
There are some exceptions to this procedure, defined by
law, that allow the AEAT to disclose tax data to specific
bodies without asking for the taxpayers consent. This is
norm in cases of collaboration for the prosecution of fraud,
e.g., disclosure to justice courts and public prosecutors,
other tax administrations or the Social Security General
Treasury for this purpose.
However, the consent of the taxpayer is not required for the
disclosure of information from other authorities to the Spanish
Tax Agency for any purpose related with their tax affairs.

In the Tax Agency, the right of taxpayers to access, rectify

or cancel their personal data contained in the tax files is
enforced by the Personal Data Protection Law and also
internal guidance rules.
Depending on the kind of infringement, either penal or
administrative, penalties can be imposed for contravention
of these regulations.
Additionally, the IT procedures of the Tax Agency dealing
with personal data, along with the procedures of other
administrative bodies, are audited by the Data Protection
Agency who is an autonomous entity reporting to the
Ministry of Justice. The Data Protection Agency also
maintains a central register of public and private files containing personal data. This information comes from the
files of Spanish organisations and companies, who must
declare them in a standardised form.

Security constraints
The personal data protection laws also apply to the tax
administration with some technical exceptions and require
the Spanish Tax Agency to provide a security document,
which is formally endorsed by the management of the Tax
Agency. The security policies contained in the document
are prepared by AEATs Information Technology
Commission for Security and Control, created over 10
years ago and composed of both security specialists and

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E-government
Finally, the Tax Agency has to comply with the Spanish
Law for Electronic Access to Public Services, passed in
2007, the main objective of which is to encourage the use
of electronic government, making it more effective and
easier for the general public to use. The Tax Agency has a
large number of electronic services on its website, some of
which are interactive and very advanced.
The Tax Agency has been considered over the last ten years
to be one of the pillars of the information society in Spain.
The task of introducing electronic procedures for such a
diverse project has been complex and challenging and it is
now supported by specialist staff with specific resources
assigned to it.
Observing the obligations imposed by the Law for
Electronic Access to Public Services, the Tax Agency is also
working on the electronic dossier, an ambitious internal
project that is trying to eliminate completely the use of
paper documents. It is achieving this in the medium term
by substituting hard copy, whenever possible, with authorised, scanned, electronic copies. The whole project,

23

a r t i c l e s
already operative in part, has to merge the different legal,
budgetary, technical, procedural and cultural aspects.

ment of funds, are obtained from the relevant authorities

through individual requests.

Information Liabilities
Like in other countries, in Spain taxpayers have formal tax
liabilities, summarised in the following list:
Submission of returns;
Obtaining and use of a TIN;
Book-keeping;
Issuing of invoices;
Providing the tax administration with tax relevant documents and information on themselves and third parties;
Providing the interested party (employees, bearers of
shares or interests, etc.) with a certificate of withholding;
Any other liability imposed by law.
The information liability is a milestone for the Tax
Agencys information system since every taxpayer must
provide the Tax Agency, regularly or upon individual
request, with relevant tax documents and information on
themselves or third parties.
The individual requests for information are often managed
by a specialised unit of our organisation, the Information
Central Team, which belongs to the National Office for
Fraud Investigation of the Tax Auditing Department. The
information collected by this team may be incorporated on
the central IT systems if it is found to be of interest for
control purposes. The team also acts as a Central Liaison
Office (CLO) for the VAT Information Exchange System
of the EU.
Whenever any general information is going to be requested by the control services from either public or private
providers, the Tax Agency must prepare a standardised
model which is then approved by the Ministry of Economy
and Finance and enforced by publication in the State
Official Gazette.
Depending on the profile of the provider and the kind of
information requested, it may be a legal requirement to
send the data to the Tax Agency using electronic media.
Whether compulsory or not, a large majority of the data is
now received over the Internet or by equivalent electronic
solutions.
As an example, one of the main sources of economic tax
information for the Tax Agency is the annual sales and purchases return, submitted by businesses who have carried
out transactions over a certain amount, currently set at
EUR 3,000. This means that each sale or purchase over
EUR 3,000 must be declared individually on the form.
Another important example of liable moral persons who
are obliged to co-operate with the Tax Agency are financial
entities and banks. In Spain, there are no bank secrecy laws
and the financial entities regularly submit information on
different kinds of assets, income and operations to the Tax
Agency on a standardised return form. In particular, annually we receive basic information of the owners and the
beneficiaries of bank accounts. Other data, such as move-

24

All the information on taxpayers coming from our different

procedures is processed and stored in a single database, the
search engine of which is founded basically on the tax identification number (TIN). The database in turn feeds the
specific applications of the AEATs departments.

Tax Fraud Prevention Plan

Without neglecting other business areas, since 2004 the
fight against fraud has become the main strategic objective
of the Tax Agency. For this purpose an ad hoc plan was
developed using a systematic approach which includes four
steps: general diagnosis, analysis by experts, draft preparation and public communication. The plan was finally
approved in 2005 and immediately implemented.
The Tax Fraud Prevention Plan is an instrument for strategic planning that stresses the design of fiscal fraud preventive measures and investigation as the core of control activities. The plan is designed to be integral, operative and
flexible.
As part of the Tax Agencys overall model, the plan considers information as a critical factor for its success.
Therefore, its design is founded on information. The initial phase of the plan (general diagnosis) involved the identification of any weak areas in AEATs strategy and recommended solutions for any identified. The resulting suggestion was to adopt an integral fraud vision which would
use all available information and also improve the information gathering processes in order to achieve success in the
performance of the plan.
The plan also contains specific measures relating to the
maintenance of information (e.g., the creation of an
inventory of information, information to fight against
fraud schemes, information on real estate sector), as well
as other support measures connected with information
such as institutional alliances, memoranda of understanding and legislative changes.

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a r t i c l e s

Measures of the Plan Related with

Information
The Information Inventory
The Information Inventory is an IT application created to
allow users (officials of AEAT) to better manage the information available from the database. It provides users with a
facility to find data in the IT system; the meaning of the
information; its origin and frequency of occurrence; its
source and person responsible for maintaining it; the
expected data quality; and other relevant metadata.
The application, which is located on our Intranet, can be
accessed directly or through other applications (e.g., when
performing a comprehensive consultation of a taxpayer, a
link leads to the Information Inventory).

Fight against fraud schemes

In the plan, the fight against fraud schemes attracted different approaches to the information issue:
Measures regarding available information (e.g., identification of useful information in our corporate database; promoting the gathering and systematic analysis
of information from all sources; the creation of a specific database for monitoring the fight against fraud
schemes);
Measures regarding the processing of information
(e.g., development of specific tools for use nationally to
select and request information relevant to traders within a specific fraudulent economic sector);
Exchanges of information with other countries;
Specific agreements with representatives of potentially
fraudulent economic sectors.

Real estate sector

Front Screen Printout of the Information Inventory

The information held in the corporate IT system has been

indexed using a series of cards which constitutes a thesaurus. Each card contains the following information:
short name of the card, large name, ways to access the
information in the database, date last modified, description, origin and presentation, basic legislation and quality
report.
The searches in the inventory can be done using free text,
or by types of information with the help of filters.

The plan also contained measures to try and strengthen

controls of specific economic sectors, mainly by the means
of obtaining new information.
In the case of the real estate sector, the main problems
detected during the initial diagnosis step were the fragmentation of the information available, the fact that information was not related to the phases of town-planning, and
the ownership of property by non-residents. The measures
undertaken to resolve these problems were as follows:
Asking for land registry reference numbers in tax
returns;
Improving co-ordination with other administrations;
Restructuring related information in the corporate
database;
Conducting a census of non-resident owners of real
estate;
Use of information on foreign currency traffic;
Requests for more information (e.g., on energy consumption).

Other measures: improvement in the request for

information
The plan also included some improvements in the request
of information, such as the collection of new kinds of periodic/systematic information not foreseen previously which
related to financial and economic operations. After checking the quality of the data and cleansing it the new information has been integrated into the corporate database and
analysed using the corporate risk and selection tools, which
have also been improved.

Alliances and Agreements

Front Screen Printout of a Card

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In order to achieve its strategic mission and objectives, the

Spanish Tax Agency employs a corporate policy of national and international alliances with public and private partners (social security entities, home office, other tax administrations, associations of economic sectors, etc.). The pur-

25

a r t i c l e s
pose of these alliances and agreements is to obtain or
exchange tax relevant information.
Thus, the Tax Fraud Prevention Plan intensified the
already existing relationships and promoted the signing of
agreements with new partners.

The positive evaluation of the initial 2005 plan, along with

positive changes in the economic and social environment, the
evolution towards the use of new forms and approach towards
non-compliance and fraud, has lead the organisation to renew
the plan, discussed in 2008 and approved in 2009.

Legislative Measures of the Tax Fraud

Prevention Plan

Plan of 2008: general ideas

The content or scope of some of the measures often

implies that they must be enforced by law or regulations.
When a new law was passed (Law 36/2006, of 29th
November 2006, on Measures for the Prevention of Tax
Fraud), three previous laws were partially modified: the
Law of Notaries, the Law of Mortgages and Real Estate
Registry, and the Law of the Land Registry. From these
changes a new regulation was drafted based on its content.
As a result, the following measures have been approved but
not yet implemented:
The Tax Agency may now access the new computerised
index of notary documents;
More information must be recorded in the deeds to a
property including the TIN and means of payment; on
the one hand, notaries are now required to inform the
authorities of non-compliers with this obligation and
on the other hand, deeds without a TIN or means of
payment will not be registered in the Real Estate
Registry;
The Land Registry Reference Number should be
included in contracts for the supply of electricity and in
the assignment of rights on real estate.

Revising the Tax Fraud Prevention Plan

Evaluation of the plan 2005
The plan was critically evaluated throughout and the
results obtained were notified to the media. The most outstanding result is the estimated increase in tax collection:
the Tax Agency estimates that additional EUR 27,421 million was collected as a direct result of this initiative
between 2005 and 2008. In more detail, the sequence of
increases per year, in millions of EUR, is: 5,526 (2005);
6,407 (2006); 7,434 (2007); 8,054 (2008) as it is shown in
the chart below.

The new Tax Fraud Prevention Plan is composed of three

lines of performance:
Promotion of voluntary compliance;
Control of risk areas;
Measures of support.
Among the measures to promote voluntary compliance, we
highlight two of them: the new approach in the relationship with large taxpayers and fiscal consulting firms and the
development of a very dynamic procedure to sort out small
discrepancies in tax returns.
For the control of risks areas, the plan focuses on the fight
against black economy, the fight against fraud at the time
of levying taxes and the control of foreign trade.
Finally, in relation to the measures of support, the plan
introduces new technologies in the workplace, balanced
human and material resources, and the gradual implementation of a strategic map based on the balanced scorecard
methodology. As in the plan of 2005, external alliances and
legislative measures are also forecast.

Information contained in the plan of 2008

In order to improve the control of risk areas a number of
additional measures related to information are being
adopted.
Control of black economy
The control of black economy is focused on five measures
of performance:
Control of outward signs;
Imports of counterfeit goods;
Cash transactions;
Non-submission of tax returns;
Subcontractors.
For all those five areas, information is essential. For example, for the control of outward signs AEAT is developing a
national plan to gather information on purchases and the
use of pleasure craft, luxury residences, art works, etc. In
respect of cash transactions, the Tax Agency is collecting
data on the use of credit cards and high denomination
banknotes. The analysis of such information has led us to
introduce specific control programmes whenever we detect
inconsistencies.
Census control
The critical data for the census of taxpayers is the TIN. In
the case of individuals, the TIN is their identity card number, which is issued by the General Directorate of Police.
This is why the plan advocates a continuous update of the

26

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a r t i c l e s
census by means of periodic exchanges of information with
the police.
The domicile is also a very important data in our census,
crucial for the control activities of the AEAT. Therefore
the plan also foresees the improvement of our data on the
taxpayers domiciles.
Control of specific sectors
Both the fraud schemes and real estate sectors continue to
be targets for control in the 2008 plan.
In the fraud schemes sector an improvement (both quantitative and qualitative) of the information management
tools is required, as well as improved co-operation with
other domestic governmental bodies.
The diversity and complexity of the real estate sector
makes it necessary to structure our information in different
ways in order to exploit its benefits.
New sectors have been integrated into the plan for 2008, including the jewellery sector, in which the available information has to
be improved. It is intended that we will sign an agreement of
understanding with the representative association.
Information in the phase of collection
In this phase it is essential to record information on taxpayers assets in order to be able to seize them if necessary.
Alliances and agreements
This support measure proved to be very effective in the
plan of 2005 and therefore new agreements are to be
signed both with governmental and non-governmental
bodies (e.g., with the police or the jewellery sector).
Regarding the collaboration between AEAT and the tax
authorities of the Spanish autonomous communities, a crucial step will take place with the implementation of the socalled Shared Single Census. This census, which will be
managed by AEAT and provides a clear step forward, since
the information will be immediately available compared
with the current mechanism based on periodic exchanges
of information.
Legislative measures
As it can be seen from the 2005 plan, the content or scope
of some of the measures requires a suitable framework to be
in place. Therefore, a number of specific regulations were
passed, such as the Regulation for the Periodic Submission
of Information from Sailing Clubs and Marinas, to give
some control on the outward signs of the black economy.
Also regulations for periodic submissions of information
from electricity suppliers on consumers were introduced to
aid in the control of the real estate sector.

Administrative Burden and Large

Taxpayers Forum
The tax management model, set up since the beginning of
the eighties by the Tax Agency imposes an obligation to

TAX TRIBUNE

submit periodic information both for individuals and businesses. The administrative burden on taxpayers has been
reduced by the administration giving them help and assistance as well as providing them with the ability to declare
and pay taxes through the Internet.
The Spanish Tax Agency introduced a Forum for Large
Taxpayers in 2009 in order to help improve compliance
with tax issues in this sector following recommendations of
some international organisations (e.g., OECD, through
the Seoul and the Cape Town Communiqus). In this
forum the Tax Agency and some of the largest enterprises
in Spain can discuss, at a board level, how to make voluntary compliance easier and how to solve common problems.
The Forum for Large Taxpayers is one of the main measures of the new Tax Fraud Prevention Plan. In the forum
two of the measures of performance of the 2008 plan are
merged, since we understand that the fight against tax
fraud is closely linked to the promotion of voluntary compliance.
One of the key points of the forum is information. Without
transparency and trust from both parties the forum will not
be able to achieve its aims, which are to enhance the relationship between AEAT and the enterprises in order to
reduce tax risks and to incorporate tax matters into the corporate social responsibility.
The forum has recently created three technical groups,
dealing with subjects relevant for both parties:
Preparation of a code of tax best practices;
Analysis of the administrative burden over the taxpayers;
Matters related to transfer pricing.
The information on the forum may be seen on AEATs
website www.aeat.es.
This initiative is continuing to grow even as we are writing
this article. The Tax Agency is planning to extend its scope
by the formation of similar forums for medium and small
companies and for tax intermediaries.

Other Recent Measures Dealing

with Tax Burden Reduction and
Information
The administrative burden on taxpayers is further balanced
by other measures that try to stimulate the economy in the
times of global crisis. For example, since January 2009, taxpayers can opt for a monthly VAT refund system. This
new scheme has the advantage that it avoids the financial
costs of deferring repayments which, usually, are based on
quarterly tax periods but only allowing refunds to be paid
at the end of each year. In return, some information
requirements must be fulfilled:
1. Taxpayers must register in a monthly refund roll;
2. VAT returns must be submitted electronically;
3. A detailed return based on the contents of the VAT
accounting records must be attached to the return.

27

a r t i c l e s

Conclusion
The main strategic objective of the Spanish Tax Agency is
the fight against fraud. In the Tax Agency, the best way to
achieve this objective is the collection and advanced use of
accurate information.
The coherent international framework for the Spanish
Tax Agency is hence co-operation and exchange of
information. Therefore, the Tax Agency strongly sup-

28

ports the use of alliances and agreements with other tax

administrations and relevant international initiatives
like the OECD Global Forum of Jurisdictions for the
development of tax transparency; the European Union
EUROFISC for a more operative multinational VAT
control; and the IOTA proposal for increased cooperation among tax administrations sharing information and
expertise.

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a r t i c l e s

What Affects
the Outcome
of Audit
Activities?

S weden
Anette LANDN
Head of Large Taxpayers Region,
Swedish Tax Agency

171 94 SOLNA,
TEL:
(46) 10 574 2716
ANETTE.LANDEN@SKATTEVERKET.SE
E-MAIL:

Ms. LANDN is the head of Large Taxpayer Region in

the Swedish Tax Agency.

Anders STRIDH
Compliance Strategist,
Swedish Tax Agency

171 94 SOLNA,
TEL:
(46) 10 574 8153
ANDERS.STRIDH@SKATTEVERKET.SE
E-MAIL:

Mr. STRIDH works as a compliance officer at the Head

Office of the Swedish Tax Agency.

by Anette LANDN
Anders STRIDH

W
W

hy should a tax administration shift focus from output to outcome? Is the

way we do audit and checks really important for a good outcome? In this
article you will find the Swedish tax administrations view on these issues
and some results from studies.

What Is a Good Outcome?

In the Swedish tax administration, like in most countries, we want to increase
voluntary compliance and we want things to be right from the start. The possibility and the willingness to comply are therefore essential.
In order to use our resources in the best way we think it is important to know
how large the tax gap is, and what it contains. Our tax gap analysis shows that
we have a tax gap of approximately SEK 133 billion in a year which equals 10%
of the theoretical
correct tax. The
money we raise as a
result of checks and
audits is approximately SEK 22 billion and our total tax
determined
SEK
1,300 billion.
If we break down the
tax gap we can see
that the smallest businesses, the microbusinesses, represent
a large part of the

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29

a r t i c l e s
gap. We can also see that illicit work is the biggest part of
the tax gap.

attitudes we at the tax administration had and how these

affect trust. It was a very comprehensive study with 84 indepth interviews and 500 telephone interviews.
We wanted to know if there were any differences between
different groups of taxpayers. Therefore we divided taxpayers into small businesses, large businesses, people with
a foreign background, old people, young people, etc.
There were no differences between the groups, all perceived the same attitudes. The result was that the taxpayers
met three different attitudes within the tax administration,
these were called A, B and C. [Note that there is no difference of how we interpret the law, we follow the law in the
same way with all the different attitudes, the difference is
how we are perceived when we carry out the work.]

The A-attitude
A good outcome for us is a reduced tax gap and increased
taxes declared and paid right from the start. A good outcome for us is an increase of compliant behaviour, not the
output of the audits we do.
In order to be able to use our resources in the best way we
need knowledge about the reason for the compliant behaviour as well as the non-compliant behaviour. It is wise to
make a distinction between intentional and unintentional
errors. Legislation can be very complicated to understand
for the taxpayer and therefore results in a lot of unintentional errors. To use audit resources to correct unintentional errors is very expensive and therefore not the best
tool. Instead we try to pre-populate tax return forms and,
if it is possible, clarify information to the taxpayers on the
website, etc.
When it comes to intentional errors we see that there are
many different factors that affect behaviour. Some common factors are:
Social norms;
Personal norms;
Opportunity;
Risk of detection;
Penalties;
Crises situation;
Trust in the tax administration.
We have worked a lot with risk models and computerised
selection systems and this is, of course, very important but
it is not enough to achieve the best outcome. These models help us to do the right things, but in order to achieve
the best outcome we must carry out our activities in a professional way.

Perceived Attitudes
We are convinced that a trustful relationship between the
taxpayer and the tax administration is very important in
order to create the best conditions for voluntary compliance. In 2004 we commissioned a study to learn more
about this. The purpose of the study was to find out what

30

This attitude is cold and insensitive. The officer thinks that

most taxpayers are dishonest and will do everything to try
to avoid paying taxes. He or she thinks that people complain too much and know too little about taxes. He or she
has an arrogant behaviour and wants to use his or her
power.
This leads to a taxpayer behaviour that is:
Insecure;
Angry;
Feels disrespected;
Feels powerless;
Disappointed.
This attitude has a strong negative effect on the trust in the
tax administration.

The B-attitude
This attitude is recognised by impersonality. The taxpayer
feels that he or she is like a tax return form or a case, not a
person in the view of the tax administration. The officer
treats the taxpayer as an object. The officer thinks that all
taxpayers should be treated in exactly the same way.
Everybody should know the law but those who fail to fulfil
their obligations must take their consequences.
This leads to a taxpayer behaviour that is:
Not relaxed;
Insecure;
He or she tries to show that he or she has knowledge;
He or she feels inferior;
Leaves the meeting without understanding what the
officer meant or said;
He or she feels stupid;
We dont speak the same language.
This attitude has a negative effect on their trust in the tax
administration.

The C-attitude
This attitude is recognised by empathy and cooperation.
The officer is helpful, human and wants to find a solution
for the taxpayer.

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a r t i c l e s
He or she knows that it is difficult for the taxpayer to
understand legislation and therefore needs a helping hand.
The officer thinks that we are equal, most people are honest, and that the taxpayer is important. He treats the taxpayer with respect.
This leads to a taxpayer behaviour that is:
Relaxed;
Feels that he or she can discuss the case;
Opens up and talks;
Optimistic;
We can solve this together.
This attitude has a strong positive effect on the trust in the
tax administration. Taxpayers also feel that they can take a
negative answer in a better way if they are treated with this
attitude.

Change of Trust after an Audit

We wanted to see if the trust in the tax administration
increased or decreased after an audit, and the reason for the
change. Therefore we let a company do a study based on
audited businesses in different categories and the result
shows a slightly more negative result for desk audits compared to field audits when it comes to the change of trust.

What most taxpayers stress as the most important factor

for increased trust after an audit is the capability to listen
and have a good dialog. Nice and polite treatment was also
very important. Note that this was much more important
than the size of the reassessment. When it comes to
decreased trust, the result was almost the same. The most
common explanation for reduced trust was the lack of the
tax administrations ability to listen and have a good dialog;
the taxpayer perceived that the auditor did not treat him or
her with respect, etc.

Conclusion

The most interesting question is, however, why did the

trust increase? This is what the survey shows:

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In order to increase the willingness to comply, it is very

important that tax administrations have a holistic view, that
we move our focus from output to outcome. The knowledge about the drivers behind a compliant or a non-compliant behaviour is essential in order to use resources in the
best way. To use risk models is important, but it is not
enough. We have to use our recourses wisely and we think
that the knowledge about how taxpayers perceive us when
we carry out audits is something that we must be aware of
and use in our strategies and day to day work. It is natural
that we and the taxpayer sometimes have different opinions
about taxes they should pay, but we should always treat the
taxpayer with respect, listen to them and take the initiative
to have a good dialog if we want to create the best conditions for things to be right from the start.

31

a r t i c l e s

The Fight against

Tax Fraud and the
Taxpayers Data
Confidentiality
in Switzerland

by Marco MOSCA

S witzerland
Marco MOSCA
Lawyer, Head Country Office VI,
Division for International Affairs,
Swiss Federal Tax Administration
EIGERSTRASSE 65,
3003 BERN,
(41) 31 324 90 91
TEL:
E-MAIL:
MARCO.MOSCA@ESTV.ADMIN.CH

Mr. MOSCA has been working for the Swiss Federal Tax
Administration as a lawyer since 2002. After several
years in the Law Division, he is now working within the
International Division and is mainly involved in double
tax conventions matters.

Confidentiality is a virtue of the loyal, as loyalty is the virtue of faithfulness. (Edwin

Louis Cole, American writer, 1922-2002)

A
A

The Swiss Tax System

tax system is not only a cluster of legal provisions, directives and case
law. The tax system in a country like Switzerland is the outcome of
the needs, the cultures, the expectations (and many other factors) of
Swiss people. Of course, every tax system must stay dynamic; it must be tailored
to the public needs and favourable to the economic growth.
Due to the federal structure of Switzerland there is no centralised tax system,
with some taxes being levied exclusively by federal authorities (i.e., indirect
taxes such as VAT, a domestic anticipatory tax and stamp duty) whereas others
are levied by the cantons, the communes and the federal authorities concurrently (i.e. direct taxes such as the tax on income, the tax on business profits,
etc.) The delimitation of taxation powers is governed by the Swiss Federal
Constitution. Thus, the cantons as sovereign States are authorised to levy
any type of tax as long as they do not infringe upon the exclusive authority of
the Confederation (e.g., cantons tax inheritance and gifts, which are not taxed
at a federal level).
Swiss people can decide on tax matters. They can influence the Swiss tax system. Therefore, the Swiss tax system reflects the view and attitude of Swiss people. This also means that the federal and the cantonal governments do not hold
the same inordinate powers as other States have vested themselves with regard
to taxes. The Swiss feel that is up to the taxpayer to assume his/her responsibilities: the system is founded on the declaratory principle of the taxpayer (in
indirect taxes there is even a self-taxation principle).
Besides or beyond tax planning and tax avoidance, there are other tax
behaviours which are characterised differently in Swiss tax laws and receive a
different response.
Tax evasion consists of not paying taxes using illegal means. It is typically the
act of causing a tax to be falsely assessed such as through the failure to report
taxable income on a tax return. This is an administrative offence and such matters are dealt within Swiss tax courts not criminal courts.
However, some fraudulent tax conduct could be treated as criminal. There is a
slight difference between direct and indirect taxes in this matter. Direct taxes

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a r t i c l e s
laws treat the deliberate falsification of records (e.g., a balance sheet) as tax fraud. The criminal conduct in indirect
taxes is done via other acts.

The Relationship between the Taxpayer

and the Tax Administration
It may be surprising to think the taxpayer could have a
good relationship with the tax administration but it is true
that in Switzerland, despite some natural exceptions, this
relationship is excellent.
The liaison between the taxpayer and the tax administration is possible, on the one hand, because of the responsibility given to every taxpayer and, on the other hand,
through the clear guidance provided by the tax administration and the proximity and accessibility between the two
counterparts. In fact, the two are not only counterparts but
partners: an enhanced relationship between the taxpayer
and the tax administration is what both of them want. It is
one of the pillars to build up correct taxation, to have the
certainty of the law and to improve the transparency in tax
matters. The result of this situation is a sort of prevention
of illegal conducts in tax matters.
Nevertheless, to have an enhanced relationship does not
mean there is no control or that every taxpayer behaves
correctly. The tax administration and the taxpayer know
they have duties. The tax administration must ensure the
correct taxation, where correct means equal and uniform.
In direct taxes, the tax administration has a control function (assessment of tax returns) and, in indirect taxes, this
control is made by auditing the tax declarations, the balance sheets and onsite examinations. The taxpayer has also
to perform in order to settle a proper and truthful taxation.
As said before, under Swiss tax laws, the taxpayer has to
cope with a mandatory disclosure regime for direct taxes
and a self-taxation and self-payment for domestic anticipatory tax, stamp duty and VAT. He/she has an obligation to
co-operate with the tax administration in order to facilitate
control and to ensure the correct procedure is followed and
to disclose discrepancies at an early stage in the taxation
process. This co-operation even includes discussions
between the taxpayer and the tax authority. The first can
ask the tax administration to examine and provide solutions
and best practices for a particular tax issue and both can
then shape a ruling concerning the situation. All this is
done through a genuine and consistent tax dialogue.

The Fight against Tax Violation

However, every relationship has its ups and downs. There
must be measures and procedures, next to preventive
methods, to fight tax fraud and other illegal practices. To
fight means to restore the correct taxation and to punish
the responsible. Besides the assessments of tax returns and
audits, the different tax authorities could exchange information between themselves. Of course, they can also investigate, gather information and, where necessary, search for

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and confiscate documents. Seizing of bank accounts and

assets is also a measure provided by tax laws to protect the
tax authoritys interests. Repression could afterwards be
hard to bear by the nonchalant taxpayer. The penalties are
an administrative fine from CHF 1,000 to CHF 10,000 for
the breach of co-operation duty, a fine of 1/3 to 3 times the
due tax amount (for direct taxes) and a fine of up to CHF
30,000 or to 3 times the due tax amount (for indirect taxes)
for tax evasion. Tax fraud is sanctioned with a fine of up to
CHF 1,080,000 or imprisonment of up to 3 years. Of
course, the due tax has to be paid as well.

The Limits within Tax Disputes

On the one hand, the Swiss legal framework gives tax
administration a lot of power to pursue the fight against tax
violations. On the other hand, Swiss legislation also
ensures the respect of the taxpayers rights.
Switzerland is a State of Law (Rechtsstaat), which insures
the rule of law as the expression of the Peoples will and
where the principle of equality of all before the law is
realised. Beside this basic assertion are the general principles of law (e.g., the principle of non-discrimination, the
principle of proportionality, the protection of fundamental
rights, the rights of defence, etc.)
The taxpayer also has procedural rights as the due process
of law and the right to be heard.
An additional difficulty for tax administration in tax evasion or tax fraud proceedings is that the burden of proof is
shifted to it.

The Data Confidentiality

Swiss legislation also guarantees the respect of privacy for
individuals and legal entities. Thus, the taxpayer knows
that the information he/she/it has to disclose is more than
confidential. This confidentiality is offered to everyone in
Switzerland and established, first of all, under the Swiss
Constitution.
The clearest example of personal privacy protection is, of
course, the bank secrecy.
Bank secrecy refers to the professional discretion of the
banks, to protect the bank client not the bank itself. Under
Banking Law, the professional secrecy of the banker based
on civil law is regarded as a professional obligation, whose
violation is liable to prosecution and imprisonment. Under
the principle of bank secrecy, privacy is statutorily
enforced, with Swiss law strictly limiting any information
shared with third parties, foreign governments or even the
Swiss tax authorities.
Swiss bank secrecy is not absolute. Exceptions to this kind
of confidentiality are provided for under civil law, debt collection and bankruptcy law, criminal law, administrative
law (including federal and cantonal tax laws) and in cases of
mutual assistance in legal and administrative matters. In
such cases, banking secrecy can also be lifted by order of
the courts against the wishes of the client. Swiss tax author-

33

a r t i c l e s
ities have the right to obtain bank information for the purpose of prosecuting tax crimes.
An additional protection for the taxpayer, this time not
against the tax authority entitlement to pursue tax violations, is the shelter given by the tax authority itself through
tax secrecy. Its origin lays in the mandatory disclosure
regime functioning in Switzerland: on the one hand, the
taxpayer has to give all the information needed for a correct taxation and, on the other hand, all the information
gathered remains secret.
This is also a method to enhance the relationship between
taxpayer and tax authority. The co-operation is essential to
have fair taxation.
Tax secrecy is a qualified professional secrecy. All the people
applying tax laws are bound by this professional confidentiality and the fact that those people are civil servants make it a
special qualified secret. Even the Swiss Supreme Court
said in a decision that tax secrecy is an element of the Swiss
tax culture (Supreme Court Judgements of May 15, 1998
[ATF 124 I 176], page 181, consid. 5d/cc).
Of course, this confidentiality as bank secrecy is not
absolute. The tax authority can lift it under certain conditions and through a special procedure. Every time the tax
authority receives a request coming from another Swiss

34

authority to disclose some information concerning a taxpayer, this request is examined and, if legitimate, a consideration of the interests is applied to decide on the possibility to provide the information: the interests of the authority asking for, the interests of the individual or the company aimed and last but not least the interest of the tax
authority to reveal or to conceal in accordance with the
law the information.
Tax secrecy is a very serious matter. This is also because
when someone violates tax confidentiality, they expose
themselves to an administrative procedure, to a civil procedure and to a penal procedure.

Conclusions
The bottom line for any tax administration is to protect the
honest taxpayer. And to collect the taxes which are due.
The Swiss tax administration has several means to achieve
these two simple goals and even if some legal boundaries
limit its action, it gives additional protection to the taxpayer in accordance with tax secrecy. Is this a paradox? Not at
all. An enhanced relationship between the tax authority
and the taxpayer allows detecting the incoherencies or
wrong or missing declarations at an early stage and consent
to ensure correct taxation. This is the aim of both parties.

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i n t r o d u c t i o n

revention and
Detection of VAT Fraud

wo meetings of the Area Group Prevention and Detection of VAT Fraud were held in
2009, in Vilnius, Lithuania and Bucharest, Romania. The main agenda items related to
VAT fraud issues, especially on the use of IT forensic and methodologies applied
towards the cash industry and the fight against missing traders.
The following articles present some specific approaches to the topics addressed during these two
events:
From Denmark Jens SORENSEN and Jan CHRISTIANSEN relate how IT forensic tools
recover valuable information in the fight against fraud.

Laima SINKEVICIENE writes about the VAT control system in Lithuania.

Mateusz GRYNICZ looks at the coordination of actions in the field of e-commerce by the
Polish tax administration.
Liz KILENIUS investigates Point of Sale systems (POS) from a Swedish point of view.
Finally Steven POPE from the UK reports on the project Lanyard, which aimed for early identification of Missing Trader Intra-Community (MTIC) fraud.

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a r t i c l e s

Use of
IT Forensics
in the Fight
against Fraud

Denmark
Jens SORENSEN
IT Forensic Officer,
Danish Customs & Tax Administration

TOLDBODGADE 3,
8900 RANDERS,
(45) 72 37 34 75
TEL:
E-MAIL:
J.SORENSEN@SKAT.DK

Mr. SORENSEN is a former VAT auditor. For the last

three years he has worked as an IT Forensic specialist.
Education: EnCase Certified Examiner.

Jan CHRISTIANSEN
Senior Adviser,
Danish Customs & Tax Administration

HELGESH J ALL 49-55,

2630 TAASTRUP,
TEL:
(45) 72 37 88 82
JAN.CHRISTIANSEN@SKAT.DK
E-MAIL:

Mr. CHRISTIANSEN is a former VAT auditor. For the last

four years he has worked as an IT Forensic specialist.
Education: MSc in Commercial Law, LLM in VAT and
Indirect Taxes, EnCase Certified Examiner.

by Jens SORENSEN
Jan CHRISTIANSEN

T
T

he use of IT Forensics as a tool in tax administrations in order to fight

against fraud is relatively new. Some countries have been using it for some
years whereas some have just started using it and many have yet to make it
a part of their organisation. But what is IT Forensics and more importantly how can
a tax administration benefit from using it in their work?

What is IT Forensics?
IT Forensics has many definitions. In our world though, it means collection, examination and documentation of electronic information, stored on different electronic
media, in an efficient and safe way, treating the electronic information the same way
as we treat information on paper. In a traditional tax or VAT audit one would look
through a companys bookkeeping, financial reports, different vouchers, etc. which
can be stored either electronically or on paper. In brief you could say that IT
Forensics is looking at everything but the things mentioned above, that means documents, spreadsheets, e-mail, Internet files, deleted files, etc.
There are three main reasons for using IT Forensic tools to examine these things in
a tax or VAT audit:
1. Completeness;
2. Safety;
3. Proof/Evidence.

Completeness
With an IT Forensic tool we are sure to get all the available information stored on
any electronic media in the company. Using an IT Forensic tool you make a bit by

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a r t i c l e s
bit copy of the media, making sure you get a complete gathering of information. Using a desktop computer as a media
example, it means you make a copy of every area of the hard
drive, not just a copy of the files one would find when looking
through Windows Explorer, but also the areas that at first sight
appear to be empty.
Compared to information found on paper, it would be like having a binder or book with a 1000 pages in it, but only 300 of
the pages have something written on them, the rest appear to
be blank. Even though most pages appear blank you still make
a copy of them, because it turns out that a lot of them contains
traces from previous or invisible (hidden) writing; and using
the right tools and methods you can make that writing visible
again. A computer hard drive works in a similar way. The 300
written pages are what you can see when booting the computers operating system, like Windows. The other files, such as
deleted or hidden files, are what you also get the ability to
examine using the correct IT Forensic tools and methods.

Safety
Besides ensuring we get a complete copy of all the information
stored in a company, using an IT Forensic tool is also a very
safe way to collect information, for both the company and the
tax administration. A common way to copy a file or folder from
a computer to a USB stick or CD is by using copy/paste or
drop/drag methods. A lot of the time this works well, but this
task can be very harmful if instead of making a copy of the file,
you accidentally move the file from the computer to the USB
stick, meaning the file is no longer on the computer. It is
potentially very risky to perform tasks directly on the taxpayers computer.
Using the correct IT Forensic methods this will never happen.
When copying using IT Forensic tools we connect the company media to our own hardware using a hardware or software
write blocking device. This ensures that we can look at and copy
everything on the media, but we cannot delete or change anything, leaving it the exact way it was before we made the copy.

Proof/Evidence
Finally, using IT Forensic tools and methods gives the tax
administration the proof that the information used in an audit
did actually come from the companys media and that we did not
change anything when finding and examining the information.
IT Forensic tools and methods have been used by various private corporations and government agencies, such as police and
investigative departments for many years. It has therefore been
presented in and approved by courts world wide as a safe and
correct method of gathering evidence to build a criminal or
civil case, meaning the information the tax administration use
will be valid in taxation or possible criminal cases.

How Can a Tax Administration Benefit

From Using IT Forensic?
When we are talking about fraudsters, we are dealing with a
minority of taxpayers, where the tax amount they declare does

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not match the amount that should have been declared, with the
wrong declaration submitted on purpose.
IT Forensic tools are only used in the fight against fraud.
When auditing a potential fraudster, it is critical that the auditor has access to all relevant information during the first visit to
the company. When a fraudster knows about the audit, information has a tendency to disappear very quickly.
In the business world today almost all information is produced,
handled and stored inside computers now that many companies do not use handwriting or even typewriting for letters,
agreements, invoices, etc. Also, a lot of the information inside
the computer is never printed on paper. Thus it has to be
assumed that plenty of relevant information is initially intangible to the auditor, compared to the way the auditor worked
before computers got the breakthrough in the business world.
Why should you print and mail an invoice, when you can
attach it to an email?
Why should you print copies of all your invoices and trading correspondences and put them on the shelf in the
bookcase, when they are safely stored in a computer?
These statements fit a large number of companies in nearly any
industry, but beside those, there are whole industries that are
almost 100% computer-based: web shops, internet cafs or
even the new trend of carbon credit trading. All companies in
industries based on an electronic platform will keep its information in computers by default.
As mentioned above IT Forensic tools make it possible for the
auditor to get access to documents, spreadsheets, e-mails containing critical audit information. Years ago all this information
was available on paper, but now we need IT Forensic tools to
maintain the information level as before the shift to computers.
We would like to outline these three reasons for using IT
Forensics to fight tax fraud:
1. If you do not use IT Forensic collection of information in
an audit you will miss a large and important part of the
total quantity of relevant information available.
2. Maybe you will not see the fraud at all!
3. Some years ahead all paper will be gone and then you cannot fight tax fraud without IT Forensic methods.

Organisation and Working Methods

Working with IT Forensic tools and methods is very different
from how we normally work in a tax administration and it is
not something every auditor should be trained to do. It should
be restricted to a few specialised units, but how many IT
Forensic units and employees your administration needs and
how you should organise them, depends on the structure of the
rest of the organisation, the geographical size of your country,
composition of companies, etc.
If you are new to this area though, it is our advice that you start
out on a small scale and then expand as the need emerges. In
Denmark we divide the use of IT Forensic into a 3 step process:
1. Copying data;
2. Processing and preparing data;
3. Analysing data.

37

a r t i c l e s
IT Forensic employees do not have their own cases but serve
as a technical aid for the auditors and are responsible for steps
1 and 2, while the regular tax auditors handle the final analysis
of the data supported by an IT Forensic employee.
Copying and processing/preparing data is the part of IT
Forensics that requires special hardware and trained employees. Copying is of course collecting the data and processing/preparation consist of, among other things, recovering
deleted files, extracting e-mail, sorting out irrelevant files such
as system files, rebuilding RAID systems from servers, etc.
The most important part of processing the data is preparing it in
a way that makes it easy for the auditor to analyse to allow them
to find the smoking gun. This is done by extracting relevant
file types (documents, spreadsheets, e-mail, etc.) and running
them through an indexing process, making it possible for the
auditor to use search words to go through the usually many files.
We have tried to build an organisation most suitable to handle
this three-step working process. We have two main IT
Forensic units, with special trained employees and equipment,
to handle the copying and processing/preparing of data. The
two units are placed in strategic locations for the best coverage
of the country. The units are organised inside the tax administrations anti-fraud units.
To cover all anti-fraud units we have established an additional
four analysing units with specially selected employees, who act
as liaisons between the IT Forensic units and the auditors, and
then of course the regular tax auditors around the country are
doing the final analysing.
We also have an IT support centre, which among other tasks
handles IT Forensics, with one specialised trained employee
and equipment for both copying and processing data.

What Kind of Hardware and Software

Do You Need?
Hardware
The use of IT Forensics obviously does require some special
hardware and software, but to get started using these tools does
not necessarily mean you have to spend hundreds of thousands
of Euros buying state of the art hardware.
Basically, what you need is a laptop, write blocking devices to
ensure safe copying, cables and connectors for different media
types, storage capacity and some forensic software for copying
and analysing data. As you go along though, you will experience
the need to further invest in different equipment, in order to be
more efficient in handling and analysing large amount of data.
What kind of hardware you exactly need depends largely upon
the number of cases and amount of data you collect. Remember
that copying using IT Forensic methods means copying everything, so if the computer you are going to copy has a 500GB
hard drive, you will be copying and analysing 500GB of data.
In the Danish Tax and Customs Administration we have been
working with IT Forensics for about 4 1/2 years and we are still
looking to find the perfect hardware setup for our needs. Now,
in line with our three-step work process mentioned earlier, we
are using three different types of computers for different tasks.

38

For copying we have a fairly powerful computer, with some

extra RAM, etc. trying to speed up the copying process, but
without getting too technical there are some other circumstances beside raw computer power that will limit the speed
that you can copy a hard drive.
Processing the copied data is where you are able to really speed
up your work with the correct hardware. We are using specially built very powerful computers for this, because a standard
laptop or desktop computer simply cannot handle the ever
increasing amount of data found in computers today.
The final analysis and searching through the processed data
does not require any special computer power, so for this we just
use standard laptop computers.
The electronic world is changing very fast, new computers,
hard drives, operating systems, etc. are sent to market all the
time. What you find as the perfect setup today may not be the
best solution next year, you therefore need to keep up to speed
with the changes and adjust your knowledge and equipment
accordingly.

Software
IT Forensics also requires some special software. There is a lot
of different software for forensic use and a lot of it you can find
for free on the Internet. However if you want to be sure that
the software you are using is a truly safe and an acknowledged
forensic tool, using undocumented programs might not be a
good idea.
There are three main forensic software products on the market right now that we know of: EnCase from Guidance
Software, Forensic Tool Kit (FTK) from AccessData and Ilook
from Perlustro Inc. All three are well documented for copying
and processing data in a forensically sound way.
In Denmark we use EnCase, but all three programs are basically similar and have different strengths and weaknesses, so
which program your country chooses to work with will be
what you find most suitable for your organisation. You will not
be able to find one perfect program for every different task you
encounter.
As well as one of these programs you will need other minor
programs to handle different special tasks, but what we have
found to be especially useful is to have a good indexing and
search program, which makes the auditors final analysis much
easier and more efficient.

Recapitulation
We hope that this article has given you some insight into the
world of IT Forensics. Of course, it is very important also to
focus on the legislation and the auditors legal powers. The legislation varies a lot between the countries even inside the EU.
But one very important thing that is is that the auditor keeps
the same level of information in his/her cases when information shifts from paper to computers.
If you have any questions regarding IT Forensics, or would like
a more thorough description about the organisation in
Denmark, please do not hesitate to contact us.

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a r t i c l e s

VAT Control
System
in Lithuania

L ithuania
.

Laima SINKEVICIENE
Head of VAT Control Division, Control
Department, State Tax Inspectorate
under Ministry of Finance of the
Republic of Lithuania
VASARIO 16-OSIOS STR. 15, VILNIUS,
(370) 52687 992
TEL:
E-MAIL:
L.SINKEVICIENE@VMI.LT

Ms. SINKEVICIENE has been working within the field of

control for Lithuanian tax administration for 11 years.
Since 2004 she works as head of VAT Control Division
of Control Department. She graduated from the Faculty
of Economics at Vilnius University and also holds a
masters degree in law from the Law University of
Lithuania.

by Laima
.
SINKEVICIENE

T
T

he expanding European Union, rapid globalisation and the development of information technologies influence cumulative development
processes in the political, economic, social and cultural life of the
European Union. With international trade rapidly developing, tremendous
added value is created and the welfare of the EU citizens is improving.
Therefore, state institutions should properly fulfil functions assigned to them
and thus ensure their further undisturbed development.
Today the EU is in the position to establish and run business in the European
Community. Business knows no borders. The jurisdiction of the country, where
the work is carried out and trade developed, does not matter. Business globalisation, expansion to new economic space, the pace of adaptation to the existing
conditions is inevitable. However, the bright side always goes along with the
dark side, which is related to financial crime in the EU, e.g., illegal use of the EU
structural funds, VAT fraud, money laundering, and other criminal offences.
The article discusses the VAT control model applied in Lithuania, which was
introduced in the IOTA Area Group Prevention and Detection of VAT Fraud
meeting held in Vilnius, Lithuania, in January 2009, and is based on the presentation given by the author of this article therein.
The integration to the EU, increasing organised crime on an international scale, rapid
development of globalisation and information technologies influence cumulative
development of the political, economic, social and cultural life in Lithuania. All these
factors increase the importance of strategic management in all the administrative
fields of the state. Internal and external changes make great influence on the strategy
and tactics of the work of the tax administrator. A lot of preparatory work has been
done till 2004, when Lithuania became a Member State of the EU. It was necessary
to review the work performed and to make sure whether activity trends correspond
to the present day expectations. Moreover, the best practices applied by the tax administrations of the Member States have been analyzed and a new strategy for the work
of the tax administrator in the field of the control has been drawn up.
The main purpose of the strategy is to aim the tax administrations1 activity towards
distinctive combination of control levels: to provide the taxpayer with the help, to
1) Tax administration of Republic of Lithuania is composed of State Tax Administration under Ministry of
Finance (central tax administration, hereinafter STI under MF) and 10 county state tax inspectorates (local
tax administration, hereinafter county STI).

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foster administrative cooperation with the tax administrators
of other states and to maintain a political dialogue with regard
to the efficient legal regulation. Thus, it is expected to ensure
the implementation of the efficient prevention and control.

VAT Control System

In May 2004 Lithuania joined the European Union and the
European Economic Area and adapted the best practice in
the field of VAT control strategy applied in the EU
Member States and implemented its own control system of
a modern, open and best practice oriented tax administrator, who should ensure voluntary tax payment. The main
activity trends of VAT control system are as follows:
Pre-registration control;
Post-registration control;
International administrative cooperation;
Administrative cooperation with law enforcement
institutions;
Cooperation with fair (bona fide) business.

Pre-registration Control
Pre-registration control means risk assessment of future
VAT taxpayers and the selection of appropriate post-registration control tools. The aim of the pre-registration control is to protect the VAT system from persons pursuing
aims hostile to the interests of the society or which in
future may be used for criminal purposes. Risk of every
registered VAT taxpayer is assessed before the VAT number is provided to a person liable for tax. It should be noted
that according to the Law on VAT the registration of VAT
taxpayers in Lithuania can be voluntary or compulsory2.
According to the score, the risk with each taxpayer can be
high, medium or low. The aim of the pre-registration control is to gather and evaluate all the available and accessible
information about the taxpayer (all persons related to
him/her are also evaluated) with regard to risk retrospectively and in prospect and to select certain control tools for
the post-registration control if necessary. Special attention
is paid to detecting real intentions of the trader to perform
economic activity. It is necessary to find out if the economic activity indicated by the registered person really exists, if
the persons intentions to perform economic activity are
legal and if there is sufficient background to realise those
intentions. The traders tax history and financial discipline
are also assessed. The selection of the post-registration
control procedures depends on the shown and attributed
risk. It should be decided in 7 working days3 to register or
not to register a person as a taxpayer. On the basis of the
risk level (high, medium, low) attributed to every registered VAT taxpayer the following post-registration control
tools can be selected to a newly registered taxpayer:
Monitoring (monitoring of the submitted declarations
and activity for a certain period of time);

Visiting program (periodic visits to the taxpayers place

of business);
The requirement to periodically provide the data of the
VAT Invoices Register kept by the taxpayer, (the register of issued/received VAT invoices).
As it has been noted above, the tax administrator in the
stage of the pre-registration control has the right to refuse
to register a person as a taxpayer, if there is enough evidence that economic activity does not exist. However, if
there is no possibility to refuse to register a taxpayer as a
VAT taxpayer (e.g., registration is compulsory according to
the law), but the performed activity gives the tax administrator some suspicion, such person is registered and placed
to the high risk group and is closely monitored by the tax
administrator for a certain period.
The preparatory work to formulate and implement the
VAT control model was sequential and methodical.
Lithuania has chosen a well thought course based on the
best practice of Member States, which first of all is oriented to prevention. Cumulative business development
trends and the adaptation of advanced practice of control of Member States in the field of administration in
Lithuania, aiming forces towards the fight against fraud
and protection of fair business, formed background for
the VAT control system and the VAT taxpayers registration procedure. The pre-registration control based
on the risk assessment of a future VAT taxpayer protects
the VAT system from persons, who do not carry out
and/or do not intend to carry out economic activity, and
seek for the VAT number with the aim to plunder or,
acting as a mediate link, allow other dishonest persons,
established in EU community, evading VAT payment or
embezzlement.
Experience shows that countries that do not have the preregistration control stage or have very flexible and
favourable VAT taxpayers registration procedure (e.g.,
online) may face more significant problems, like the
increasing non-forecasted threat of experienced VAT loss.
Such uncontrolled consequences cause unfavourable conditions economically and socially. Therefore, tax administrators are forced to perform administrative control procedures expensive to taxpayers, to carry out long lasting
search of a trader, etc., fair business loses its confidence in
a tax administrator, who in such case is unable to ensure
equal treatment of an organisations tax obligations of fair
competition and their inevitability, attribution of certain
responsibility and its imminence for the performance of
illegal act seeking to properly implement the principle of
equality of taxpayers before the law. Hence the price of
inaction is really high. That is why the pre-registration
control first of all is preventive and is aimed to minimise
risk of potential access of the so called potential missing
traders to the VAT system.

2) Article 71, 711 and 72 of the Law on Value Added Tax, 5 March 2002 No IX-751 (with later amendments).
3) Till 31 December 2009 the term was 12 working days.

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Post-registration Control
Post-registration control includes:
Control of new VAT taxpayers, operating less than 12
months;
Identification of the most risky VAT taxpayers and
their selection for control;
VAT refund control;
Investigation of cases of suspected VAT fraud.
Tax administrators in Lithuania have implemented a risk
management system, which is applied today and allows
ensuring consequent assessment of activity results of enterprises as well as monitoring according to the data presented by taxpayers and, with the use of the operative information available to other institutions, reacting to changes
rapidly. The control system is based on the selection of
control procedures adequate to the risk degree of the taxpayer. The principle that the benefit of the application of
control tools should exceed the potential harm of its controlled risk is observed. Moreover, control tools should be
based on the rational use of human resources, i.e., the
applied resource should be proportional to the identified
risk. The differentiation of taxpayers, their grouping
according to the risk level and the control procedures
applied accordingly is ongoing process, while the selection
of control tools (tax audit, operational check or desk audit)
depends on the degree of the displayed risk as well as on
the aim to minimise and/or restrict this risk.
The aim of control tools is to limit potential risk, i.e., to
control the present situation effectively and, of course, to
pay special attention to the qualitative service of reliable
economic entities and to the work with them. The bigger
the risk identified during the pre-registration control, the
more complex and more complicated control procedures
are applied and greater attention is paid to the activity performed by the taxpayer at the later stage.

Post-registration control of new VAT taxpayers

Post-registration control of new VAT taxpayers helps to
assure that payers are not used for illegal act, but carry out
activity as described in their declarations. Traders with
unusual, significant changes of the activity are identified
during the ongoing monitoring, and the application of the
operative control procedures at this stage helps to examine
the factors identifying these risks. If it has been proved that
the person does not carry out economic activity according
to the Law on VAT, deregistration from the VAT Register
is initiated. The identification of factors, such as; VAT declaration has not been presented for several months in a row,
sales are not declared in VAT declarations, acquisitions in
the EU are not declared, the taxpayer cannot be reached
via indicated means, cannot be found in the indicated place
of business, does not meet the requirements set by the tax
administrator seeking to find out if the economic activity is
performed and the data presented in the declarations are
right, or other features hostile to the interests of the com-

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munity are identified, e.g., the payer is used as a cover to

carry out illegal activity, etc., imply inaction of economic
activity. The statement of the default economic activity in
every case is individual and a local tax administrator decides
the sufficiency of proves individually.
In general, the aim of the post-registration control is fraud
prevention, with its help the VAT taxpayers attribution to
high risk group for de-registration, and risk management is
achievable. The urgency/background to apply control tools
is based on the call for the action adequate to a persons or
groups (taxpayers) unacceptable behaviour trying to
change the model of his/her behaviour and to prevent
unwanted consequences. In this case the unwanted behaviour can be subjectively voluntary and not voluntary. In the
first case the taxpayer seeks to obtain the VAT number for
selfish interests hostile to the community, i.e., aims to
cheat, to make damage deliberately. On the other hand, the
taxpayer seeks the VAT number because of the others.
However, the taxpayer does not know or/and obscurely
knows about the benefit of a VAT number. If the suspicion that the unwanted behaviour of a taxpayer has been
deliberate arises, the control means can be employed to the
object directly or not directly, trying to inhibit such behaviour to change it with own conduct. Thus, constant work
in this field is carried out with regard to all the VAT taxpayers. Besides, the same attention is paid to the VAT taxpayers working longer than one year. Taxpayers are considered as risky on the basis of the data collected available
in the database by the tax administration or provided by
other institutions. Separate criteria as well as their combinations are used to identify risky payers.

Identification and detection of the taxpayers with

highest risk
With the consequent implementation of VAT control
strategy, great attention is paid not only to new, but also to
all the VAT taxpayers. The main task here is to identify the
VAT taxpayers with the highest risk and to ensure their
timely control. They are identified and selected with the
help of the Audit Information System. The system was prepared while implementing the twinning project The
Development and Implementation of Computerised Audit
System (2004-2006), and introduced together with the tax
administration of Sweden in June 2008.
The fully computerised Audit Information System (hereinafter Audit IS) has been created employing standard
functions of information platform ESKORT to ensure tax
obligations and is used to help the employees performing
tax administrators control procedures to assess risk and
select procedures and carry out tax audit and desk audit.
Audit IS is used to computerise risk assessment and taxpayers selection process as well as the processes of tax audit
and desk audit, helps to use rationally resources available to
the tax administration and to ensure equity and objectivity
with regard to taxpayers, to increase efficiency of control

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procedures, to save performing control procedures of
employees and taxpayers time, to improve quality of the
employees work, to ensure the spread of the best practice
of control activities inside the tax administration. Audit IS
is implemented in all the county state tax inspectorates.
The users of Audit IS are structural divisions of the tax
administration performing the functions of tax audit and
desk audit, excise duties administration, VAT control, risk
assessment and selection. There are more than 1100 users
of the Audit IS inside the tax administration (21.05.2008.
data).
Audit IS consists of two subsystems:
Risk analysis and selection subsystem (RASS). It determines the score of taxpayers risk and selects a certain
number of taxpayers for control acts.
General audit support subsystem (GASS) standardises
and facilitates work of the officer of the tax administration in every stage of the audit activity.
RAAS is a subsystem of risk analysis, selection of taxpayers
necessary to audit, identification of risk levels and filtration.
It evaluates risk and selects taxpayers for audit. The aim of
this subsystem is to identify the most risky taxpayers, to
which a certain control activity should be applied. Usually it
means tax audit or desk audit. The register of risk features is
used to identify risk level. It scores risk features related to
inappropriate or possibly inappropriate performance of tax
obligations by taxpayers. Twice a calendar year the register is
revised and supplemented with new identified risks. In the
register the main administered tax types, which can be significantly influenced by a certain risk, are attributed to every
risk feature. The field not subject to tax is also provided.
Here the risk is related to the taxpayer, but not to the performance of financial obligation of a certain tax, e.g., a taxpayer is known for previous violation of tax law and/or failure to follow instructions of the tax administrator.
In 2008 the register consisted of 238 risk features and in
2009 of 306 risk features, related to taxpayers improper or
potentially improper performance of financial obligations.
These risk features have been gathered and defined on the
basis of the criteria descriptions used for the control acts of
taxpayers selection employed in the work of the tax administration and other taxpayers behaviour risks known.
GASS is a subsystem of common audit support, which uses
data acquired by the RAAS subsystem. As soon as a control
act is initiated electronic audit case file of every taxpayer is
started. All the electronic documents drawn up and
obtained during the tax/desk audit, electronic copies of
written documents, check-up schedule, questionnaires and
other information related to the tax/desk audit of the taxpayer are kept in the case file. Thus this information can be
accessed at any time.
It should be noted that tax administrators in Lithuania dispose of a rather broad system of accessible data. Thus in
the process of risk assessment tax administrators dispose of
different kinds of internal as well as external data resources,

42

such as Register of Legal Entities, Resident Register, VAT

Database (ITIS EU), Integrated Tax Information System
(IMIS), Customs Department Database, Social Insurance
Database, VAT Information Exchange System (VIES),
EUROCANET/AUTOCANET, Register of Invoices,
International Information Exchange Database, other data,
for example, bank accounts, criminal records, Car Register,
Real Property Cadastre and Register, Inland Ship Register,
Civil Aircraft Registry, etc.
All the above mentioned data can be easily accessed by the
user in the data warehouse (with the help of the software
DATA Warehouse Business Objects). Standard work documents are drawn up and kept in the warehouse and are for
restricted use only.

VAT refund control

According to the tax administration only the application
and use of complex control tools and control activities,
which are based on risk assessment, can ensure proper and
effective VAT fraud prevention. When considering, special
attention is paid to the control of VAT refunds, which is
dependent on the submission of the application for the
VAT refund and, according to the identified risk in compliance with a number of criteria applied, is divided into
three levels:
VAT is refunded within 30 days or 5 working days to
compliant taxpayers as set forth in the national law on
tax without involving any control activities;
VAT is refunded as soon as the desk audit has been performed but no later than within 30 days;
VAT is refunded only after the tax audit.
Individuals running a business in Lithuania and liable for
tax know that sooner or later a tax administrator will pay
attention to their activity. The ongoing VAT refund control, if such is necessary, is not limited by formal inspection
of VAT invoices, documents. The officer at the tax administration examines intently expedience of the concluded
contracts, checks if they are not artificially drawn to seek
for taxing benefit, etc. Moreover, the check-up does not
stop short at the examination of two parties of the contract.
On the contrary, the tax administrator checks whether
VAT, which is asked to be refunded, has been paid under
the range of contracts.
VAT evasion and fraud is not an exceptional phenomenon
in Lithuania, or in the EU area. All the Member States face
more or less problems in the administration of VAT and
look for more efficient control ways to prevent this negative phenomenon, incurring rather significant losses in the
EU. Since 2004 the Department of VAT Control has been
established in the tax administration. Its main functions are
as follows:
Supervision of VAT control system realisation;
Identification and investigation of VAT fraud cases;
Coordination of acts in the investigation of suspected
fraud cases;

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Cooperation with other law enforcement institutions;
Cooperation with tax administrators of other states
exchanging information on potential fraud cases
(SCAC 383);
To guide and ensure the performance of multilateral
controls.
The activity trends of this division cover control of inner
contracts and activity of the enterprises participating in
them, as well as control of international contracts and
activity of the enterprises participating in those.

Investigation of suspected VAT fraud cases

The fight against international VAT fraud, which can be
met in different forms, from such as fraud cases met inside
the country or fraud on an international scale, with participants from third countries involved, to money laundering, has always been one of the prevailing VAT control
fields in the activity of the tax administrator.
VAT evasion, fraud can be legally evaluated through
administrative fiscal and criminal approach. Thus it is
necessary to note that the competence of the tax administrator is limited to the administrative fiscal tax investigation of the taxpayer. The tax administrator is not authorised to apply operational tools and to perform pre-trial
investigation. If the tax administrator has identified features of illegal act, he/she informs legal enforcement institutions, responsible for pre-trial criminal investigation in
Lithuania. Considering, the tax administrators entire work
is first of all oriented to prevent VAT fraud by fighting
against it. Therefore, great attention is paid to intelegence
work, analysis of the available data. If necessary, suspected
buffer and broker enterprises, working in fields related to
great risk, are visited. Different kinds of activities are
organised to identify potential offenders, etc.
In the investigation of VAT fraud cases first it is necessary
to build up the whole scheme with all the traders participating in it and to assess their activity and input into
fraud with regard to the responsibility, i.e.:
To identify and investigate persons, appearantly
involved in fraud;
To examine the facts and to gather data (sufficiency
here is of utmost importance);
To determine the content of the concluded contracts;
To evaluate tax loss;
To decide which economic entity in the group is
responsible for the unpaid VAT, etc.
As soon as the persons involved in the scheme are identified, investigation of all related persons is launched. They
are visited, documents are compiled, the property is arrested, if there is suspicion, that it can be disguised, other law
enforcement institutions for further investigation are
invoked. It is necessary to initiate action on time, so that
the question concerning the appliance of prosecution
towards all the participants in the fraud is solved. No
doubt, quick response and the investigators mobility are

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important to the successful investigation of a case. In most

cases traders from other states also participate in the fraud
chain, thus the tax administrators of other states should be
informed as soon as possible.
It is worthwhile mentioning that in 2009 the plan
Strengthening Prosecution of Fraud in Lithuania was
launched and its implementation measures were approved.
The aim of the plan is to strengthen the prosecution and
intolerance towards fraud. The Prosecutor Generals
Office organises its implementation and all prosecutors
offices and pre-trial investigation institutions in cooperation with other institutions apply projected tools. Despite
the fact that the tax administrator is not directly responsible for the implementation of the plan tools, he/she takes
part in the activity of different work groups to ensure complex monitoring of fraud and relevant phenomena, efficient
and well coordinated fraud control, and thus contributes
within his/her competence to the strengthening of security of the financial interests of the state.

Administrative Cooperation with the

Law Enforcement Institutions
As it has been described above the tax administrator is not
authorised to conduct an operational activity. Therefore
administrative cooperation with the law enforcement institutions in Lithuania is of utmost importance in the prevention of VAT fraud. The tax administrator cooperates with
the Financial Crime Investigation Service, with the main
purpose of disclosing, investigation and prevention of illegal
acts related to money laundering, VAT fraud, illegal reception and use of the financial fund of the European Union
and foreign countries. Tax administrators cooperate with the
Customs Criminal Service. Mutual projects, corporate
investigations of certain cases (gold trade, investigations of
the trade of mobile phones, etc.) are organised.
It is also worthwhile mentioning the standing committee
established under the Government of the Republic of
Lithuania to coordinate and foster cooperation between
institutions of economic and financial control and law
enforcement institutions of the state. The aims of the committee are as follows:
To coordinate cooperation of control institutions, to
ensure timely and systematic exchange of specific,
comprehensive and analytical information among
them;
To ensure joined actions of control institutions to identify and eliminate negative factors of economic and
financial activity;
To ensure joined actions of control institutions in the
field of the preparation of legal acts as much as they are
related to the security in the financial and economic
interests of the state.
In the activity of the committee great attention is paid to
strategic problems, relevant to the whole financial control
system in Lithuania; thus representatives of different kinds

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of strategic fields participate in its work. For example, representatives from the Ministry of Finance, Government of
the Republic of Lithuania, the Ministry of the Interior, the
Ministry of Justice, tax administration, customs, the
Financial Crime Investigation Service, State Border Guard
Service, Prosecution Service, police, State Labour
Inspectorate and State Social Insurance Fund Board. Also
representatives from Special Investigation Service, State
Security Department, and National Audit Office take part
in the work of the committee.
Special working groups accountable to the committee are
established in all the counties of the country. Heads (or
their representatives) of the local STIs work in them. This
activity is necessary to improve and enhance VAT control,
to combine efforts of institutions in combating VAT fraud.

International Administrative Cooperation

As international organised crime, fraud threats in the world
are increasing, and so is the solidarity of states to work
together; a closer and more intense international administrative cooperation becomes more and more important.
Rapid internal as well as external changes also influence
changes in activity strategies and tactics of the tax administrator, prioritising combating fraud inside the Community.
International VAT fraud affects not only the financial
interests of the state, where it has been illegally refunded or
unpaid, but also financial resources of the whole EU.
Therefore, the security of financial interests of the
Community is one of the main aims in the EU. Today the
problem of combating VAT fraud transcends national
interests, because the related problems cannot be solved by
one state alone. The rate of information exchange and its
comprehension is very important in the field of the fight
against the VAT Intra-Community fraud development. We
are sure that the ultimate success depends on the joined
actions of all the Member States as well as corporate interest in combating the fraud independent of the country
where the fraud is committed, because often illegal acts
detected in one state are only elements of a big criminal
puzzle. Thus the decision to confine to national aims, perfunctory attitude towards international cooperation and
mutual help will negatively influence the ability to pursue
for the aim. It is very important for Lithuania together
with other Members to exchange information on detected
cases of VAT fraud, to signal others about suspicious contracts, because operative information exchange and acts by
tax administrations in all the countries involved are necessary to detects, eliminate and prevent VAT fraud as soon as
possible. Only thus the problem of VAT fraud migration
(export) from one Member State to another will be optimally minimised.
Legal background for this close cooperation within the EU
is set forth in Council Regulations (EC) No 1978/2003 and
No 1925/2004. Automatic and structural information is
defined in the above mentioned regulations is exchanged.

44

Lithuania has also signed a trilateral agreement with neighbouring countries, i.e., Latvia and Estonia. Different kinds
of information are exchanged, e.g., on persons shareholders, administering enterprises in foreign countries,
information on persons, not residing in the Member State,
but possessing accounts in banks, etc.

Cooperation with Fair Business

Memorandum of Understanding (MoU) with taxpayers
with regard to mutual help and understanding is another
form of the work of the tax administrator, based on the
willingness to cooperate with taxpayers, mutual trust and
help. It is also a new way to identifying risky VAT payers.
Striving towards closer and more efficient cooperation
with business the tax administration has signed the agreement with the biggest organisation in Lithuania, which
represents small and mid-sized business, the Lithuanian
Business Employers Confederation. The purpose of the
agreement is to induce business entities to meet requirements set forth in the tax laws and to pay taxes voluntarily,
to provide business with conditions of equal competition
and to prevent from the possibility to obtain competitive
superiority evading taxes. At present there are work groups
established where the tax administrator and business representatives discuss problems faced by the small business and
mid-sized business enterprises and look for ways to solve
them by mutual dialogue, discuss possibilities to simplify
terms of tax loan, analyse and assess businessmens complaints regarding activities of tax authorities, manifestations of potential bureaucracy, etc.
There also are cooperation agreements signed with different
kinds of national and local business associations, such as:
Lithuanian car entrepreneurs, Lithuanian logistics,
Lithuanian brewers, Lithuanian builders, recycling enterprises, salvage enterprises, recyclers associations, etc. Tax
administrators in the counties cooperate with local associated business structures, trade unions, business information
centres, Chamber of Commerce, Industry and Crafts, etc.
The tax administration in the cooperation with business
first of all seeks for ways to ease the administrative burden
for business, to simplify procedures of the performance of
tax obligations and to help fair trade to properly fulfil its
obligations towards the state.
The provision of wide scope electronic services is also one
of the main activity fields of the tax administration, e.g., it
provides on the website the possibility to check the VAT
payer number validity, information on the persons, who do
not meet the requirements set by the tax administration is
also available. This information should help the taxpayer to
decide on the reliability of the business partners. The website also provides other publications, dedicated to the taxpayers proper fulfilment of tax obligations. In future the
administration will offer more electronic services to preserve the name of one of the most advanced institutions in
public sector providing electronic services. The priority in

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a r t i c l e s
this field is to encourage the very user to use e-services; to
reduce administrative burden by providing the possibility
to fill in and submit electronic declarations as well as to
improve the efficiency of local and regional tax administrations servicing taxpayers.
Moreover, it has been decided to reduce the disturbance of
fair trade as much as possible, and thus to develop new
quality relations between the tax administration and the
taxpayer, to promote proper fulfilment of tax obligations
and cooperation with the tax administration based on good
will. As soon as control procedures for taxpayers, who
according to the set criteria can be considered as reliable
(compliant) with regard to VAT refund, were simplified
and accelerated, and the control system was based on the
selection of control procedures corresponding to the risk
level of the taxpayer, VAT claim is refunded in five working days without the application of control procedures.

And Finally
Though VAT in the European Community has existed for
forty years, today there still is not one prevailing formula
to a successful control system, which would ensure successful fight against VAT evasion and fraud. As interna-

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tional organised crime, fraud threats are increasing, solidarity of IOTA tax administrations to work together, in a
closer and more intense international administrative cooperation becomes very important. Rapid internal as well as
external changes influence enormously changes in activity
strategies and tactics of the tax administration of each
country and the priority for combating fraud both inside
and outside of the Community. Every country faces more
or less the same problems of tax discipline and combating
VAT fraud, and they try their best to solve these problems.
However, the question HOW always pops up. Which way
is the most efficient? The answer in retrospect and in
prospect point of view towards the present situation is the
only one. The tax administration should work to the direction of individual combination of control levers, where
close, intense, immediate international administrative
cooperation of experts and exchange of the best practice
and efforts of Members to improve taxpayers compliance
with the law as well as to increase the efficiency of the service and administration of the taxpayers under quickly
changing circumstances will remain concurrent condition
for the performance of the efficient control and realisation
of preventive work.

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a r t i c l e s

Actions of Polish
Tax Administration
in Scope of
Monitoring
E-commerce

by Mateusz GRYNICZ

Poland
Mateusz GRYNICZ
Fiscal Officer,
Tax Chamber in Bydgoszcz

18 WARMI SKIEGO STREET,

BYDGOSZCZ,
ISSH@KP.MOFNET.GOV.PL
E-MAIL:
MATEUSZ.GRYNICZ@KP.MOFNET.GOV.PL

Mr. Grynicz has been working for tax administration for

seven years. His responsibilities include international
cooperation and external risk management on regional
level. He has also experience in supervision over tax
offices in VAT refunds and tax registration field. He
holds a diploma in economics from Nicolaus
Copernicus University in Torun.

EE

E-commerce as Risk Area Included in National

Compliance Plan

-commerce is a dynamically developing economic branch that generates

huge profits. In many areas of business entities are provided with the
opportunity to extend traditional range of activity by spreading it into
the Internet. A lot of entities oriented towards business typical for the Internet
were also set up. E-commerce turned out to be additional and often even the
only source of income for natural persons. Economic transactions using the
Internet are carried out by entities of different profiles. The risk related with
under declaring the real value of turnover and unrevealing the sources of revenue from e-commerce is a great challenge for the tax administration.
Implementing the Strategy of External Risk Management the Ministry of
Finance annually elaborates National Tax Compliance Plan, which includes the
catalogue of risk areas of a national priority and with reference to that defines
the goals and determines the tasks of the Polish tax administration. Since 2009
the catalogue of risk areas covers inter alia business activity carried out over the
Internet. The main goals in the field of monitoring e-commerce are aiming at:
Increasing the level of voluntary tax compliance among entities doing business over the Internet;
Preventing tax evasion by entities doing business over the Internet among
others by improving the effectiveness of actions carried out in scope of their
identification;
Elimination of grey market on the Internet in order to ensure honest
competition between entities carrying out business activity.

Coordination of Actions in the Field of E-commerce

In the field of e-commerce the Polish tax administration undertakes coordinated information actions, analytical actions, desk audits, audits on the spot and tax
proceedings.
Information being published on the Internet concerns basic tax obligations
related to business activity carried out over the Internet and most common tax
mistakes identified in the field of e-commerce serves a unified information policy.

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a r t i c l e s
Coordination of actions in the other aspects is achieved by:
Carrying out ministerial trainings in scope of methodology of monitoring e-commerce;
Working out unified selection criteria of entities for
audit in the field of e-commerce;
Setting up a unit for e-commerce within the organisational structure of the tax administration, of which the
main task is to assist tax offices countrywide in scope of
identification of entities carrying out business activity
over the Internet and identification of all tracks of taxable business activity in the Internet.

Actions Carried out by Tax Offices

in the Field of E-commerce
The starting point for actions carried out by tax offices in
the field of e-commerce is the risk analysis of registered
entities based on the data on the type of business activity
and the data from periodical tax returns and annual statements submitted by the entities. In the course of the analysis the following three main criteria are taken into account:
1. Value of revenue raised by taxpayers making retail
sales outside a retail chain or through mail order stores
during the first two years of the business activity;
2. Value of revenue raised by taxpayers dealing with data
processing, webpage management and activity of a
similar character during the first two years of the business activity;
3. Increase of turnover during the previous seven months
or three quarters of business activity carried out by the
above mentioned taxpayers.
Consequently, the taxpayer declaring low average annual
revenue during the first two years of business activity of the
above mentioned type is considered as risky.
The taxpayer declaring considerable increase of the
turnover from business activity of the above mentioned
type is also considered as risky. When determining the
considerable increase the turnover from the previous
month or quarter is taken into account and compared to
the turnover for the seventh months or third quarter back.
However it shall be underlined that a risk analysis based on
the above mentioned criteria concerns only the group of
entities with the business activity registered in the field of
e-commerce. Registration data gathered in local tax databases only partly permits to determine the actual number
of entities running business activity over the Internet that
are within the competence of a certain tax office. Moreover
taxpayers very often hide from tax authorities also the real
type of business activity.
Therefore tax offices make use of the other sources of
information in the course of analytical actions carried out
in the field of e-commerce. One of them is the Central
Database of Specific Entities (BPS) that contains information about entities posing a potential threat to the taxation
system. Additionally tax offices make analyses of information delivered by institutions, organisations and private

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persons (concerning among others unregistered business

activity, billing refusal concerning certain transaction, carrying out transactions out of tax records, unrevealed
sources of revenue).
During monitoring of business activity carried out over the
Internet tax offices also analyse information that is accessible in the Internet itself. The aim is to identify possible
divergence between the data about taxpayers possessed by
tax offices and the information concerning taxpayers
obtained from the Internet.
Based on the results of the above mentioned analytical
actions tax offices may launch a desk audit or audit on the
spot which may later result in launching tax proceedings.
Nevertheless in that stage it may turn out that the analytical material collected by tax offices requires complementing. In many cases entities running business activity over
the Internet hide their identity (running business anonymously or hiding under pseudonyms) which results in
problems with determining the real scope of business activity carried out by the entity.
There also may occur a situation that only in the course of
desk audit, audit on the spot or tax proceedings a tax office
comes into the possession of materials or evidence which
indicates tracks of running business activity in the Internet
and comes across difficulties with analysis of the materials
or evidence.

Technical Assistance for Tax Offices

In each stage of actions the heads of tax offices countrywide
may put forward a direct request to the head of the Tax
Chamber in Bydgoszcz for technical assistance and taking
analytical actions by the E-commerce Unit. Analytical
actions are carried out with reference to a specific person/entity or in order to check (verify) the evidence possessed. Computers used for that purpose are separated
from the Intranet. Therefore the actions taken by the
employees of this unit are anonymous.
Requests for technical assistance may be submitted on
paper or by e-mail. Each request delivered to the E-commerce Unit is examined in sequence based on the delivery
date unless the nature of the case (audit on the spot or tax
proceedings in progress) determines the necessity to take
analytical actions immediately.
Responses to the submitted requests are sent on an information sheet with analytical materials attached, which
include among others a list of identified transactions,
scanned bank statements, money transfer evidence, commercial offer, information about links of users or links of
user accounts, location of servers, etc. In order to improve
the course and methods of further analytical work, each
response to the requests for assistance requires feedback on
findings by filling in the same information sheet. All the
problems that tax offices come across in the course of their
actions are also presented in the information sheet which is
very helpful when working on other cases.

47

a r t i c l e s
The procedure of examining requests for technical assistance is presented in Schemes 1 and 2.

information concerning problems faced in the course of

actions.
The procedure of examining the cases initiated by the Ecommerce Unit is presented in Schemes 3 and 4.

Tools Used for Monitoring Business

Activity on the Internet

Other Actions Carried out in the Field

of E-commerce
Tax offices in the whole country receive information on
entities identified in the course of actions initiated by the
E-commerce Unit. After identification and selection of
taxpayers generating high turnover and risky in terms of
violation of the law, employees of the E-commerce Unit
ask the heads of tax offices to verify of the information
gathered by them with the data found in local tax databases. In case of positive verification, i.e., divergence of the
data with the information sent by the unit, the heads of tax
offices receive the information sheet with analytical materials attached and a request for initiation of actions or making use of the materials in regular work.
As it is in case of examining requests for technical assistance, the heads of tax offices are obliged to send feedback
on the results of actions taken by them (including among
others results of audits on the spot) based on the materials
handed over by the E-commerce Unit. They may also send

48

Identification of entities and tracks of their business activity on

the Internet is the most significant and at the same time most
difficult and time consuming stage of actions taken by tax
authorities in the field of monitoring e-commerce.
For this purpose the Polish tax administration makes use of
self-developed and commercial expert tools. As the main
area of a tax offices interest concerns transactions carried
out via auction sites, the tools are dedicated most of all for
extraction and analysis of data from the websites of Polish
auction portals.
Application of the expert tools allows inter alia to assess the
value of turnover for individual users of the auction sites,
generate the list of most active users or search for the links
between users based on phone numbers, numbers of bank
accounts, tax identification number (NIP), e-mail addresses, etc. Furthermore, the tools make it possible to trace dishonest sellers by searching for particular keywords that
occur in the text of auction or in the content of comments
to transactions left by the buyers.
Apart from expert tools, the Polish tax administration
makes use of common tools, too.
One of the examples is the Internet searchers. Different
phrases (in different configurations, using operators such
as and, or, site, etc., including surname and first
name, phone numbers, e-mails, addresses, Skype numbers,

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numbers of bank accounts) are entered in search fields.
Based on that further attempts are made to determine possible inter-links, links with other data and then types of the
links, e.g., links with nick names from auction sites, with
certain Internet domain addresses, forums, social portals.
Cached option by links to web pages listed as a result of
Google queries is used. The option presents the last cached
snapshot of a page which is useful for further evidence purposes.
Waybackmachine available at www.archive.org is a useful
tool in case of expired links to certain pages. It shows the
dates of recent updates of a certain webpage and after
entering the archived link to the webpage it makes it possible to find information previously published and currently unavailable on the webpage. It may also prove to be very
useful for further evidence purposes.
A package of common tools for monitoring e-commerce
includes also internal searchers available on trade, auction
or social portals. They are useful especially when having
knowledge of users nicknames.
Tax administration analyses public information, which may
be found on webpages of trade and auction portals, such as
inter alia about me information, information concerning
location, descriptions of items offered for sale or placed for
auctions, hyperlinks to other pages, properties of graphics,
negative comments from buyers, statuses (scores) of nick
names (portal user accounts). Information published in the
Internet databases of companies or classified ads of
Internet portals is also a part of the analysis.
Other useful tools are Internet locators, software determining location of server and the number of commercial
domains located on the server, statistical calculation pages,
pages presenting the Internet links for certain domains.
And who is databases are used for identification of
domain owners (by domain names).

Irregularities Identified in the Field

of E-commerce
The most frequently occurring irregularities identified by
the tax administration in the risk area concerning e-commerce concern:
Running not registered business activity;
No VAT registration;

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Lack of tax documentation;

Underrating revenue by underreporting sales made
over Internet auction sites;
Making sales without issuance of invoices;
Making sales disregarding cash register;
Lack of cash register installation despite the obligation
or overdue installation;
Using somebody elses user accounts.

Developing Cooperation with Other

Bodies and External Entities in the Field
of E-commerce
In order to increase the effectiveness of analytical and verification actions cooperation with General Police
Headquarters, National Sanitary Inspectorate, Central
Inspectorate of Trade Inspection was undertaken by the tax
administration. Common and coordinated actions allow
improving quality and completeness of proceedings against
entities violating the law. Cooperation gives the opportunity to gather experience, which results in a better effectiveness of actions.

Summary
One of the main tasks of tax authorities in Poland is to pay
attention to budgetary receipts, correct taxpayers performance of tax duties imposed by legislator and the fight
against grey market.
With respect to that, actions of the tax administration have
to be adopted (from organisational and factual point of
view) to the tasks aimed at the limitation of non-registered
business activity carried out over the Internet, limitation of
tax evasion related to transactions carried out over the
Internet and increase of the voluntary tax compliance in
case of taxpayers doing business on the Internet. These
actions require also systemised cooperation with external
entities on acquiring data about entities and transactions.
Taking into consideration the growing number of transactions carried out via the Internet that involves a high level
of risk resulting in decrease of budgetary receipts, e-commerce becomes a regular part of the main directions of tax
authorities actions in range of audits on the spot, desk
audits and information actions.

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Investigating
Point of Sale
Systems (POS)
from a Swedish
Point of View

by Liz KILENIUS

50

S weden
Liz KILENIUS
Project Manager,
Swedish Tax Agency

BOX 2825,
403 20 GOTHENBURG,
(46) 1057 350 85
TEL:
E-MAIL:
LIZ.KILENIUS@SKATTEVERKET.SE

Ms. KILENIUS has been working in the Swedish Tax

Agency since 2004. In 2005 she started working with
investigating cash registers. Now Liz is a project manager for a project on auditing cash traders in the
Western Union in Sweden.

U
U

Background
ntil January 1, 2010 there have not been any general requirements for
cash traders in Sweden to have a cash register. Only restaurants that
serve alcohol must, since 2003, register all sales in a Point of Sale
System (POS), always give the customer a receipt and have reports that meet a
certain standard. When this new legislation came in, the Swedish Tax Agency
seriously started to look at cash registers. Together with the local authorities the
Tax Agency went out on unannounced inspections looking at POS in restaurants. Soon it was found that they were using their cash registers for the purpose of tax evasion. They were using different void functions, training mode,
copies of receipts or simply just putting the money in an open drawer. The POS
were programmed not to show the corrections or the training mode in the
reports. The use of POS that did not meet the standard was very widespread
and once the local authorities found such misuse restaurants using these POS
risked losing their permit to serve alcohol.
Restaurants soon changed their cash registers to more sophisticated PC-based
systems that we initially knew nothing about. To learn more about the use of
manipulated POS and focus more on investigations on POS, the Tax Agency
started a project in 2005 looking at restaurants having a licence to serve alcohol. The focus was looking at their income tax by investigating their POS. The
project is still going on and was expanded in 2008 to include all cash traders.
The Swedish Tax Agency has audited over 1,600 companies in different branches such as restaurants, cafes, hairdressers, opticians and we have found that the
use of cash registers that can be used for tax evasion is widespread. The restaurants, since they have been controlled more often, use sophisticated PC-based
systems while the other cash traders more often still use regular cash registers
with void functions and training mode. The experiences that we gained by
auditing restaurants a few years ago have been very valuable when looking at all
other cash traders.
The results from this project are one of the reasons why we have new cash
register legislation in Sweden from January 1, 2010. The new legislation
states that all cash traders in Sweden must have a certified cash register. The
cash register should be connected to a control unit that will save all transactions. The data in the control unit is encrypted and can only be decrypted by
the Tax Agency.

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Zappers and Phantom-Ware

When it comes to PC-based POS, zappers and phantomware are used to reduce the sales. Phantom-ware is factoryinstalled software within a PC-based cash register that can
selectively delete sales records leaving no trace. A zapper is
software that falsifies the electronic records of POS systems
for the purpose of tax evasion. It is an external program
often placed on a USB device or other external device.
What zapper and phantom-ware does:
Deletes transactions from the database;
Re-calculates reports, the database and the journal;
Often there is a function to reduce all sales by a selectable amount;
It does not leave any trace in reports or the journal;
It replaces a more expensive item with a cheaper one;
or
It will simply delete items.
In Sweden we have found both zappers and phantom-ware in PC-based
POS. Some of them are manufactured and only used in Sweden and
some of them are software used all
over Europe.

tom-ware can leave traces such as missing rows in the database, a question mark at the end of the row, a different
marked row in the database, etc.

Imaging the Restaurants POS

Imaging the POSs hard drive gives more information
about the zapper or phantom-ware and the traces of it. The
advantage with imaging the computer is that we can investigate cases on a deeper basis and that we get more evidence that makes the process in the courts easier. We have
found receipt/sales before the manipulation and we have
restored deleted information from the hard drive. After
confronting the companies with our findings the information very soon seems to reach the manufacturer or wholesalers and the traces we have found disappear. Below is
some more information about what can be found when
imaging the POS.

How to Investigate a PCBased Point

of Sale System (POS)
Since the PC-based POS get more
and more complicated, Sweden has
chosen to take a technology approach
to tackle the problem with phantomware and zappers. To learn about the
system the computer on the business Figure 3. The program folder can contain other valuable information. In some of the cash registers that we have investigated we have found log files that give a lot of information. By comparing the information in the database to the information
premises is often imaged or files are
in the log file we could exactly calculate the amount missing.
copied. By doing this we can analyze
the database, we can run the cash register as a virtual machine
Older versions of the database on the hard drive can be
and we can get information from the computers register to try
compared to the information in the current table and
to find traces of the use of zappers and phantom-ware. Here
reports and receipts that have been deleted can be
restored and compared to receipts in the database.
are some examples from the analysis of different databases.
Below is an example of a receipt that has been restored
When analyzing the database and the information in the
and compared to the receipt in the POS.
program folder, we have also found that zappers or phan By using a virtual machine we can
learn more about the software and
we can also learn about the signs of
the zapper or phantom-ware.
Analysis of time stamps of certain
files can give information about
when different files or the database
Figure 1. In this database one of the receipts has a longer duration than others
have been changed. The time
stamps can be compared to the
timestamps on the reports in the
bookkeeping.
Checksums and counters can be
analyzed to determine if items
have been deleted.
Figure 2. Some of the receipts have a lower sales original price than sales profit but some do not

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a r t i c l e s
between the national and the regional groups. In every audit in the project a member of the regional or
national group participates.

What the Project Has

Led To

The National Cash Register Group

Since the restaurant project started in 2005 Sweden has
had a national cash register group with members from all
seven regions in Sweden, the group has 19 members.
People around the country working with cash registers
started to find ways of using cash registers for the purpose
of tax evasion and soon there was a need for gathering
knowledge and spreading it to more investigators. The
groups main tasks are:
Coordinate the work with POS in Sweden. All investigations
involving POS are registered in a national file. All experiences of different cash registers are gathered in the file.
Develop methods for interrogating electronic tills and
PC-based POS.
Create a library of manuals and keep it up to date.
Make support sheets for different brands and models.
For a lot of different POS we have made support sheets
which contain information about how to print transaction and programming reports and what to look for
when investigating the POS.
Share experiences.
Since 2008 every region has its own cash register group
with 2-6 members. The group is led by a member of the
national group. In that way the information is shared

52

The project so far has made Sweden

aware of the fact that the use of
manipulated POS is common among
all cash traders and that the tax loss is significant. In the
project 1,600 audits has been performed and the yield is
about SEK 1 billion. A lot of restaurant owners all over
Sweden have been charged with tax fraud and have been
sentenced to prison. In 2009 we have started to look at different retailers of cash registers and tried to make them
responsible for complicity in tax fraud in the companies
that they have sold cash registers to.
In May 2009 Sweden got the first verdict against a retailer.
He was sentenced to 1 year and 3 months in prison for
complicity in tax fraud in eight restaurants. He did not only
sell the software to 22 restaurants but also, after finding out
what the Swedish Tax Agency knew about the software,
helped the restaurant owners to delete evidence from their
computers.
The retailer claimed that he did not know about the phantom-ware but documents describing how to use the phantom-ware were found in his computer. Two restaurant
owners confessed and pointed out the retailer as the person
who showed them how the software worked. Analysis of
used USB devices in both the restaurants and retailers
computer showed that the USB devices required when
using the phantom-ware came from the retailer.
In 2010 the Swedish Tax Agency is looking forward to seeing the effect of the new cash register legislation.

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Project Lanyard
Early Identification
of Missing Trader
Intra-Community
(MTIC) Fraud

by Steven POPE

United Kingdom
Steven POPE
Deputy National MTIC Coordinator,
HM Revenue & Customs

100, PARLIAMENT STREET,

LONDON SW1A 2BQ,
(44) 207 147 0105
TEL:
E-MAIL:
STEVEN.POPE@HMRC.GSI.GOV.UK

Mr. POPE has worked for HM Revenue & Customs and

previously HM Customs & Excise for 25 years. He has
worked in the field of MTIC fraud on and off since 2000
in various roles including coordinating international
investigations, advising on policies to tackle MTIC fraud
at HM Treasury and currently as Deputy National
Coordinator at HM Revenue & Customs.

I
I

Introduction
n 2005/2006, in response to a rapid and significant increase in the levels of
VAT Missing Trader Intra-Community (MTIC) fraud in the UK, HM
Revenue & Customs (HMRC) enhanced its strategy for countering this
type of fraud. One key element was identifying and de-registering fraudulent
traders at an early stage. The approach, which is called Project Lanyard, has
proven to be a great success and it continues to influence HMRCs current
operational activity.

Background
VAT MTIC fraud involves a fraudulent business or individual taxpayer obtaining a VAT registration number in one EU Member State with the sole intention of purchasing goods VAT free from a business in another EU Member
State and then selling them on to another business at a VAT-inclusive price but
without paying the VAT charged to their tax authority. In many cases the fraudulent business disappears immediately, hence the term Missing Trader,
although sometimes the registered business will keep on trading and building
up a debt until the tax authority eventually takes action to close down the company.
VAT MTIC fraud has been a major challenge both for individual EU Member
States and for the European Commission, which has committed a considerable
amount of time and resource to facilitating the debate within the EU on how
best to respond. Most of these discussions have taken place at either Anti-Tax
Fraud Strategy (ATFS) or the VAT Standing Committee on Administrative Cooperation (SCAC) meetings.

Types of VAT MTIC Fraud

There are two types of MTIC fraud: (a) carousel, and (b) acquisition fraud.
MTIC carousel fraud is carried out with the aim of submitting a fraudulent VAT
repayment return (or to reduce the amount of VAT that a business pays to the
national tax administration). Goods are typically imported VAT free from another
EU Member State and then passed through a chain of contrived transactions
before being re-exported. As the goods are being exported, the goods will be sold

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a r t i c l e s
VAT free, thus creating a large VAT repayment for the
exporting trader1 based on the VAT paid to his or her supplier. The transaction chains are contrived in a way that ensures
that at or near the beginning of the transaction chain one of
the traders will go missing to avoid paying VAT to the tax
authority. The goods will then pass through a series of VAT
registered businesses before finally being re-exported. If the
VAT repayment return submitted by the broker is paid, it
crystallises the unpaid paper debt accumulated by the missing
trader. The fraud could be perpetrated using just two traders
in the Member State, the first to go missing, and the exporter
who submits the VAT repayment claim. However more
traders are inserted into the transaction chain to distance the
exporter from the missing or defaulting trader.
In an MTIC carousel fraud, the same goods can be repeatedly imported, sold and then exported, each time creating
a repayment claim, hence the term carousel. In some cases
there may be no goods at all, simply a series of paper transactions. As a rule, all of the traders within the supply chain
will be aware of the fraud and working actively to facilitate
its operation.
VAT MTIC acquisition fraud differs from carousel fraud in
that the goods are eventually sold for retail consumption.
In this case, the VAT charged but not paid to the tax
authority by the missing or defaulting trader forms the
profit, enabling fraudsters to undercut genuine trade.
MTIC carousel fraud poses the greatest fiscal threat,
because its contrived nature means that there is theoretically no limit to the amount of VAT that can be stolen.
A key element of keeping VAT losses to a minimum is to
identify the missing or defaulting trader as soon as possible
and taking action to de-register them. This is the role of
the HMRC Project Lanyard teams.

Project Lanyard
Project Lanyard is an audit based project designed to identify fraudulent transaction chains at the earliest possible
opportunity, building a picture of non-compliance by:
Identifying and de-registering missing or defaulting
traders;
Using live intelligence from audits to build a broader
picture of MTIC activity;
Examining goods despatched in MTIC fraud to identify misdescription;
Demonstrating circularity of goods in MTIC carousel
frauds.
At the height of the MTIC attack in the UK, HMRC identified that 70% of the goods used in MTIC frauds were
being stored on their arrival in the UK in only five warehouses. These warehouses offered storage facilities for the
goods while they were being traded in the UK. Once the
goods reached the final trader in the chain (the broker) the
warehouses released the goods for shipment overseas.

Tax auditors carried out a full verification of both the goods

and the supporting documentation at the suspect warehouses. Much of the documentation listed companies
which proved to be the missing or defaulting traders, whilst
examination of the goods identified examples of misdescription. In many cases the goods were of a much lower
quality and value than described on the invoice, while in
other cases items of no value at all were used.
When HMRC auditors inspected goods at the suspect
warehouses they were encouraged to record full details of
the goods examined and to evidence their actions. This
took the form of two supporting activities, marking the
external packaging and scanning and recording any barcode details.
As a result of this action HMRC was able to prove that
goods were being circulated within MTIC trading chains,
rather than sold to final consumers. This proved to be a key
element of building the case for refusing any export related VAT refund claims.
In addition to activity at the warehouses, HMRC customs
officers examined suspect goods at ports and airports and
stamped the outer boxes with a Customs date stamp. That
way any HMRC tax auditor at a warehouse could immediately identify goods which had been previously examined.
The date stamp not only identified where the goods were
examined, but also the precise date.
Both Project Lanyard officers and HMRC customs officers
scanned the unique barcodes on each box and downloaded
the information into a database. The database offered
HMRC the ability to identify any shipments previously
seen as well as the date and the number of times the barcode had been scanned. As a result suspect goods could be
quickly identified.
All this information was disseminated to HMRC audit
teams, and in some cases other Member States, enabling
them to gain an immediate audit trail of previous sightings
of suspect goods.
Project Lanyard formed just one very important part of a
combined strategy for tackling MTIC fraud, all of which
was overseen by a committee of senior managers representing all areas of HM Revenue & Customs employed in
tackling the fraud.
Key performance indicators (KPIs) were put in place which
could identify not only the success of the strategy but also
any changes in performance. The KPIs were discussed on
a monthly basis at committee level and changes to the
strategy agreed where needed. This ensured that the UK
was able to continue applying pressure on the fraudsters
and keeping levels of MTIC fraud to a minimum.

Impact of Project Lanyard

This carefully targeted and coordinated approach has made
a significant contribution to the UKs efforts to tackle

1) Known as a broker.

54

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a r t i c l e s
MTIC fraud. In 2006/07 approximately 80% of the total
number of default or missing traders identified had come
directly from Project Lanyard resulting in a significant
reduction in VAT losses.
As is the case with all complex frauds, the perpetrators
responded to HMRCs success by taking both covert and
overt action to frustrate our activity. The initial response
was fairly subtle, with warehouses no longer recording the
full details of a recipient of goods entering the warehouse,
thereby making it extremely difficult for auditors to identify potential missing or defaulting traders. This was followed by changes in opening times at warehouses to periods outside of the normal business working times. When
HMRC countered by visiting out of hours, the auditors
were then refused access to warehouse premises and in
some cases threatened with violence. This tactic was countered and ended by HMRC deploying criminal investigators to protect staff.

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The above illustrates what tax administrations can expect

when they seek to tackle major VAT frauds of this type.
However, a determined and coordinated approach played a
key part in a dramatic fall in the levels of MTIC carousel
fraud.

Summary
The tactics deployed via Project Lanyard had a dramatic
impact on the UKs ability to tackle MTIC fraud. However
the key to success was the time invested in understanding
how the fraud was being operated, identifying key areas
where the fraud could be best tackled and finally applying
auditors with the necessary skills.
As can be seen from this article, the fraudsters reacted to
our strategy requiring us to adapt our approach where necessary. This was only possible because the UK had set
strong governance in place to monitor performance and
authorise changes when required.

55

i n t r o d u c t i o n

axpayer Education
and Services

he Area Group Taxpayer Education and Services met for the last time in Belgrade,
Serbia at the end of 2009, their first meeting of the year having been hosted by the
French tax administration in Paris. Over the years the group had discussed a wide range
of taxpayer education and services issues and for their final year, topics included e-communications and e-services, with a special emphasis on websites, communications and particularly channel strategies and latest developments in taxpayer services.
Rosen BACHVAROV from Bulgaria provides us with information how usability tests can be
done for the tax administration websites taking into consideration Bulgarian experience.
Channel strategy is examined by Bo Helbaek THOMSEN who analysis the strategic focus on
handling customers effectively in the Danish tax administration, and Katarna SLIZIKOV
looks at the providing of information and services in the Slovak tax administration.

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Taxpayers Struggle
with Articles and
Paragraphs or How
to Make Our Internet
Sites Understandable
and Useful
by Rosen
BACHVAROV

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Bulgaria
Rosen BACHVAROV
Communications Director,
National Revenue Agency

52 DONDUKOV BLVD.,
SOFIA 1000,
(359) 298593065
TEL:
E-MAIL:
R.BACHVAROV@NRA .BG

Mr. BACHVAROV is working in the National Revenue

Agency since 2000. He is responsible for public communications of the Bulgarian tax administration, including internal communications and web strategies.
Masters degree in Marketing, Masters degree in Law.

U
U
Usability

sability is a term used to denote the ease with which people can
employ a particular tool or other human-made object in order to
achieve a particular goal. Usability can also refer to the methods of
measuring usability and the study of the principles behind an objects perceived
efficiency or elegance.
Tax administrations throughout the world need to solve a major problem: how
complicated legal provisions turn into the desired behaviour on the part of taxpayers. It seems that administrations are inclined to talk about tax literacy, tax
culture and knowledge of the law on the part of the clients too frequently. In
fact the problem is more serious. Firstly, no one likes to pay taxes, but even less
people want to read incomprehensible articles and paragraphs, which in effect
demand them to do something. It is for this reason that tax agencies all over the
world build up communication strategies, create client-oriented approaches,
call centres and, in the 21st century, Internet sites.
Usability is a science which also helps Internet site architects to design their sites
in conformity with users expectations. The first truth here is that the substance
of your site should be well arranged, understandable and intuitive to use. Below,
I will provide several examples of bad practices in Internet design, as well as tell
you about the experiences of the Bulgarian National Revenue Agency (NRA) in
designing and constantly changing its Internet site www.nra.bg.
Error number 1 we speak about the institution, and not about what we expect
from the clients.
State administration sites throughout the world readily speak about their
organisational structures, about their managers, about their OWN organisations. But our clients do not need any knowledge about which official is in
charge of their miseries they need answers to the questions: What do you
want from me? What should I do? Where should I go? And how could I deal
with the vexing tax obligations as soon as possible?
Error number 2 The law says everything, read it. Or if you do not know it,
contact the call centre. Yes, but nowadays a telephone call costs a lot money
for the administration which supports qualified resource for answering questions, a great deal of money for equipment, and it takes both parties quite a lot
of time. Why dont we just use the modern medium the Internet to answer
our clients questions?

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The Bulgarian tax administration decided to check to what
extent its site complied with its users needs. Our experts
were convinced that there is everything one needs on the
site. Nevertheless we had some suspicions that the architecture, the contents, the manner in which the texts were
written, and all the services accessible via www.nra.bg in
principle, could be significantly improved. A team of public communications experts reviewed the entire site, got
acquainted with the latest user surveys of taxpayers opinion, and decided to hire an external company dealing with
Internet sites usability tests. In Bulgaria, one such a company is Lukrat (www.lukrat.net). Our experience showed
that even if you have the methodology to conduct such
tests, it is always much better to trust an external, independent company. It will not save you the negative evaluations,
and after all this is their main scope of business.
The first tests of the site were conducted in 2008. We have
planned the next testing to take place by the middle of
2010, the conviction of the Bulgarian NRA being that the
site of the agency should develop continuously in order to
be alive, and that potential users opinion should be studied for each innovation on it.

Usability Testing Methodology

Three groups of users were selected the first consisted of
26 natural persons, the second included the same number
of accountants, and the third consisted of owners of small
and medium-sized companies. This is also the biggest part
of the users of www.nra.bg.
To obtain comparative data, we defined the three main
indicators, which were significant for the use of NRAs site.
These were: success rates, Coefficient of Orientation
(COr), and satisfaction.

Success rates
Defined as a measure of the sites capability to help the users
perform certain tasks. For each individual task, it accepts values 1 = success and 0 = failure. Summarised for all users, it
gives a measure for the site as to what degree it provides for
the successful interaction of the users with the site.

COr
The Coefficient of Orientation shows the degree of effective interaction of users during their use of the site. It is
measured in comparison to a predefined standard an
optimal approach for performing a certain task. It takes
values from 0 to 1. Value 1 is the highest and indicates a
complete match between the optimal manner for performing the task and the actual one, used by the users. A low
coefficient of orientation is an indicator for:
Misleading navigation;
Unclear interface elements and respectively many
errors on the part of the users;
Unclear instructions;
Difficult and incomprehensible texts.

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Satisfaction
A subjective measure of the opinion of the sites users, compared to a predefined criteria.
The grades for satisfaction are a good indicator about the
degree to which the site fulfils the requirements and the
expectations of users. The satisfaction scale extends from 1
= very dissatisfied to 5 = very satisfied.

The Results
The results we received surprised us unpleasantly. It turned
out that the vision of the NRA is different from that of the
sites users. We received a good grade for the homepage
and the architecture of the main menu. The evaluation of
the great volume of information published on the site was
positive as well. But we also received a multitude of recommendations as a result of the tests. Among the most significant weaknesses were:
The information about the various kinds of taxes and
social security contributions is not presented uniformly.
For example, there is no unified structure about each kind
of obligation of the type what is this tax; how much it
amounts to; where and how it is paid; where I should ask
about it; and what am I expected to do if I am a taxpayer.
The search engine does not function uniformly and does
not always show the most significant information first.
There is no column on the homepage for publishing
the most current things of interest to the clients. The
columns are not appropriately arranged, and the most
useful information is at the bottom.
The location of the appropriate people in the NRA is
difficult to find, and it is not easy to locate information
about the call centre.
It is difficult to find information about payment of
taxes and social security contributions, and this information is of the kind most sought after by citizens.
The texts on the site, in spite of NRAs attempts,
remain relatively complicated to understand, and is
written in administrative jargon.
The success indicators had the following values:
General satisfaction of the users value for the natural
persons 3.21
For the companies 3.94
Total for all the groups 3.58
Target value set up prior to the tests 4.00, where 0 stands
for very dissatisfied and 5 for very satisfied.
Success rates value for the natural persons 50%
For the companies 69%
Total for all the groups 60%
Target value set up prior to the tests 70 to 90%, where 0
stands for failure and 1 for success.

Lessons Learnt
We learnt a lot from the tests with users. As a result of this:
We completely restructured the homepage;
The significant links went to the most noticeable places;

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We created a special column about the most current
changes;
We completely altered the manner of how the search
engine functions;
We put information about the call centre on each page
and subpage, we put links to the tax payments services
in several locations;
We translated over 1400 documents into understandable (we hope ) language;

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We introduced a uniform structure in the descriptions

of the various kinds of taxes. Now the entire information has an identical structure regardless of which kind
of tax it refers to.
Further to that, we tested the introduced changes with a smaller but similarly structured group. We were satisfied to find out
that an 80% improvement was reported after the sites restructuring. Simple and clear. We did it for the benefit of the clients,
but in fact user orientation is a situation where everyone wins.

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Improving the
Channel Strategy
in the Danish Tax
Administration

Denmark
Bo Helbaek THOMSEN
Senior Counsellor/ Business
Architect, Danish Tax and Customs
Administration
STBANEGADE 123,
DK-2100 COPENHAGEN,
(45) 72 37 13 15
TEL:
E-MAIL:
BO.THOMSEN@SKAT.DK

Mr. THOMSEN since 1998 has been a principal officer

in the development of e-services for citizens in the
Danish tax administration. Recently his focus has turned
towards developing the channel strategy. He is the
Danish representative on the OECD Forum on Tax
Administration: Taxpayer Services Sub-Group. He has
been the Danish representative on the IOTA Area
Group Taxpayer Education and Services.

by Bo Helbaek
THOMSEN

60

G
G

rowing from a one-dimensional strategy towards a multidimensional strategy focusing on handling customers effective and relatively different.
During 2009 the Danish tax administration has been improving our
channel strategy. The goal of this channel strategy is to deliver the most effective service to our customers using as few resources as possible. We find that in
order to deliver the most effective services it is not enough to focus solely on
each channel of service delivery; you also need to focus on the customers and
the nature of the contact.
Channels for customer contact can be priced by an average cost per contact
using each channel, and this way a hierarchy among the channels can be defined
and thus a channel strategy can be designed. The strategy typically implies
directing the customers towards using the cheapest channels which more or
less can be interpreted as the channels with the most advanced level of digitalisation.
However, we feel that two other criteria need to be taken into consideration
when developing a channel strategy:
Does the customer contact include any exchange of personal or private
data?
Which segment of customer is undertaking the contact? Is the customer
resourceful, or does the customer on the contrary have very little context
relevant knowledge? Does the customer have certain obligations or maybe
a high level of privileges?
If the customer contact includes exchange of personal or private data, then confidentiality needs to be secured. This implies that confidential information only
can be exchanged, when the identity of the customer has been determined.
If the customer has very little knowledge of the relevant context and only limited insight in the use of the most effective channel, the customer might not
necessarily be expected to use the most effective channel. The customer possibly prefers a more expensive channel, because the customer feels that a faceto-face meeting has the highest credibility. Therefore working with a channel
strategy implies analyzing how the customers gain confidence in the tax administration.

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Therefore we find that our strategy needs to be based on
the following three parameters:
1. Level of channel digitalisation;
2. Level of contact complexity;
3. Segmentation of customers.
These factors are relatively dependent on each other, so the
choice of most effective channel depends on the specific
customer-meeting, which we describe in Figure 1 The
Channel-Dependency Model.

tact with the customers, inspired by the Australian

Taxation Office2:
Information - one-way communication, general questions;
Interaction - two-way communication, including
questions with private data;
Transaction reporting of data.
It is worth noticing that information does not include exchange
of confidential data. An instruction or a guidance based on
exchange of confidential data is considered an interaction. The
distinction between interaction and transaction is not totally
precise, but generally speaking a formal form has to be used
(manual or digital) to perform a transaction, and the input in
this form is most often numerical data.

Customers
Figure 1. Channel-Dependency Model

Channels
Typical channels for handling customer contact with tax
administrations1:
Web;
Phone;
E-mail;
Paper;
Face-to-face.
In the Danish tax administration we have found that we
need to define our channels in a much broader context that
reflects the way we really handle the customer contact.
Therefore we have re-scoped the number of channels
available / or being developed:
No touch;
System-to-system;
Extranet;
Secure e-services;
Not secured e-services;
Push information;
Phone;
E-mail;
Paper;
Face-to-face.
No touch means no contact needed and this is actually implemented since the majority of taxpayers in Denmark (4 million of 4.7 million) do not need to fill in their tax returns.

Contact
As mentioned above, customer contact can be categorised relating to whether confidentiality needs to be
established. Including also a process categorisation, we
have chosen to distinguish between three kinds of con-

We distinguish between three kinds of customers at an

overall level:
1. Citizens;
2. Businesses;
3. Authorities.
These three categories can be divided into several layers of
distinction. Level 1 and 2 of our customer description
looks somewhat like this:

Table 1. Level 1 and 2 of the Customer Segmentation

We want to include the customers in our channel strategy

in a way that reflects how we are actually handling the
meeting with customers and how we want to be handling
the customer meeting. Some channels we only offer to certain segments of customers and not to other segments, for
instance:
The No touch channel is solely for citizens;
The Extranet channel is solely for authorities;
System-to-system services are solely for businesses and
authorities;
TastSelv Voice Response services are solely for citizens and
businesses;
The paper channel is not for authorities - authorities are
supposed to be communicating digitally with each
other in Denmark;
Face-to-face services are necessary for certain processes,
for example, learning the youth about tax obligations
or our handling of physical car number plates and dealing with registration of foreigners.

1) Improving Taxpayer Service Delivery: Channel Strategy Development, OECD, May 2007.
2) As previous.

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The overall purpose of the channel strategy is to ensure
that as many customers as possible are using channels in
the green (in this table - blue) segment.

Figure 2. 3D Channel Strategy

This model is only for internal work progress and not for
outward communication. The model is supposed to be a
tool in our work with developing and refining our channel
strategy. So far we have accomplished the description of
two of the three parameters of the strategy, i.e. the combination of the channels and the contact. Based on the type of
contact we offer the customers a mix of channels. The
interests of the tax administration are implemented in the
available channel-mix.
In Table 2 all the available and preferred channels
(described by colours) are listed, and the hierarchy among
the channels is defined by the numbering of the channels.
The channels are classified in green, yellow and red segments (in the table of this article - blue, grey and black).
Green segment (in this table - blue): the responses
to the contact are performed without any manual
processes or just a few manual processes.
Yellow segment (in this table - grey): contact through
these channels implies a high level of manual processes.
Red segment (in this table - black): the mentioned
channels are not recommended for this kind of contact.

Table 2. 2D Channel Strategy

High priority of the system-to-system channel and the

extranet channel implies a development of our digital services to the highest level of e-services maturity3. We are
developing the following kinds of process and service integration:
Integration of manual processes: our extranet services for different Danish authorities ensures a benefit for both the tax administration and the involved
authority by rationalising processes, but these services do not eliminate all together the specific manual processes.
Integration of automated processes: system-to-system services ensures a benefit for the involved
authorities by eliminating manual processes and creating all new services.
The overall result of the channel strategic work is therefore
a highly valuable development of the tax administration
and the relations to its customers and partners.

3) Framework for the Provision of Electronic Services, OECD, May 2009

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Current Channel
Strategy of
Providing
Information and
Services Applied
in Slovak Tax
Administration
by Katarna SLIZIKOV

Slovakia
Katarna SLIZIKOV
VAT Methodologist, Provision of
Services Unit, Public Services
Department, Tax Directorate of the
Slovak Republic
NOV 13,
975 04 BANSK BYSTRICA,
(421) 48 4393 111
TEL:
E-MAIL:
KATARINA .SLIZIKOVA@DRSR.SK

Ms. SLIZIKOV graduated the University of Matej Bel,

Economy, branch Finances. She worked in private business sector more than 10 years before she joined tax
administration. She is working as VAT methodologist in
the Provision of Services Unit more than four years now,
where she is responsible to provide information about
VAT law application.

I
I

t is necessary to emphasise that the Slovak tax administration like the Slovak
Republic (SR) itself is very young. It was established in 1993 when the whole tax
system was changed and the tax administration started to profile its own structure. Since then we have gone quite a long way. Slowly our tax administration has
changed its approach toward taxpayers from retaliation to customer orientation.
Other important dates are 1 May 2004, when the Slovak Republic joined the EU,
and 1 January 2009 when the Euro was introduced. The Slovak tax administration
would like to belong to the modern, developed administrations in Europe. We would
like to convince our taxpayers of the benefits for them and of the efficiency and
enforcement abilities of the tax administration. They must consider the tax system
sufficiently equitable.

Tax Administrations Vision, Mission and Structure

Our vision, mission and strategic objectives are the starting point for the activities of
the tax administration. The Slovak tax administrations vision is: Collection of
Taxes is the Means, Satisfied Citizens is Our Target. The vision is elaborated in the
organisations mission. The principal mission of the Slovak tax administration is:
To provide for effective collection and administration of taxes and preservation
of the economic interests of the government;
To fulfil the tasks set out in the national budget and at the same time reflect
medium term objectives of economic policy pursued by the Slovak Republic and
the EU;
To set up the scope of activities and tasks in line with the objectives and requirements of the Government and Ministry of Finance of SR.
Internal objectives and tasks are described as strategic objectives in the principal
document Tax Administration of the Slovak Republic, Strategic Plan for the Period
2008-2010. The strategic plan is updated each year. Each of the defined strategic
objectives included critical success factors and their respective performance indicators, the meeting of which was a prerequisite of complying with the tax administrations vision. For the year 2009 we have defined eleven strategic objectives. The
Ministry of Finance of the Slovak Republic has defined the key budget indicators for
the tax administration, which are expected to provide compliance with tax liabilities
in an effective manner.

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Tax administrations bodies comprise the Tax Directorate of
the Slovak Republic and the tax offices. In addition, the Tax
Office for Selected Taxpayers was established in Bratislava.
The tax administration needs to ensure that activities performed by tax offices are as efficient as possible and in accordance with Act No. 150/2001 Coll. on Tax Administration
Bodies. The Tax Directorate of the Slovak Republic established its own regional offices, which are currently eight in
number and are located in the regional capitals (Bansk
Bystrica, Bratislava, Koice, Nitra, Preov, Trencn, Trnava,
Zilina). Their objective is to ensure that certain specific tax
administration related activities are carried out locally.

Tax Administrations Approach

to Voluntary Compliance
The first strategic objective is to achieve, by increasing the
effectiveness of the organisation and enhancing the quality of
work through improved professionalism of our personnel
towards the collection of taxes. This is to be done by establishing an equal approach towards all taxpayers, aimed at achieving full compliance within the defined requirements of the
national budget for tax revenues. It will provide for additional
support to taxpayers in order to help them declare in a voluntary manner at least 96% of the planned tax revenues. The goal
set in this strategic objective is ensuring the improved voluntary compliance of taxpayers.
Voluntary compliance in the Slovak tax administration is
defined as payment of 96% of assessed tax or a tax return paid
within time. We believe that appropriate communication with
taxpayers supports voluntary compliance and that is why we
would like to enhance the voluntary compliance and accurate
submission of the tax liabilities by providing taxpayers with the
information they need. Taxpayers ask how to fulfil their
responsibilities and understand their rights. Providing information to the taxpayers is free of charge.

Channel Strategy of Providing

Information and Services
The aim of providing information and services to taxpayers is
to enhance voluntary compliance and because of this the Tax
Directorate of the Slovak Republic defined their channel strategy of providing information and services.
Channel strategy:
Comes out from the first strategic objective related to
ensuring voluntary compliance;
Is binding for the whole tax administration;
Responds to the needs of taxpayers;
Includes quality measurement indicators with which we try
to maintain a certain level of quality.
Channel strategy defines each channel and responsibilities/duties of the relevant part of tax administration. Channel
strategy comes out of legal Acts No. 150/2001 Coll. about the
Tax Administration and No. 211/2000 Coll. about Free Access
to Information. The Tax Directorate of the Slovak Republic
issued a directive on how to provide the information in accor-

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dance with the mentioned legal acts. Channel strategy is based

on this directive of the Tax Directorate (No. 9/2003/270) about
providing information to the tax subjects on their rights and
duties in respect of taxes and specific regulations.
Tax officers are not tax consultants and because of this the tax
administration defines the extent of the information provided.
Professional information is the information which is generally available and refers to the appropriate section and paragraph of the law. Information provided must be valid and
usable by all taxpayers not only for one group or subject. In the
directive it is also specified what information is not provided.
Our aim is not to solve a specific problem for an individual as
this would require the examination of their bookkeeping or
contracts. Information provided is not intended to optimise
the tax for specific taxpayers.
Competent authorities responsible for providing information and services are the Tax Directorate of the Slovak
Republic through its Public Services Department; which is
part of the Section for Administration of Taxes. The Public
Services Department consists of the Support Services Unit and
the Provision of Services Unit. The Public Services
Department coordinates all areas for providing information in
the tax administration. Providing information within the
regions is handled by the regional offices of the Tax
Directorate of the Slovak Republic through its Tax
Methodology and Provision of Services Unit. Under them are
the local tax offices and the Tax Office for Selected Taxpayers
who are allowed to provide only basic information during faceto-face meetings.
The channel strategy for providing information and services
defined five main channels: electronic, personal (F2F), written,
phone and media.

Electronic channel
The Slovak tax administration use the tax administrations
portal (www.drsr.sk) e-TAX for electronic channel of providing information and services. A brief history of e-TAX portal: In 2001 the Tax Directorate of the Slovak Republic established a website. At the beginning the website presented only
static information without any interactive services. During the
action plan eEurope, declared at the EU summit in Gteborg,
the Slovak Republic committed to provide online public services for people and legal entities. The creation of the tax
administration portal was developed with the cooperation of
the CCTA Danish Central Customs and Tax Administration.
The e-TAX portal was commissioned on 1 May 2004. The
addition of the tax administrations portal was on 7 March
2005. From this date e-TAX has provided not only static information but also information and services for authorised users
as well (online e-services).
Available information on e-TAX
Information about the tax administration: basic information, tax administrations duties, structure and zone divisions of the tax administration, management of the Tax

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Directorate of the Slovak Republic, human resources
information, public procurement;
Tax forms: forms for downloading, interactive forms to fill
in, interactive forms to fill in and send via e-TAX;
Tax information: taxpayers site, registration, tax returns,
tax liabilities and terms, directions and other regulations,
general information, booklets, leaflets and other information sources, other information related to taxes, scale of
administrative fees;
Legislation: legal acts, rules and other tax related regulations;
Statistics: number of tax subjects according to certain
structures and classifications, national budget payment settlements, results of control activities, various analyses;
Support means: e.g., tax calculator calculations, surveys
and verifications of ones tax liability amounts, calendar of
all tax liabilities and terms, accounts of tax office national
revenues ability to locate the account applicable for tax
payment, tax declaration submitted by tax subjects interactively by filling in the form and sending it to the electronic registry of the corresponding tax office, register of VAT
taxpayers, VAT on e-service (special scheme for non-established persons supplying electronically supplied services).
Available electronic services on e-TAX
On the tax administration portal e-TAX there are electronic
services generally available and electronic services accessible
only for the authorised users.
Generally available electronic services are for all users, they
do not need authorisation and they are interactive in a two-way
information exchange. Examples: verification of VAT numbers
in the Slovak Republic and in the Member States of the
European Communities (EUVAT); identification of the
address of the local tax office; provision of information
(enquiries) - interactive portal enabling user to raise questions
and non-structured enquiries in respect of the law, which are
answered by the tax administration; FAQ frequently asked
questions - based on enquiries from the information portal,
interactive tax forms to fill in.
Authorised electronic services: this requires a PIN authorisation code or electronic signature for access. The PIN authorisation code is issued by the tax administration. After sending
a document it is also necessary to bring the first page in paper
form to the local tax office too. Safeguard electronic signature
no need to bring paper form. Communication between tax
subjects and the tax administration is ensured through their
own communication box on e-TAX. Examples of electronic
services:
Electronic submission of tax forms;
Review of taxes applicable for registered subjects:
upon demand data is provided about registration of tax
subject, their local office and other registration details;
Review of documents submitted by tax subjects: the
user is provided with a list of all documents they have filed
with the tax office by tax subject; the list is provided upon

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demand for the correct tax (if filed electronically, possibility to display the form);
Review of documents issued by tax office: upon
demand the tax subject receives a list of documents which
have been issued to them by the tax office;
Review of taxpayers account status - total or partial:
within this review the tax subject has, on demand, a view
on their total status - overpayment or underpayment or on
his/her partial status divided into individual taxes;
Administration of the certificate: tax subjects can modify their certificate (add in or take off);
Automatic reminder of the tax subjects tax liabilities
and terms of tax maturity.

Personal channel (F2F)

Although we try to convince our taxpayers to use other kinds
of contact, they still prefer personal contact with the tax administration. Ways of personal contact:
Personal consultations;
Open days in local tax offices;
Cooperation with Slovak Chamber of Tax Consultants.
Personal consultations
This way of providing information to the taxpayers is organised on all levels local, regional and central. Local tax offices
and the Tax Office for Selected Taxpayers are responsible for
personal consultations at a local level. Consultations are made
upon request it is not necessary to book a date. People can
come during official working hours and discuss basic matters
related to tax returns or tax assessment.
Questions related to tax law application are answered by the
Tax Methodology and Provision of Services Unit of the
regional offices of the Tax Directorate; they are responsible for
consultations with the taxpayer at a regional level. The consultation is made upon request of the taxpayer and it is necessary to have an appointment for the meeting. The practical
problems regional level offices are not able to answer, are put
through to the Tax Directorate.
Tax Directorate is responsible for consultations with tax
consultants or large taxpayers upon request. The Tax
Directorate also controls all kinds of personal consultations
on a central level. In problem cases the personal consultation with the taxpayers is made with the cooperation of the
Ministry of Finance.
Open days in local tax offices
Open days are organised regularly as a part of an educational
project for new businesses, new VAT payers and during the
period of filing tax returns. During the open days the tax officers responsible for public services provide all kinds of general
information about tax legislation, for example, registration for
income tax or VAT, responsibilities involving their tax matters
and use of the e-TAX electronic services. Each participant in
the open day receives an information package with all presented information, leaflets and tax forms.

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a r t i c l e s
Especially during the period of filing tax returns on the open
day the tax administration is providing help with tax return filling and tax assessments. Additionally we provide payment
details. Each tax has a special account in the State Treasury.
Activities during the open days are handled by tax officers
responsible for providing information in the local tax offices.
Cooperation with Slovak Chamber of Tax
Consultants
This is the special personal channel, which we use for providing information to the taxpayer. Because of the number of
single taxpayers, efficient communication with them is difficult; therefore the tax administration established this kind of
cooperation with the aim of ensuring an exchange of information with the taxpayers to whom it has to be addressed. An
agreement about cooperation with the Slovak Chamber of Tax
Consultants was signed. The agreement covers the areas of
information exchanges between the contracting parties for the
purpose of achieving a unified set of tax regulations in practice
and to improve voluntary compliance and the accurate application of the tax rules by the taxpayers. The main forms of
cooperation are:
Exchange of information concerning drafts of tax laws or
legislative changes;
Contribution of speakers in training programs organised
by either of the contracting parties;
Common negotiations;
Attendance of tax administration officers at educational
activities of the Slovak Chamber of Tax Consultants.

Picture 1. Cooperation with Slovak Chamber of Tax Consultants

From the tax consultants side there is high demand for tax
administration speakers, because during seminars there is often
time to resolve questions which in practice are causing problems. There are positive responses to public debate, where
controversial issues are resolved. Meetings are organised when
necessary and when the need demands. It means they are not
compulsory, regular events.

Written channel
The written channel is very often used, because taxpayers in
Slovakia still feel secure when they have something in hand
although we would prefer to communicate with them electronically. For example, in a lot of cases even though they are
writing to us electronically, they ask us to send the answer in

66

paper form with a signature and seal of the office. Means of

providing written information are:
Leaflets and booklets; and
Written statements.
Leaflets and booklets
General information is published in the form of leaflets and
booklets. Public Services Department of the Tax Directorate
through its Support Services Unit prepares these kinds of centralised informational materials. The information is about registration, bookkeeping, basic information after changes in the
law, basic information about tax laws, informational leaflet
about the Euro introduction, etc. These documents are used
by both the Tax Directorate regional offices and local tax
offices, for example, new registered taxpayers receive information package at time of registration. The Tax Directorate
ensures that there are leaflets produced in English as well.
Written statements
Written statements are received and sent via the e-TAX portal,
e-mail or via regular mail. Upon request by the taxpayer the
responsible tax officer prepares an answer. The answer is
processed in the following way: the question is assigned to a tax
officer who will be responsible for the answer. All incoming
requests are assigned to the Public Services Department, where
they are divided into two main groups according to their content:
Requests in accordance with the act about free access
to information: most of these requests come from university students who are doing research for their diploma
work. They ask us to provide them with various statistics
such as an analysis or the numbers of taxpayers. Support
Services Unit is responsible for answering requests in this
group;
Requests in accordance with the act on tax administration bodies. These are requests about the rights and
duties regarding taxes: these inquiries are assigned to the
Provision of Services Unit. Tax officers working in this unit
are specialists for all kinds of tax and duties issues and taxpayers rights applications. Each enquiry is assigned to the
responsible tax officer: tax expert, bookkeeping expert or
administrator for taxes and fees expert. The experts are
divided up according to taxes, e.g., VAT, income tax, corporate tax, road tax.
All written statements must be in accordance with Directive
No. 9/2003/270. The statements are generally valid in law and
help taxpayers to apply the tax laws correctly.
All written statements are uniform: our standard letter begins
with a header - the name of the Tax Directorate of the Slovak
Republic and address, on the right side there is name and
address of the recipient, in the line under this there is the number of the recipients letter followed by our number consisting
of the number of our unit (251) and the number of the record,
this is followed by the name of the responsible tax officer and
his/her direct line, and the last is the name of the city and date.
Subject of the letter is Information of Your Request. At the

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bottom there is the name and position of our director of Public
Services Department. In the footer of the standard letter there
are the phone, fax and website address details.
Written statements sent in hard copy we send with a signature
and seal of the office. In all written statements copies are sent
to the regional office of the Tax Directorate and the taxpayers
local tax office, in the case of our capital, Bratislava, statements
are sent to the Tax Office for Selected Taxpayers as well.

of service is a facility to help taxpayers with basic problems, but

sometimes tax consultants call us too.
Tax Directorate regional offices are allowed to carry out consultations via telephone as well. They provide phone services
for regions and local tax offices, sometimes when they do not
feel sure or can not answer a particular question, they give the
advice to call directly to the Tax Directorates hotline.

Media channel

Picture 2. Written Statements Processed by Tax Directorate

In Picture 2 you can see the diagram about the number of

requests concerning rights and duties for taxes that have
been received and processed by Tax Directorate alone. The
amount for the whole tax administration is around 20-30%
more. On average the Tax Directorate has 70-80% proportion of the total and this is indication of the total number of
requests.
It can be seen from this chart that since 2001, when we started to provide written statements through the newly established Public Services Department the amount has increased
each year. There is a marked increase in 2004 when the
Slovak Republic joined the EU and the VAT law was
changed accordingly.

Phone channel
The next channel is the one we would like to improve in the
future. We do not have a call centre in our tax administration
but we still define a phone channel in our channel strategy.
We offer a hotline to the Tax Directorate as a regular channel for providing information. We have one phone number for
the whole country 048/4393 111, the service is available each
day from 08.00 a.m. till 03.00 p.m. officially. The tax experts
from Public Services Department are responsible for this.
They are divided into groups according to taxes and one of
them for each tax must always be available for phone calls.
Normally they provide this kind of service twice a week for half
a day. The number of calls is on average 30 per day. This kind

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We have the following forms of media contacts: spokesperson

of the Tax Directorate, contacts with the press, discussion on
TV. We have tried to use discussions on TV since 2008. This
is not a regular event, but during the period of filing tax return
or after important amendments to the laws, we use time on TV
and in the form of a question and answer session we provide
information about frequently asked topics.
The spokesperson of the Tax Directorate is responsible for
informing the public about the results and activities of the tax
administration such as national budget payment settlements or
the results of major control activities. They represent the voice
of the Director General of the Tax Directorate in front of the
media as well.
Contacts with the press are carried out at various levels. On
one level we are providing basic tax information to the public
such as information about registration and tax returns, but
there is also professional information provided for public use
like a specialised advisory service in newspapers, magazines or
specialist publications, including Tax Directorate regulations
or guidelines. Another form of contact with the press is information in local newspapers after tax law amendments.

Future Plans
Our future plans in the area of providing information and services to taxpayers are to develop phone and electronic channels. The phone channel is the first we would like to develop
by establishing a Call Centre. This is one of the objectives of
the tax administration reform. There will shortly be a merger
with the customs administration. At the beginning we plan to
make a virtual Call Centre with the back office in the Tax
Directorate. Later we plan to have a system of Contact
Centres that will cover all the main channels of information.
As regards electronic channel, we plan to broaden the number
of authorised electronic services.
Hopefully this shared experience could help you to broaden your
knowledge about ways of providing information and the current
channel strategy applied in the Slovak tax administration.

67

i n t r o d u c t i o n

arge Taxpayer
Treatment and Audit

uring the year 2009 this Area Group met in Vienna, Austria and Berlin, Germany. Based
on the Member administrations request, the main focus of discussion during these two
events was on latest developments in the treatment of large taxpayers and how to
encourage voluntary compliance in the large business sector.
The following articles are based upon presentations made during these events:
Horst KOLB relates the circumstances that led to the introduction the German Anti-Tax
Evasion Act of 2009.
Michael LOVETT from the Irish tax administration examines the promotion of cooperative
compliance as seen through the experience of the Irish Large Cases Divisions Food Industry
Unit.
Suzana MITROVIC reports on the latest electronic services of the Serbian Large Taxpayer
Unit.
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a r t i c l e s

The German
Anti-Tax
Evasion Act
of 2009

Germany
Horst KOLB
Deputy Head of Federal Audit Unit,
Federal Central Tax Office

AN DER KUEPPE 1,
53225 BONN,
(49) 1722436047
TEL:
E-MAIL:
HORST.KOLB@BZST.BUND.DE

Mr. KOLB as deputy head of a Federal Audit Unit is responsible for audits of very large companies in the automotive
and aerospace industry. He works on bilateral and multilateral advance pricing agreements with tax administrations from Western Europe, Asia and North America. He
gives lectures on transfer pricing and regularly participates
in IOTA transfer pricing events.

by Horst KOLB

S
S

ince the beginning of 2009, international tax evasion and the implementation of an internationally agreed tax standard have been very high on
the political agenda, reflecting scandals that have affected countries
around the world. In Germany, the tax administration received information
about several thousand bank accounts kept by two Liechtenstein banks. As a
result, about 2,000 public prosecutors investigations were issued. The tax
administration received more than EUR 200,000,000 in down payments for
evaded taxes. And the law making bodies took the initiative and created a new
law to combat tax evasion: the Steuerhinter- ziehungsbekmpfungsgesetz.
In July 2009 the second chamber of the parliament - the Bundesrat - agreed to the
Act. In August 2009 the Federal Government enacted an Executive Order Law
specifying the measures in detail. The Bundesrat approved it in September 2009.
The law will take effect on 1 January 2010 and is meant to encourage compliance by investors and others with business dealings in non-cooperative jurisdictions by putting them under risk that certain tax benefits could be denied.

Background of the Law

The reasons behind the law are the problems the German tax administration
encounters when it tries to gather information about income that German taxpayers earn and receive in so called non-cooperative jurisdictions. The
administration depends on the cooperation of foreign authorities because their
own authority to ask for relevant information is restricted by international public law to its own territory.
The OECD has developed standards about information requests in Article 26
of its Model Treaty. They require that information like bank account statements and ownership structures should be open to access by foreign tax authorities. But not all countries use or practice this article.
Ways to find internationally accepted solutions for this problem (which are
encountered by assumedly most tax administrations all over the world) were
discussed during a Meeting of the G20 States in London in April 2009 and at a
conference in Berlin in September 2009. There 19 countries jointly reviewed
the progress made in implementing the international standards of transparency
and exchange of information for tax purposes, as reflected in the Model Tax

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69

a r t i c l e s
Information Exchange Agreement and Article 26 of the
OECD and UN Model Tax Conventions.
As a result of the Berlin Meeting, the participating countries agreed that they:
Expected a swift and effective implementation of the
standards of transparency and exchange of information
in tax matters;
Reminded the jurisdictions that committed to the latest OECD standards that a refusal to conclude agreements or protocols with OECD member countries
would be considered as a lack of willingness to fully
implement their commitment; and
Agreed to explore the possibility of using new tools,
including multilateral negotiations or instruments, in
order to speed up the process and to help developing
countries getting full access to it.
They also declared their determination to promote the
best practices to protect their tax base against those countries and territories that are not implementing the OECD
standards in a timely and effective manner. Defensive measures should be applied to prevent undue delays in the
implementation. Up to each country, these defensive measures can include:
Denial of deductions in respect of expense payments to
payees resident in a non-cooperative jurisdiction;
Increased withholding taxes in respect of a wide variety
of payments made to non-cooperative jurisdictions;
Termination of treaties with countries and territories
which refuse effective exchange of information.

The Target of the Law

The law is directed at cross-border transactions of German
taxpayers as, for example:
Payments for business expenses;
Credits, debts;
Purchase or sale of property
in connection with non-cooperative jurisdictions.
In the past the German tax administration encountered
schemes where money was paid to shell companies, trusts,
etc. which were secretly connected to or owned by the taxpayer and based in these jurisdictions. The payments were
declared as deductible expenses for the purchase of goods
or services. Thus taxpayers created a capital base for receiving interest or investment income they did not include in
their tax returns at home. They could feel safe that the
German tax administration would never learn about these
untaxed funds (in German such funds are called
Schwarzgeld, meaning black money, illicit money or dirty
cash). Therefore the funds could even be used as financial
collateral for simulated transactions like a loan from a
financial institution based in a non-cooperative jurisdiction. The interest the German taxpayer paid for such a loan
was received in the end by the entity he/she owned there,
reduced only by a handling fee for the financial institution
but fully deducted from the German tax base.

70

Subjects to the Law

The law affects all German taxpayers:
Physical persons (natural people);
Legal entities;
Subsidiaries; and
Branches (permanent establishments).

Taxpayers Obligations
The law imposes additional duties on the taxpayer:
Taxpayer has to provide a documentation of the arms
length character of the transaction,
Irrespective of an (existing) transfer pricing documentation,
Within 30 days from the date on which the authority
demands for it,
If the annual amount of money paid to the third party
in a non-cooperative jurisdiction is higher than EUR
10,000.
The information has to be provided even when the partner
of the transaction is an independent party.

Documentation of Transactions
with Third Parties
Here something new is implemented in German tax law.
All other documentation requirements cover transactions with dependent parties (subsidiaries, permanent
establishments). This part of the law extends them to
business with (at least officially) non-related parties.
The arms length principle which sets the standard for
the evaluation of transactions between related parties by
analyzing the business between non-related parties is
based on the concept of contradictory interests. Usually,
business partners do not share a common goal when
they negotiate prices but try to maximise their profit,
meaning there is no free lunch in the business world.
In the case of business with partners in non-cooperative
jurisdictions, however, the German law sets a different
point of view.
The documentation has to include the following information:
1. Character and circumstances of the business connection;
2. Contracts and conditions of the business connections,
and all changes of them;
3. All intellectual property which is used or provided by
the taxpayer in accordance with these connections;
4. The functions and risks of the business partners
including all changes during the business;
5. The assets used;
6. Business strategies;
7. Important conditions of the markets and the competition in these markets;
8. Full shareholder information about the business partner (down to the level of natural persons) (but not if
not listed on a public stock exchange).

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a r t i c l e s

Transactions with Financial Institutions

in Non-Cooperative Jurisdictions
According to the law, a deduction of interest paid to such
financial institutions (not only banks, but also trusts, private moneylenders, etc.) is allowed only if:
There is proper documentation; or
Taxpayer authorises the German tax administration to
request information from the foreign financial institution.
If the tax administration has objective indications that the
taxpayer could have earned financial income by transactions with such a financial institution, it can demand:
Affidavit of the taxpayer; and
Authorisation of the GTA by the taxpayer to request
information from the foreign banking institution.

Consequences of Non-Compliance
If the taxpayer cannot provide the necessary information,
he/she will have to suffer consequences:
Denial of deduction for business expenses;
Tax estimation of not-declared income;
Denial of tax exemptions for dividends from entities in
non-cooperative jurisdictions;
Denial of withholding tax relief for foreign investors;
Denial of the tax privileges of 8b Corporate Tax Law
and some other specific rules.

Non-Cooperative Countries
According to the German Tax Law, non-cooperative jurisdictions are:
Countries Germany has no tax treaty with;
Countries which do not exercise the principles of
Article 26 of the OECD Model Tax Treaty;
Countries without a Tax Information Exchange
Agreement (TIEA) with Germany.
If a country has expressed its willingness to negotiate a
TIEA, it will not be regarded as a non-cooperative jurisdiction. The German Ministry of Finance will yearly publish a list of the countries which are still seen non-cooperative jurisdictions. Until now, this list was not published,
due to the following reason.

Results of the International Efforts

against Tax Evasion in 2009
The OECD announced that worldwide more than 50 tax
information exchange agreements (TIEAs) were signed in

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2009. This means that in 2009 more agreements were

signed than during the last 10 years.
In 2009 Germany signed TIEAs with Bermuda, Cayman
Islands, Cyprus, Gibraltar, Guernsey, the Isle of Man and Malta.
The OECDs Global Forum on Transparency and
Exchange of Information has developed principles of transparency and exchange of information. In October 2008 the
UN Committee of Experts on International Cooperation
in Tax Matters incorporated these principles into its own
Model Tax Convention. In April 2009 the OECD issued a
progress report on the implementation of the internationally agreed tax standard for the 84 jurisdictions that participate in the Global Forums annual assessment of the legal
and administrative framework for transparency and
exchange of information (for further details, see OECD
Document Nr. 43757434 with the title Overview of the
OECDs Work on Countering International Tax Evasion,
23 January 2009). Since the first issue of the progress
report a lot of jurisdictions moved from commitment to
substantial implementation of the international agreed tax
standard and all other jurisdictions moved from non-commitment to commitment of the tax standard.
This means that there is no black list of the OECD anymore. Therefore, it is not necessary for the German government to publish its own black list.

The Future
During an OECD meeting in Los Cabos, Mexico, in
September 2009 a report to the G20 finance ministers and central bank governors was finalised (for further information see
OECD Document Nr. 43775637, titled Moving Forward on
the Global Standards of Transparency and Exchange of
Information for Tax Purposes). It was agreed that the OECD
will monitor and review the legal and regulatory framework of
TIEAs and the actual implementation of the OECD standards
of international tax information exchange. Germany is one of
the vice chairs of the OECD steering group. Additionally, a
peer review group was established.
So it seems that the German law to combat tax evasion will
not take any effect in the foreseeable future, if all TIEAs are
conducted as they are intended to. The German tax administration already started to test the willingness of some countries to exchange information under the new TIEAs.
Nevertheless, the law will stay as a Sword of Damocles over
the heads of the taxpayers which try to evade taxes by still
denying information in their tax returns.

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a r t i c l e s

Promoting Cooperative
Compliance From
Theory to Practice:
The Experience of the
Irish Large Cases
Divisions Food
Industry Unit
by Michael LOVETT

Ireland
Michael LOVETT
Assistant Principal,
Revenue Commissioners

SARSFIELD HOUSE, FRANCIS ST,

LIMERICK,
(353) 61 488554
TEL:
E-MAIL:
MILOVETT@REVENUE.IE

Mr. LOVETT has been employed by the Revenue

Commissioners since 1992. He initially worked in the
debt management area of the Collector Generals
Office and then in the E-filing Section. He was transferred to Large Cases Division in 2003. Michael is currently part of the Food Industry Unit of that division.

L
L

Background to Irish Revenue Large Cases Division

arge Cases Division (LCD) was established in October 2003 following
a major restructuring of the Irish Revenue. LCD is responsible, with
some exceptions, for all Revenue operational activities in respect of the
largest businesses (some 350 large corporate groups with a turnover exceeding
EUR 130 million or tax payments of over EUR 13 million) and high net worth
individuals (some 360 with assets in excess of EUR 50 million or income over
EUR 1.27 million) in the state. These businesses and individuals contribute
over 40% of Irelands total net tax receipts. LCDs main purpose is to secure the
highest possible level of tax compliance from the businesses and individuals
concerned.
The Divisions case-base is dealt with by business units based on economic sectors, as follows:
Food industry;
Construction, property, mining and energy;
Drink, tobacco and multiples;
Financial services (banking);
Financial services (insurance);
Financial services (pension schemes);
Healthcare and general manufacturing;
Information and communications technology;
High wealth individuals;
Oil, motor and betting.
The Division is designed on the principles of whole case management and single point of contact. Whole case management means that Revenue has a single
view of the customer. Single point of contact means that the customer has a single view of Revenue. In line with these principles each large case has been
assigned a case manager whose role is:
To monitor the cases compliance with its tax and duty obligations;
To act as a single point of contact in Revenue and ensure the provision of a
high quality customer service;
To promote the cooperative compliance approach;
To organise required intervention and enforcement where there is a breakdown in compliance;

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a r t i c l e s
To establish and maintain risk profiles for each case;
To participate in audit interventions.
LCD is designed to deliver benefits both to the large customers in terms of improved customer service and to
Revenue in terms of consolidated risk assessment and management of our largest taxpayers.

The Food Industry Unit

The food industry is one of the most significant business
sectors in Ireland. The LCD Food Industry Unit (FIU),
which comprises of 10 staff members, is responsible for
ensuring the highest possible level of tax compliance by the
top 35 corporate groups in the food sector.
These groups can be public limited companies (PLCs), cooperatives and family owned companies. Their activities
include meat and dairy processing, food ingredient manufacturing, processing of frozen and chilled consumer products, etc. Their total turnover is approximately EUR 24
billion and they have over 30,000 employees.
Each group has been assigned a case manager who manages
the relationship and interaction between the group and
Revenue. To help achieve this, the case manager has established relationships with senior management in each group.
In addition to the activities mentioned earlier the FIU case
manager also:
Promotes an ethos of tax compliance within the group;
Builds commercial awareness and understanding of the
food industry;
Identifies tax risk, which is particular to the food industry;
Ensures Revenues treatment across the food industry
sector is consistent.

The Theory of Cooperative Compliance

Worldwide, regulatory compliance and particularly tax
compliance has become an increasingly important focus for
business. In addition Revenues interaction with Irish large
business management suggests that there is a strong desire
to have certainty in relation to tax and duty exposure. For
businesses searching for ways of ensuring this certainty the
cooperative compliance approach with Revenue can help
them to achieve this objective.
In September 2005 Revenue published their document
The Cooperative Approach to Tax Compliance Revenue
Working with Large Business1. Prior to introducing the
cooperative compliance program LCD consulted with all
stakeholders. These included large businesses, accountancy firms, business representative bodies, the Irish Taxation
Institute and LCD staff.
Some of the issues that arose were:
As the program was only being offered to large businesses there was concern that a two-tier tax system was
being created. However LCD did not accept that the

approach disadvantaged other taxpayers. Given the

volume of tax revenue that flowed from a relatively
small group of very large taxpayers, Revenue had to use
the most effective methods of securing this.
Cooperative compliance is just one of a number of
methods used.
Some tax advisors were concerned that the new
approach would undermine the relationship they had
with their clients. LCDs response was that Revenue
recognised the very important role tax advisors played
in the administration of the tax code and the significant
contribution they made in leveraging tax compliance.
Therefore there was no intention to change the constructive relationship between tax advisors, their clients
and Revenue.
The program presented a new way of doing business
for LCD staff. They had to be persuaded that this new
approach was viable. Some staff questioned the capacity of the division to deliver the program. They were
concerned about limited resources, experience and the
challenge in developing commercial awareness. Staff
concerns were addressed by having a business sector
focus, recruiting a number of financial accountants
who had experience in business, a commitment of support from the Revenue Legal Services Unit, regular
brainstorming sessions within business units, building a
knowledge management system and focused training
and development.
Cooperative compliance envisages a new form of relationship between the Irish Revenue and large business, one
where both parties work together to achieve the highest
possible level of compliance across the taxes and duties for
which particular businesses need to account.
The Irish model involves informal voluntary understandings between individual large businesses and Revenue that
set out what each side needs to do to enable the business to
achieve the compliance objective.
Initially large businesses are invited to participate in the
cooperative compliance program. Once agreement has
been secured the program operates as follows:
The parties will engage in a risk review meeting at
which Revenue will give an overview of its perspective
on potential tax risks for the business and its sector.
The business is also given an opportunity to point out
its view on risk areas. Essentially both parties work
towards an agreed view of an initial risk profile for the
business.
The business will then implement an annual tax risk
management plan focusing on agreed risk areas.
Revenue audits will, where considered necessary in
particular years, be part of the overall action plan.
These audits will, as far as possible, be signalled to the
business as part of each years overall risk management

1) http://www.revenue.ie/en/business/running/large-businesses.html

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a r t i c l e s
plan and will be the least intrusive possible for businesses genuinely engaging in cooperative compliance.
The audit dimension of the cooperative approach will
therefore be reflected in a mix of self-audit and
Revenue audit.
While Revenue recognises tax planning as an important dimension of financial management, it will nevertheless expect that a business will, as an element of
cooperative compliance, be open with it in relation to
its tax planning strategies.
The business will consult with the LCD case manager
in relation to areas of doubt as regards the interpretation of tax law or practice. Revenue will respond, as
quickly as possible, to requests for interpretation assistance.
Revenue will respond promptly to well-founded complaints from business about potentially unfair tax-based
competitive advantages, which they believe are being
enjoyed by competitors.
The business will keep the LCD case manager
informed of business activities, results and key developments.
The benefits for business who adopt the Cooperative
Compliance approach are:
A relationship with Revenue based on trust, mutual
understanding, openness and transparency;
A Revenue approach based on a better understanding
of the business and recognition of the distinction
between business-driven and tax-driven decisions;
An ability to predict with reasonable confidence what
Revenues position will be in relation to tax issues;
A better understanding of Revenues approach and philosophy;
The possibility of reduced compliance costs;
Less audit intrusion from Revenue since the audit and
enforcement focus will be biased towards those not
committed to high compliance standards;
Greater certainty in relation to tax exposure;
The opportunity to highlight problems with the tax
code or its administration.
The benefits of cooperative compliance for Revenue are:
A relationship with business based on trust, mutual
understanding, openness and transparency;
An ability to predict with reasonable confidence what
the position of a business will be in relation to tax
issues;
A better understanding of business;
Greater certainty in relation to forecasting tax yield;
Business insights to inform the debate on the tax code
and on its administration;
Greater impact on non-compliance through focusing
greater audit and enforcement resources on the cases
presenting the highest risk;
Accurate and timely tax returns and payments;
The possibility of reduced administrative costs.

74

Cooperative Compliance in Practice

To-date 16 of the groups, dealt with by the FIU, have
engaged in the cooperative compliance program. When
deciding whether to engage with a business in the cooperative compliance program, the FIU considers a number of
things including the following:
Corporate governance within the group;
The groups tax compliance history;
Where appropriate the owners tax compliance history;
The relationship between the case manager and the
group;
The group tax risk profile.
Once it has been decided to proceed, a meeting is arranged
between group senior management and the LCD case
manager. The purpose of this meeting is to advise on the
cooperative compliance approach and to address any concerns the group may have. At the meeting the Revenue
document The Cooperative Approach to Tax Compliance
Revenue Working with Large Business is discussed in
detail. Where senior management are unsure about participating in the program, it is emphasised to them that it is
voluntary and the option to opt out at any stage is available
to both parties. Agreement at senior management level to
participate in the program is important as it demonstrates
to others within the group that this is a concept the group
is taking seriously.
Where a business has agreed to engage in the process the
next stage is to conduct a risk review meeting. This will
lead to an annual tax risk management plan focusing on
agreed risk areas. If the business wishes they can invite
their tax advisers to attend the meeting.
As part of the discussion the case manager gives Revenues
view of tax risks for whatever taxes are being focused on in the
particular meeting. The business and the tax adviser are also
given an opportunity to present any areas of risk they have
identified. Systems within the business are then reviewed to
establish whether they have the capacity to identify and deal
with these risks. Finally agreement is reached on the tax issues
on which the business agrees to carry out internal reviews and
on which Revenue will carry out audits.
Risks addressed by groups dealt with by FIU have been
varied. Examples are:
Employer taxes:
Benefit in kind;
Termination payments;
Pension schemes;
Share option schemes;
Approved profit sharing schemes;
Expenses payments;
Directors remuneration.
VAT:
VAT rates applied to products;
Sales invoicing procedures and controls;
VAT treatment of non-routine or non-trading
transactions;

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a r t i c l e s
VAT repayment claims;
VAT treatment of customer rebates.
Corporation Tax:
Research and development relief;
Capital allowance computations.
Among the positive outcomes, resulting from cooperative
compliance, experienced by the FIU is:
Self-reviews have uncovered errors made on previously submitted returns. Monetary adjustments have been
made to rectify these.
Improvements have been made to groups internal
controls in order to minimise errors. In some cases this
has included the publication of guidelines for staff.
The case manager is informed at an early date of significant developments within the group.
Groups within cooperative compliance are more willing to approach the FIU for advice and interpretations.

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Therefore we are in a position to influence the correct

application of the legislation.
Audit and enforcement activities are targeted at the
groups presenting the highest risk.

Looking Ahead
In our view, cooperative compliance facilitates a professional and
pragmatic approach to the interaction between large businesses
in the food industry and the FIU. It also enables the FIU to
make more effective use of limited staff resources, in that we can
focus our resources on the areas of greatest risk. To-date the
response to the cooperative compliance approach has been very
positive. None of the groups dealt with by the FIU, who agreed
to participate in the program, have subsequently opted out. The
increasing number of requests for assistance and interpretation
from those engaged is evidence that cooperative compliance is
having a positive impact on compliance behaviour.

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a r t i c l e s

Electronic
Service
of Serbian LTU

Serbia
Suzana MITROVIC
Chief of Desk Audit Section,
Tax Administration - LTU
5 KRALJA MILANA ST,
BELGRADE,
TEL:
(381) 11 333 08 13
E-MAIL:
SUZANA .MITROVIC@PORESKAUPRAVA .GOV.RS

Ms. MITROVIC has been working in Large Taxpayer Unit

from its foundation in 2002. She was working as tax
inspector and since 2006 is chief of Desk Audit Section.
She graduated from the Faculty of Law, University of
Belgrade.

by Suzana MITROVIC

S
S

E-Communication as a Specific Quality

of Large Taxpayer Unit

ince its foundation in 2002 as part of a project named Modernisation of the

Tax Administration of Serbia, the Large Taxpayer Unit (LTU) has had a goal
of making electronic communications with taxpayers a possibility - especially
for the filing of online tax returns.
According to regulations governing the criteria for large taxpayers (LTP) and the
type of taxes for which the Large Taxpayer Unit is responsible, apart from their fiscal size, they have an obligation to meet certain technical equipment requirements.
The term technical equipment is defined as the ability of the taxpayer to be properly equipped to handle electronic communications with the tax administration,
which implies the ability to file tax returns online.
Online data capture from electronically submitted tax returns provides the opportunity for immediate checks on the format as well as the accuracy of the information.
The main goals of providing an electronic data capture service are achieved by having a more efficient, faster and economical form of communication which allows for
the development of a better relationship between large taxpayers and the tax administration whilst also easing the administration, processing and recording of tax
returns within the LTU. In addition to the electronic returns, employees of the LTU
are able to use this service to monitor large taxpayers on a regular basis and to also
have an insight into the state of each LTP.
The way in which tax returns are filed online, who may submit the return, its structure
and content, confirmation of receipt, registration procedures, etc. are set out in the
Regulations on the Online Tax Return Filing. The rules governing the submission of
online tax returns for legal entities (companies), entrepreneurs and individuals are also
regulated by these regulations. Currently, this option is only used by LTPs.
The choice of filing returns online was optional for LTPs up to 1 March 2008, when
the Law on Tax Procedure and Tax Administration was amended and filing returns
online became a legal obligation.
From the beginning of September 2007 the LTU intensified its activities in promoting the e-service. Desk auditors were phoning taxpayers and reminding them about
forthcoming changes in the legal requirements for the filing of tax returns online. The
Division for Communication and Taxpayer Service also prepared leaflets and wrote
articles within the Bulletin of the LTU about filing returns online, its advantages and
legal obligations. In February 2008 meetings with taxpayers were arranged and the e-

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a r t i c l e s
services and procedures for filing returns online were presented
to them. Since 1 March 2008 taxpayers can submit tax returns
for all taxes administered by the LTU including:
1. Corporate income tax;
2. Excise;
3. Value added tax;
4. Tax and contributions on salaries;
5. Tax returns for other withholding taxes (tax on non-life
insurance premiums, etc.)
According to the Law on Tax Procedure and Tax
Administration, amended tax returns cannot be filed online.

Service for receiving claims (currently in the process of

development): this will offer a list of options that are
processed by the LTU, the method of delivery (by post, email or personally), so that the user can choose the type of
request he/she is submitting and also the way of delivering
the results after the processing of the request.

Figure 2. LTU E-Service Interface

The Advantages of LTU E-Service

Figure 1

Online Services
The Large Taxpayer Unit provides the following electronic
services making daily communication with taxpayers easier:
Authorisation of users: provides authorisation of the user
by username and password. After successful verification of
the username and password, the service will allow changes
to password, selection of another service or to log out.
Receiving and processing tax returns: enables the user
to send their tax return in a pre-defined electronic format.
After receiving the data the service validates the information and based on that either, rejects the tax return with a
given reason for the rejection, or accepts the tax return data
and gives confirmation of acceptance.
Service for insight into state of taxpayers tax account:
gives an insight into the state of a taxpayers tax account by
checking their personal account sheets of liabilities and
payments.
Service for reviewing user activities: enables the user to
review submitted tax returns with the choice of printing
them or reviewing their own activities online in a sequential order. The activities recorded are authorisation, any
change of password, the selection of another service,
attempts to submit tax returns and their processing status.
Service users support: introduces the user to the choice
of services available to them and provides them with
detailed user instructions. It also describes the format of
electronic tax returns and gives examples of correctly completed returns.

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LTU e-service has multiple advantages for both taxpayers and

Large Taxpayer Unit.
Advantages for taxpayers are: faster and more economic way
of submitting tax returns, faster means of checking the accuracy of entered data and the luxury of an insight into the state of
the taxpayers tax account. The existence of this service enables
the LTU to carry out faster and more accurate administration
of all tax requirements and to meet the taxpayers rights.

The Aim
The aim the LTU is the introduction of the electronic signature as well as developing the service for receiving claims.
On 6 February 2009 the Tax Administration of the Republic of
Serbia and Public Enterprise of PTT Communications
Srbija signed the Protocol on Cooperation relating to the
implementation and use of qualified electronic certificates of
the certification body of PTT. After signing the protocol,
Serbian post became the first large taxpayer in the Republic to
electronically submit tax returns by using qualified electronic
certificates. Thus, the Serbian tax administration became the
first national institution to enable the authentication of users
by means of a qualified electronic certificate. Until May 2009
there was the option for taxpayers to choose between authentication by means of a qualified electronic certificate or by
using their password to access LTU services.
The primary goal of the Serbian tax administration is to provide
the facility for filing online tax returns for all taxpayers in the
Republic. This goal is a part of the E-Government project, as
one of the e-services for citizens and companies (EGovernment of the Republic of Serbia is a project which is
planned to reach completion sometime between 2009-2012).

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i n t r o d u c t i o n

raetment of Specific
Industries - Construction

he Area Group Treatment of Specific Industries - Construction met for the last time in
2009, their two meetings were hosted firstly by the Polish and secondly by the French
tax administrations in Szczecin and Paris respectively. Topics discussed included the latest developments in the construction industry in the IOTA region, cross-border activities and the
detection and prevention of money laundering in the construction industry.
The following articles are related to the topics addressed during the events:
From France Pascale COUPPEY writes about the fight against money laundering in relation
to the construction industry in her country.
Judit SZABO describes the recent changes in fiscal regulations affecting the construction industry in Hungary.
Marco VAN DER WAAL from the Netherlands summarises the role of the Large Construction
Projects Team within the Dutch tax administration.
Hedvig KRNEKULL from Sweden writes about the National Project on Facilitators, which
started in early 2006 and finished in 2008. The project examined how non-compliant companies
intending to evade tax were using different services to facilitate their tax evasion.

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Fight against
Money Laundering
in France

France
Pascale COUPPEY
Tax Inspector in charge
of the fiscal team, Tracfin French
Financial Intelligence Unit
11 RUE DES DEUX COMMUNES,
93558 MONTREUIL CEDEX,
TEL:
(33) 1 57 53 27 42
E-MAIL:
PASCALE.C@TRACFIN.FINANCES.GOUV.FR

Ms. COUPPEY after spending many years in the French

National Fiscal Investigation Department joined Tracfin,
the French financial intelligence unit whose principal
mission is the fight against money laundering and terrorism financing.

by Pascale COUPPEY

M
M

How to Define Money Laundering?

oney laundering can be defined as an offence consisting in giving a
legal appearance to funds proceeding from crime in order to hide the
origin of the profits and to get an income from the investment of the

funds.
Financial institutions and numerous non-financial professions can be misused
by criminals to launder their profits.
In France, there is a legal definition provided by the Article 324-1 of the Penal
Code which stipulates:
Money laundering is facilitating by any means, the false justification of the origin of
the property or income of the perpetrator of a felony or misdemeanour which has
brought him/her a direct or indirect benefit.
Money laundering also comprises assistance in investing, concealing or converting the
direct or indirect products of a felony or misdemeanour.
The sanctions are five years imprisonment and a fine of EUR 375,000.
The sentence is doubled in a case of aggravated laundering, like money laundering regularly committed or using facilities offered by the exercise of a professional activity or in an organised gang.
There is also a criminal liability of legal persons and individuals being responsible for these legal persons.
There are three stages of money laundering:
1. The placement.
It consists in introducing in a countrys financial system money coming from
criminal activity. The techniques used can be through market intermediation
and concealing strategies, with division and complicity.
2. The layering (or concealment).
People try to confuse the origin of the money by a proliferation of successive
banking or financial operations using different bank accounts, companies,
persons, products and countries.
The technique used is transformation like successive purchase and sale of
payment tools, transferable values, real estate properties, etc. or can transit
from bank accounts to bank accounts.
3. The integration (or conversion).
It consists in investing funds of criminal origin in the legal economy circuits
and making a profit out of it.

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Different techniques exist: real estate or financial investment, purchase of pieces of art, industrial investments,
insurance products, etc.

Presentation of Tracfin, the French

Financial Intelligence Unit (FIU)
Created in 1990, Tracfin (Traitement du renseignement et
action contre les circuits financiers clandestins) was previously
linked to the Customs Department. It is now a unit with
national authority and competence, within the Ministry for
Economy, Finance and Industry.
The total number of staff is 70 officers who are mostly customs officers except two colleagues from the judiciary
police and tax administration. A legal advisor assists the
director of Tracfin. Most of them are involved in the investigation departments.

Mission of Tracfin
Various services are part of the French anti-laundering prevention and detection work:
Professionals are due to submit reports about all
detected suspicious transactions;
Tracfin is the only national service entitled to receive
these suspicious transaction reports;
The role of a FIU is to collect, to analyse and to transmit the financial information.
Tracfin is the only national service dedicated to the reception of suspicious transaction reports (STR). It must be
informed about amounts or operations that could relate to
the proceeds generated by an offence punishable by a
prison sentence higher than one year.
Tracfin collects, analyses, improves and exploits all information to establish the origin or destination of flows which
is reported in the STR.
Tracfin must inform the judicial authorities about cases which,
after analysis, seem to be related to cases of money laundering
involving offences punished by a year of prison or more.
Tracfin can inform foreign FIU and some special administrative services (tax, customs, and intelligence services).

Professions subject to the reporting obligation

There are two kinds of professionals who must submit
STRs financial and non-financial ones.
Finance-linked professionals are:
Banks and credit institutions;
Insurance companies and brokers;
Mutual companies and provident societies;
Investment companies, broking firms and UCITS
(Undertaking for Collective Investment in
Transferable Securities);
Currencies exchange establishments.
Non-financial categories are:
Real estate agents;
Casino managers, gaming houses, sport bets and horseracing tips;

80

Sellers in high value goods and art works;

Chartered accountants and auditors;
Notaries, bailiffs, lawyers, receivers;
Auctioneers;
Domiciliation firms as trust company service
providers.

The scope and processing of the suspicious transaction report

At the beginning of Tracfin activities, only drug trafficking
was targeted.
The following activities were added at a later stage:
Organised crime activities (1993);
Terrorism financing (2004);
Fraud to financial interests of the European
Communities (2004);
Bribery (2004).
Since 2009, all other offences punishable by more than a
year of prison are targeted. Therefore fiscal fraud is one
offence that must be reported.
Tracfin receives STRs from entities which are reporting on
suspicious activities. There are numerous contacts between
investigators and professionals to analyse some money
laundering schemes.
At the end of the analysis process, Tracfin informs the
prosecutor or other accredited administrative departments
for intelligence purpose.

Tools of Tracfin
Tracfin have access to various data (police, tax authorities,
customs, intelligence, supervising authorities and all
administrative departments).
The FIU has the legal right to obtain tips and documents
from professionals, subject to the anti-money laundering
rules, to hand over any file or document related to a transaction.
Professional confidentiality can not be claimed towards
the department.
Tracfin can freeze a transaction in the case of suspicion, for
up to two working days. Confidentiality of data means that
we must not disclose the identity of the informant to the
judicial or even government.
Confidentiality is given to any source of information. For
instance, by law, the source of intelligence is never communicated to justice.
Moreover, a protection of professionals (managers and
employees) reporting a suspicion in good faith exists. They
are legally protected by an exemption of their obligation of
professional confidentiality (no tipping-off to the clients)
and civil liability in case of damage resulting from the STR.

Carrying out an investigation

The first step is the analysis of the financial flows in order to
check the economic justification, expecting to determine the
type of money laundering (placement layering - integration).

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The FIU have an access to financial information thanks
to our capacity and ability to request additional information from the professional entities subject to the fight
against money laundering (AML) system (operations carried out and identify documents), the Bank Account
Register (Fichier des comptes bancaires - FICOBA). The
purpose is to confirm or not the suspicion and find possible links.
A check of commercial databases concerning French or
foreign companies is possible.
A second step consists in the analysis of the background
through various databases, criminal and intelligence data.
Tips are coming from other French services and administrations, such as central office for the suppression of serious financial crime, tax authorities, customs, supervising
authorities, state and local authorities services and social
security institutions.
An active collaboration with foreign FIUs, (by the
exchange of information subject to reciprocity and confidentiality) also permits a close follow-up of the flows.

The international activities of Tracfin

Tracfin is empowered to exchange information directly
with foreign FIUs. Exchanges with these departments are
possible under three conditions:
1. Similar powers aimed at fighting money laundering
and terrorism financing;
2. Same obligation of professional secrecy;
3. Reciprocity.
Tracfin is also present in the Financial Action Task Force
(FATF) consisting of 170 countries. It is an international
organisation of reference, who defined standards for antimoney laundering and terrorism financing (AML/TF) with
40 recommendations and 9 special recommendations concerning terrorism funding. Exercises dealing with various
typologies and strategic surveillance works are developed.
Every FATF member is subject to a mutual evaluation to
assess the reality and effectiveness of the implementation of
the recommendations. France will be evaluated in 2010,
Tracfin will be involved as the others actors of the French
AML/TF system.
Tracfin is a founding member of the Egmont Group of
Financial Intelligence Units, which is an operational
framework to exchange operational information by a
secured computer network (108 members). Tracfin is taking part in several working groups and supporting various
countries to help them join the Egmont Group.
At the European level, Tracfin works within the EU FIU
Platform, a group of 9 countries, whose purpose is to highlight not also similarities between AML/TF and data protection and also the difficulties to match them.
About 35 memoranda of understanding (MOUs) have
already been signed by Tracfin. The latest ones were signed
with Monaco, Switzerland, and Liechtenstein.The very last
one was signed with China, during summer 2009.

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The implementation of the Third

EU Money Laundering Directive
Recently adopted in the French law (Statute of January 30,
2009), in order to integrate the revised FATF recommendations, the scope of the STR has been extended to any
offence punishable by a prison sentence higher than one
year.
A specific treatment focuses on tax evasion with the possibility to receive operation which can come from fiscal fraud
and to authorise communication about any operation concerning the fraud.
This implementation involves, also for the professionals,
due diligence on a risk-based approach (different levels of
diligence: enhanced and simplified diligence).

Money Laundering Typologies

in the Construction Industry
Different typologies exist in the construction industry:
The illegal practice of banking business through undeclared work;
False subcontractors and money laundering related to
this offence;
Bribery and money laundering including real estate
investments with an international background.

Illegal practice of the banking business through

undeclared work
A tobacco shop owner who is also retailer for the national
lottery owns two bank accounts.
The account A is dedicated to tobacco and press, and the
account B to the national lottery games. According to the
French law, no link is allowed between these two accounts.
This individual receives checks from a French construction
company on his account A for an amount of EUR 150,000.
He sends EUR 150,000 in cash to these construction industry companies by using the money of games and lottery.
In order to regulate the operation, he sends EUR 150,000
in cash from the account B to the account A. With the cash
received, the construction company pays illegal workers.
Similar cases have been found with other facilities, such as
perfume shops, travel agencies, and prepaid telephone cards.
Any business involved with a lot of cash is an easy target for
money laundering in the construction industry.
This first example shows the strong need for cash in the
construction industry, the various uses of this cash, the
ways to get it, and the links between the construction
industry and other businesses.

False subcontractor
A construction company is working with numerous subcontractors (a common practice in such a business).
Subcontractors are interim work companies. Expenses are
paid by the interim work companies.
Behind a quite normal situation, and after several inquiries,
it appeared that:

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The capital of the interim work companies is owned by
the head of the construction company;
Payments made by the interim work companies have
no economic purpose and are not related to their businesses (travels, luxury vehicles, jewels);
Same registered office for all the companies.
Therefore the fraudulent setup of the interim work companies appeared clearly. It was done on purpose to pay expenses
on behalf of the owner of the construction company.

Bribery in the construction industry overseas

A drilling company obtains a public procurement contract
from a Central African country; a politically exposed per-

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son (PEP) opens a bank account in Belgium. This PEP

receives a money transfer from a French company.
After a few months, this PEP buys a house in France with
money from the account in the Belgian bank.
Oil business is a sensitive sector, and Africa is known to
be a quite unstable area, vast amounts of money are
involved.

Conclusion
The effectiveness of the fight against money laundering
and the sources of terrorism funding require an involvement of every entity, public and private, at both national
and international levels.

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Recent Changes in
Fiscal Regulations
Affecting the
Construction
Industry
in Hungary
by Judit SZABO

Hungary
Judit SZABO
Tax Auditor, Central Hungarian
Regional Directorate, Tax and
Financial Control Administration
HALLER U. 3-5,
BUDAPEST 1096,
(36) 1 299 5086
TEL:
E-MAIL:
SZABO.JUDIT@APEH.GOV.HU

Ms. SZABO has been working for the tax administration

since 2006. She belongs to the Large Taxpayers Audit
Department in the Central Hungarian Regional
Directorate. Judit graduated in economics in 2004.

Introduction

here is a large number of enterprises on the Hungarian construction

market. According to official statistics the total number of enterprises
in the construction sector was 95,101 in 2007, 94,456 in 2008 and
97,996 in June 2009. One of the reasons for this high number may be that since
September 2007 the minimum equity capital required for setting up a company decreased significantly. In the case of limited liability companies the amount
declined from HUF 3,000,000 to HUF 500,000 (from EUR 11,103 to EUR
1,8501), in the case of private limited companies it decreased from HUF
20,000,000 to HUF 5,000,000 (from EUR 74,019 to EUR 18,5051). At the
same time the registration process became shorter.
Inspections by the Hungarian tax authority, Hungarian Tax and Financial Control
Administration (Ad s Pnzgyi Ellenrzsi Hivatal (APEH)), have found an
extremely high rate of tax deviances in the construction industry, which created
competitive disadvantages for enterprises complying with the legislation compared
to non-compliant enterprises. One of the typical cases, when construction companies created economic events on paper, the sole purpose of which was to avoid paying VAT, and even if possible, to claim VAT refund. Another typical feature of the
construction industry is the high rate of black or grey labour practices, for example,
a high ratio of non-registered workers, and the practice of workers paying tax on a
lower amount than their real wages.
The above-mentioned phenomena create, in turn, a further unlawful tax practice, the use of false/fictitious invoices, which has become increasingly common, harming greatly the state budget. The employment of non-registered
workers significantly defrauds not only the state and the social security funds
but also the employees, as the non-payment of social contributions risks their
later entitlements to health care and pension insurance as well.
This article reviews some main changes in the fiscal regulations in the
Hungarian construction industry and also focuses on the tax administrations
approach and activity in this field.

Reverse Charge System

One of the most significant changes in Hungary related to the construction sector was the introduction of the reverse charge system. The reverse charge sys1) Based on an exchange rate HUF 270.20 = EUR 1

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tem had already been in use before the tax year of 2008 in
the Hungarian fiscal regulation. Until 2007 the reverse
charge covered the following transactions:
Intra-Community supply of goods;
Waste processing;
Services affecting non-EU Member (third) States;
Intra-Community services.
According to the Act CXXVII of 2007 on Value Added Tax
(hereinafter referred to as New VAT Act) these transactions continue to be subject to the reverse charge, but the
new legislation extended the scope of this system, effective
1 January 2008, on the construction industry as well.
As regards construction industry, VAT has to be paid by the
taxable person acquiring the goods or services in connection with:
The actual handing over of a building structure (part of
a building) under a building contract;
Construction, maintenance, janitorial, cleaning, management, repair, remodelling and demolition services
relating to immovable property.
The definition of services subject to the reverse charge in the
New VAT Act as of 1 January 2008 affected almost all persons taxable in VAT, that is, all of construction, maintenance,
janitorial, cleaning, management, repair, remodelling and
demolition services, which relate to immovable property.
The amendment of the New VAT Act, effective from 1
May 2008, substantially narrowed the scope of services
subject to the reverse charge. Since then, the reverse
charge only applies to services that meet each of the following three criteria:
1. The service is related to immovable property;
2. The service is related to construction, maintenance
(e.g., masonry, digging, painting, coating, etc.) or
other technical work (e.g., electrician, water installation, pipeline installation, heating installation, etc.);
3. The establishment, expansion, remodelling or other
changes (including the demolishing services) of the
immovable property requires permission from the
building authority.
It is important to mention that in the VAT system immovable property includes not only buildings in the classic
sense but also concerns other structures, for instance,
pipelines, electrical equipment, etc. In this New VAT Act,
building authority means any authority that may issue
permission for building or demolishing (e.g., building
authority of local government, mining supervision, authority for communication of information, transportation
authority, etc.)
Multi-layered subcontracting chains are common in the
construction services. In order that each member of the
chain is aware that his/her service is part of an activity subject to permission, and that reverse charge is applied uniformly to all points of the chain, the customer is obliged to
notify the supplier of the services in advance and in writing
that the activity is subject to permission (i.e., the principal

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notifies the main contractor, the main contractor notifies

the subcontractors and the subcontractors notify further
subcontractors in the chain). Certainly, in case of the customers failure to notify the supplier, the service provider is
not exempted from using reverse taxation, if the service
related to immovable property is subject to permission.
By implementing the reverse charge system the challenge
for the tax authority was similar as for the taxpayers. In 2008
the tax administration declined to impose penalties related
to the New VAT Act because of the uncertainty of the correct application of the new regulation. According to the
principles of the Act on the Rules of Taxation, the actions of
the tax authority must be equitable and reasonable.

Some Examples of New Types of

Unlawful Practices in the Construction
Industry Related to the Reverse Charge
In direct taxation, construction enterprises had two main
goals: to minimise the obligation of paying VAT; and to
find legally valid methods to conceal the product of black
labour. After 1 January 2008 the new types of unlawful
practices can be categorised into two groups: those which
aim to achieve both goals; and those that only aim to make
the output of non-registered workers legal by issuing and
using false/fictitious invoices.
1. There are three types of practices in which economic
events are falsely documented in direct taxation
instead of reverse charge:
According to the New VAT Act the reverse charge
has to be applied to construction and maintenance
services, or other technical works that are related
to the establishment, expansion, remodelling or
other changes (including the demolishing services)
of the immovable property, provided that the
establishment, expansion, remodelling or other
changes of the immovable property requires permission from the building authority. In this case
the customer must notify the supplier of the service on this fact in advance and in writing.
Taxpayers sometimes construe this latest condition to their benefit, and try to convert the transaction that is subject to reverse charge into a direct
taxation event by failing to notify the supplier or
by using a false statement to notify the supplier.
The value of the transaction is shifted towards the
cost of materials. Companies try to separate transactions into a lower-value service transaction, subject to reverse charge, and a supply of goods transaction, subject to direct taxation, sometimes by
falsely attributing a transaction to another person
(e.g., a vendor of the building material), who differs from the issuer of the service.
Services subject to direct taxation are invoiced at a
higher price than their real value (e.g., consulting
services or project organising services).

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2. Construction companies issue invoices according to
the rules of reverse charge, but because black labour
was used in construction the output is legalised using
fictitious/false invoices.

Fight against Black Labour

The rates and taxes on labour (social contributions, taxes)
create a great incentive for companies to employ non-registered workers. This practice is widespread especially in
the construction industry. In order to combat black labour
the tax inspection rules have become stricter and the following possibilities are available for the tax authority:
Assessment by estimation
From 1 January 2008, if a taxpayer employs a non-registered employee, the tax authority may establish the
amount of unpaid taxes and contributions on the presumption of at least three months employment. If the
tax authority finds the same taxpayer at fault of employing any non-registered employee repeatedly within the
term of limitation, a penalty will be imposed. The
penalty equals the amount of unpaid taxes and contributions for the period between the beginning of the
previous inspection and the beginning of the current
inspection, factored by the average number of non-registered employees found by the inspections, calculated
by presumption. However, the taxpayer has the right to
present evidence to contest the amount of tax arrears
assessed by estimation by the tax authority.
Amendments relating to penalties
From 2008 the Act on the Rules of Taxation allows the
tax authority to apply heavier penalties.
From 1 January 2008 taxpayers have to be fined
for the employment of non-registered employees,
currently or previously, up to HUF 1,000,000
(EUR 3,700) per employee. If the employer does
not comply with its reporting obligation or fails to
perform the reporting obligation in accordance
with the legal provisions, the upper limit of the
penalty is calculated by multiplying the number of
employees not registered by the highest amount of
the penalty otherwise applicable to the taxpayer as
prescribed by law (which is HUF 1,000,000 from
1 January 2008). When imposing a default penalty, the tax authority weighs all prevailing circumstances of the infringement, particularly its gravity and the frequency of the taxpayers unlawful
conduct (actions or negligence). Upon weighing
the circumstances, the tax authority may impose a
penalty that is consistent with the gravity of the
offence or may refrain from imposing a penalty.
From 1 February 2009, a penalty of HUF 500,000
(EUR 1,850) per non-registered employee may be
imposed on any individual (and on his/her direct
superior) who is required to meet the reporting
obligation based on his/her scope of duties.

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On-site inspections
The tax authority aims to increase the number of spot
checks in order to have a deterrent effect on non-compliant construction companies. The information
gained from these site visits can be used for postinspections as well.
Simultaneous audits
APEH has good cooperation and it conducts simultaneous audits with the employment authority, the customs authority and the police in order to fight against
black labour.
Clarifying the employment relationship
From 1 January 2009, according to the Act on the
Rules of Taxation, if the tax authority finds any nonregistered employee at a company, it informs the
employment authority and the health insurance administration agency in order to clarify the employment
relationship and forwards a copy of the tax administrations findings.
Taxpayers on the APEH website, who failed to
register their employees
The tax authority publishes on its website the corporate name, the place of business and the tax number of
those taxpayers, which according to the legally binding decision do not meet the obligation to supply the
personal data, the tax identification code, the nationality, the weekly work time, etc. of their employees to the
competent tax authority. The data of taxpayers published on this website will be cancelled 2 years after the
publication date, provided that the taxpayer does not
commit again the infringement, which caused the publication of their data.

Other Modifications to Hungarian

Regulations in 2009 Concerning
(Directly or Indirectly) the Construction
Industry
The regulations of the issue of invoices and the penalties
changed significantly from 2009.
Changes relating to invoicing
The taxpayer has to issue an invoice if he/she receives
an advance payment of at least HUF 900,000 (EUR
3,330) from a private individual or a non-legal entity, in
other words, from a person who is not subject to VAT
and is not entitled to deduct VAT. If the value of the
performance including VAT exceeds HUF 900,000 and
the services or goods are provided to a private individual or a non-legal entity, a cash receipt is not sufficient;
the taxpayer has to issue an invoice even if the customer
does not request it. Prior to this change, an invoice had
to be issued to such a person only if he/she expressly
requested it.
Paying VAT in the case of false/fictitious invoices
If an invoice was issued without real performance of
service or supply of goods, VAT payment may be avoid-

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ed only in cases when the issuer of the invoice certifies
that the performance failed to occur, or it was not performed by the issuer. The issuer also needs to invalidate
the invoice immediately and notify the addressee of the
invoice about that amendment.
A new type of responsibility in public procurement
Joint liability came into force 1 February 2009 for public procurements. The contractor can settle payment
(without VAT) to the subcontractor only if the subcontractor provides a tax certificate of negative tax liability, or the subcontractor is on the list of taxpayers with
negative liability before the date of payment. These
methods are necessary to verify that the subcontractor
has no public dues. This regulation applies to settlements, where the amount (without VAT) exceeds HUF
200,000 (EUR 740).
Higher penalty
From 1 February 2009 in cases when tax arrears relate
to the concealment of revenues or the falsification or
destruction of documents, books or records, the rate of
tax penalty to be imposed is 75% of the tax arrears,
instead of the earlier 50%.

Tax Changes Due to Take Effect from

2010 concerning (Directly or Indirectly)
the Construction Industry
The Government submitted a bill to the Parliament requesting various tax law amendments for 2010. The primary objective of the proposed tax law package for 2010 is to make the tax
system more transparent. I note below the major planned
changes that may affect the construction industry.
Several minor tax types will be abolished:
The employers contribution (rate: 3%) will be
repealed;

The employees contribution (rate: 1.5%) will be

included in the individual health insurance contribution, and, as a result, the individual health
insurance contribution rate will increase to 7.5%
from the current 6% rate.
It is expected that the liability to pay cultural contribution will be discharged as of January 2010 (prior to this
change 0.2% tax was charged on the direct cost of
buildings and structures).
The tax on labour paid by the employers will be
decreased (e.g., a 27% contribution will need to be paid
on wages instead of the current 32%, and the liability
to pay the amount of HUF 1950 (EUR 7) as health
care contribution per employee per month will be
abolished).
The tax allowance introduced in 2009, which decreased
the personal income tax by 30% of the invoiced value
of household related services (e.g., renovation, cleaning, etc.), will be cancelled. The maximum amount of
the tax allowance in 2009 was HUF 100,000 (EUR
370) per year, which could be utilised in full only if the
total income of the private individual did not exceed
HUF 3,400,000 (EUR 12,583).

Summary
The amendments in the Hungarian legislation for 2009
and 2010 are mainly the result of crisis-handling measures.
Due to the new legislation, higher penalties and stricter
inspection rules related to the construction industry, the
income in the state budget is expected to increase, but all
the abuses in this sector will not be eliminated. With
regard to the reverse charge system, the tax authority will
have to face new tax avoidance techniques, changes in taxpayers illegal practices, and new risk factors.

Resources:
Alexandra, Farkas. Reverse charge from May 1, 2008, Tax Journal, Issue 2008/10, 22-28.
Alexandra, Farkas and Tams, Verbai. Reverse charge in the VAT system, Tax Journal, Issue 2009/10, 33-41.
The Act CXXVII of 2007 on Value Added Tax
The Act XCII of 2003 on The Rules of Taxation
www.apeh.hu

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Tax Activities
within the
Dutch
Construction
Industry

by Marco
VAN DER WAAL

Netherlands
Marco VAN DER WAAL
Project Manager (Horizontal
Monitoring Municipalities),
The Netherlands Tax and Customs
Administration
TEL:
E-MAIL:

(31) 183 656259

MC.VAN.DER.WAAL@BELASTINGDIENST.NL

Mr. VAN DER WAAL is the Dutch representative on the

IOTA Area Group Treatment of Specific Industry
Construction. Since 2002 he has been a member of
the Team Large Construction Projects Netherlands. He
has 16 years experience of tax auditing large businesses and municipalities. Since 2008 he has worked as a
national project manager (Horizontal Monitoring
Municipalities).

his article is partly based on presentations made during the meetings

of the IOTA Area Group Treatment of Specific Industries
Construction. It contains information about the team Large
Construction Projects Netherlands and site visits.

T
The Team Large Construction Projects Netherlands
Since 2002 the Team Large Construction Projects Netherlands coordinates
the supervision of large construction projects, it is organised together with the
13 tax regions in the Netherlands. Specific knowledge of the construction
industry is shared. The team is small and the only permanent members are a
project leader, two audit/control leaders and a secretary. The team is also composed of tax experts and tax auditors, who rotate periodically, from the regions.
The offices in the regions are and remain responsible for the staffing of the project and monitoring the project. The team has an alert, supportive and advisory role.

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The Team Large Construction Projects Netherlands has
the following tasks:
Coordinating the supervision of large construction
projects (unity of policy and implementation);
Organisation of the supervision together with the
regions (including advice on the most efficient and
effective approach and assistance);
Collecting, preserving and transfering the specific
knowledge and expertise and maintaining the network.
The team provides the regions with the opportunity to
transfer skills and knowledge from the region to the team
of joint ventures, foreign contractors and the like who
almost exclusively work on major construction projects.

International cooperation
The international risk strategy remains one of the spearheads for the team. Often, taxpayers abuse the fact that fiscal control usually stops at national borders. The team has
wide experience in investigations involving international
cooperation. Thanks to the efforts of the national department, the Fiscal Information and Investigation Service /
Economic Investigation Service (FIOD-ECD), international contacts can be quickly made.
In January 2008 the team gave a seminar in Vilnius
(Lithuania) on the monitoring of major construction projects. This seminar was based on collaboration between the
FIOD-ECD and the Lithuanian Government in the context of accession to the European Union. During the
course of the event, the approach of the team towards law
enforcement was discussed. Lithuania was particularly
interested in the Dutch risk matrix, intercompany pricing,
and working in the present-day, site-visits, horizontal monitoring and chain liability law.
In July 2007 the IOTA Area Group Treatment of Specific
Industries Construction was formed, mostly driven by
the high tax risks in the construction industry. 31 tax

88

administrations participated in this Area Group. Marco van

der Waal is the representative in this Area Group from the
Netherlands, assisted by Harm Kraal.
In 2008 three Task Teams (within the IOTA Area Group)
were formed to undertake a detailed study on audit
methodologies, subcontractors and false/fictitious invoices
in the construction industry. The Netherlands was part of
the Task Team on false/fictitious invoices along with 9
other IOTA Member tax administrations.

Supervision
The main task of the Team Large Construction Projects
is the intensive monitoring and implementation of large
construction projects. The team will ensure an evenly balanced distribution of control over the various projects and
regions. Risk selection takes place on specific information
on what is going on at the construction site, instead of the
tax declarations. The knowledge and expertise of the team
can be shared with the other regions. Contract management (risk analysis, detection and prevention) is the core of
the supervision.

The monitoring of major projects

The Team Large Construction Projects supports regions
in identifying and selecting large construction projects
where intensive tax control is needed. Regular consultations are held with the regions. Cooperation with the
region is designed to monitor a large construction project
by a region and make it as accessible as possible and to
obtain maximum benefits from synergies and knowledge.
The team makes their knowledge available to the region on
the approach and the specific tax problems of large construction projects and provides access to a network of internal and external partners. The decision to effectively control a project is researched in advance through the region.
The competent region can get advice on the approach of
this research from the team. After the
preliminary investigation by the region,
in consultation with the team, it will be
decided whether a project will be supervised. The competent region defines
the objectives of the tax supervision of
the project and provides the necessary
employees for the monitoring (contract
management). The competent region
also decides on the intensity and duration of the supervision. The trend is
towards more qualitative objectives,
such as visible control, increasing compliance and innovation. The supervision/monitoring includes basically all
processes (including land acquisition,
grants, financing, construction, project
development and operation), unless
otherwise decided by the region.

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Supervision/monitoring includes accounting, contract
management, monitoring, charging and collection and
includes all taxes.
The contract management (risk detection and prevention)
is the core of the tax supervision on large construction projects. Characteristic of this approach is specific information
on what is going on at the construction site instead of the
tax declaration, as already mentioned. The contract management is a continuous current tax assessment made of
risks associated with the implementation of the project.
This will include a judgement about the internal control
and administrative organisation of the construction company. Therefore interviews will be held and site visits will
be organised. The purpose of the contract management is
to identify and minimise risk at an early stage. This kind of
supervision also has a preventive effect. A part of the contract management concerns horizontal monitoring. This is
focused on risks that otherwise would not, or after a while
will be covered. A manual has been developed which sets
out the approach of the team. Important tools are included
in the manual. An example is a risk matrix, where each type
of construction, each process and the risks are described
and elaborated. The approach is customised and is continuously evaluated.
The team considers of importance that the resources are
used on those projects where they will be most effective.
For this reason the team makes a distinction between these
groups of projects:
Top projects
Supervision/monitoring of national importance.
Criteria in this case aim to relate the financial scope of
the project, minimum size of share contracts, substantial international tax issues and social impact. Top projects should at least be involved in supervision/monitoring in cooperation with the Team Large
Construction Projects Netherlands and the region.
Other major construction projects
The value of the project should be a
minimum of EUR 250 million.
Furthermore, the extent and nature
of the likely risks involved. The
region has to arrange the capacity
for the supervision. Maximum
responsibility at the region and horizontal monitoring are priorities.
Consulting
These projects do not meet the size
criteria, but the region is still monitoring these projects. Upon request, the
Team Large Construction Projects
Netherlands advises on possible ways
of supervision/monitoring.
House Building
In recent years it was concluded that
the approach of the team was not

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effective for large projects that are actually a sum of many

small subprojects. This conclusion was particularly for
infrastructure projects involving offices building projects
and shared contracts. In 2008 an evaluation was completed regarding housing and urban development projects.
The conclusion was that the Team Large Construction
Projects Netherlands did not add much value. The
regions can organise the supervision/monitoring itself.
The team pointed out interesting signals to the regions at
this moment, concerning the housing and urban development projects.
Prior to the establishment of the team in 2002 a project was
undertaken on the construction of the Betuwe Route
(goods railroad line from Rotterdam to Germany) and the
HSL project (high-speed railroad line from Amsterdam to
Belgium). The approach was so successful that the Team
Large Construction Projects Netherlands was founded.
Since 2002 many other big projects were effectively supervised and monitored by the team, with good results.

The future plans

Based on media sources, the Netherlands had a large number of major construction projects planned or already started. These involved some 25 major projects, including
approximately 14 power plants and some major railroad
and highway lines. This knowledge led to the needed
investment forecast for the coming years. Within the next
two years several large projects will be launched that will
need to be reviewed by the team. The team makes its
choices for the coming years, based on the geographical
distribution of projects, diversity of projects and anticipated tax risks. Key projects are large infrastructure projects
and industrial investment. These investments will be monitored over the coming years by the team and the regions.
We also expect some large public infrastructure investments will be auctioned because of the accelerated economic downturn.

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The Team Large Construction Projects strives to the
combined interests of the tax administration and the construction industry, so that we continue to expand in the
future. Monitoring better reflects the actual construction
period. The team wants less emphasis on surveillance and
repressive control. The major contractors are already
familiar with the supervision by the team. They know the
way of working and some of them fit their organisation
accordingly. They are increasingly willing to cooperate.
Last year there was contact between the Team Large
Construction Projects and the tax administration responsible for the largest contractors and experiences were
exchanged. It was agreed that the Team Large
Construction Projects would be involved in horizontal
monitoring of the possible major contractors. The aim is to
deal with the contractors head office and agree a plan on
horizontal monitoring on large construction projects.

Site Visits
Site visit within contract management
Part of the contract management is to undertake site visits.
These are measures to prevent or identify the presence of
high risk subcontractors. A site visit is an audit/compliance
tool. Tax officers are allowed to go to a construction site
and interview the workers. A lot of information is obtained
regarding the workers engaged on the site and also the
contracts that have been undertaken there.
With this information we can build a strategy for the use of a
site visit as an audit tool. Various objectives can be formulated.
Also the scope of the site visit is dealt with within this strategy.
The team has site visit specialists and they organise a site
visit. In 2008, the team started working with fiscal invigilators deployed for visibility observations. In 2008, the team
held five site visits, where 235 persons were interviewed.
These site visits were organised together with employees of
the Aliens Police and the Labour Inspection Office. The
contract managers have also held a small number of specific
site visits on their own projects. It is also possible to do a site
visit in cooperation with other governmental organisations, not related to
direct actions of Team Large
Construction Projects Netherlands.
Furthermore, the site visit specialists
provide training courses for other colleagues on Doing a Site Visit on a
Construction Site and How Can I
Recognise False/Fake Identification
Documents?.

The question who are you can be issued, based on the

Identification Law;
Everybody from 14 years old and up is obliged to show
his/her ID papers when they are at their job;
Also there is an obligation to show ID papers based on
Wage Withholding Tax Laws;
All the other questions, such as who is your employer and
since when, can be issued based on the General Tax Law
(everybody is obliged to give information concerning
their own tax issues) and the Social Security Laws.

Objective of site visits

The primary objective of a site visit is risk detection. For the
use of risk detection it is of great importance that we know
which persons and companies are active on a construction
site. Risks are for instance black labour, foreign employees
who are obliged to pay Wage Withholding Tax, unknown
subcontractors and permanent establishments of foreign
companies. It is of great importance that we get an overview
of employees who are working at the construction site.
Many of the main contractors file employee movements in a
labour report. This is usually done by filing a list of who is
present at the first coffee break at 9:00am (on our request).
Thats why we speak of 9:00am Lists. Also some construction sites have closed electronic gate systems that can be
used to follow the flow of labour.
The site visit can be used as to verify the accuracy and completeness of the 9:00am listing procedure. If this procedure
has no flaws, we can use it for analysis and we can generate
risk signals based on these 9:00am Lists. Supervision on
the flow of labour by the main contractor with the use of
the 9:00am List is an example of horizontal monitoring.
We have to bear in mind that the 9:00am Lists show a
continuous process of the flow of labour and that a site visit
is just a snapshot in time. We can execute a site visit together with our external partners and with a lot of people, or we
can execute it with only two men. It depends on the scale
of the site and what we want to achieve.

Legal framework for site visits

During the site visit we ask the people
we meet who they are and for whom
they work. The legal framework on
which we can execute a site visit in the
Netherlands is:

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If a main contractor does not have a procedure around the
9:00am Lists, we will have to execute many site visits to
get an insight on the flow of labour of a project. As already
mentioned the site visit is a snapshot in time, 9:00am
Lists gives a better insight over a longer period.
At the start of a construction project we usually execute a site
visit on a large scale with all of our external partners. As soon
as we have an insight of the general procedures we can decide
to execute a smaller site visit. We can aim these smaller visits at
a specific target, such as an individual subcontractor. Based on
the outcome of these smaller observations we can decide to
scale up the observations and execute a large one.

Preparation phase of site visits

At the beginning of the contract management we send a
letter to the main contractor in which we announce that we
can execute a site visit at any time during the entire period
of the project. We also explain the legal framework and
how we perform a site visit. Finally we tell the main contractor which data and documents will be needed during
the site visit. As soon as a site visit is
scheduled, we contact our external partners to decide if the site visit needs to be
executed together. Our external partners are:
Labour Inspection: for audit on
Foreign Labour Law, minimum
wages and ID document experts;
Aliens Police: for transport of illegal
workers, ID document experts and
fines on missing ID documents;
Employee Insurance Agency: for
audit agency for the employee
insurance;
Customs: for audit on trade mark
fraud and on excise.
We survey the construction site at
entrance and exit points, safety issues,

where on the construction site are people working, what kind

of work is done and how many people are working there. The
next step is forming the teams: interview teams interpreters,
gate keepers and back office. Our experience is that by using
interpreters we can get better and more information from the
employees. All the information that has been gathered is put
in a plan. This includes the objectives of the site visit and the
people involved. Finally the interview forms and safety equipment are prepared.

Execution phase of site visits

After preparing a site visit the next step is the execution of
the visit. First of all there will be a briefing session for all
the people who are participating in the site visit. We go
over the plan and any necessary adjustments are made.
Everybody will be informed about his or her tasks and safety issues will be announced. The procedure with the back
office is also highlighted. The next step is to go to the
building site all together. The main contractor will be
informed that we are about to execute a site visit. We will

ask if there are any specific safety issues

we have to deal with and the 9:00am
Lists of the day will be requested and
copied. As soon as the signal has been
given to start with the interviews we will
access the site. Gatekeepers are positioned at the access and exit points, so
we can secure the surroundings and
have total control of anyone entering or
leaving the site. Everyone will be interviewed, even visitors or truck drivers
who are only delivering goods.
The team members will start to interview
the workers. We will stop the work, but
we do not interfere with critical procedures such as the pouring of concrete. In

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such cases we will wait until it is finished. Everything is done
in cooperation with the site foreman. Most important of all:
keep in mind your own safety! We do not chase people who
flee the site. We discuss those issues with the foreman and we
will ask the main contractor his/her opinion on those issues.

Before starting interviews of the workers on the construction

site, we put on our safety equipment and enter the site. On top
of the interview form there is some general information about the project, the
date and the place of our observation.
Currently the interview form is available
in many languages. After we have identified ourselves to the workers and tell them
the objective of our site visit, we ask who
they are and if they have some kind of ID
paper on them. We register all personal
data and address data on the form. We
also record the data on the ID document
itself. One of the practical problems that
we run into is that most of the workers on
the building site do not have their ID
papers on hand. They are usually kept in
their cars or in the dressing room lockers.
Some of them do have a copy of their ID
papers on hand. If these copies are of
good quality we will accept those just in
case their car or dressing room is too far away. In case of doubt
we will gather the persons with no ID paper and go with them
to their cars or dressing rooms to check their original documents and fill in the forms. We also inform them about their
obligations with the ID papers. We also question them about
the kind of work that is performed, when did they start at the
project and when do they expect that the work is finished. Also
we ask who their employer is. It is important to ask further to
ensure that you establish the actual employer. In many cases

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they will give the name of some subcontractor that hired their
employer. Also they can work for an employment agency. It is
important to get to know who is actually paying their salary.
We also try to track and trace self-employed persons. These
are entrepreneurs without personnel. If someone is a selfemployed person we ask who hired
him/her and when he/her was hired. We
also use a back office. When we perform
a site visit we have someone over at the tax
office that is able to check our databases.
If there is any doubt about the information that a worker gives us we contact our
back office by mobile phone to verify the
information that has been given to us.
The information provided by a selfemployed person can also be verified
immediately. This allows us to act immediately if the information is incorrect.
Finally we let the worker sign the interview form and provide him/her with a
flyer. In this flyer he/she can read what we
have done (the site visit) and with this
flyer he/she can walk freely on the site
without being interviewed again. It is a
proof that he/she has been interviewed by
one of us. To prevent fraud the workers sign the flyer so we
can verify that signature with the one on his/her ID papers.

The pictures in this article are of construction sites on

which site visits have taken place. This gives you some
insight into the scope of these projects.
Never underestimate the creativity people use to escape from
or avoid our site visit. After everyone has been interviewed we
can finish our action in the fields. Everyone meets at an office
on site and the back office is informed about the conclusion of
the site visit. Next thing is to collect all of the forms and do a
quick scan so inconsistencies on the forms can be clarified at

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once by the teams. We also hold a debriefing session. We evaluate the site visit so everyone can say what they thought went
well and what went wrong, so we can learn and adjust for
future observations. The preliminary results are reported to
the participants. We also inform the main contractor that we
have finished our site visit. We tell him/her our impressions
on the execution of the site visit and provide preliminary
results. He/she will also be advised of our analysis of the data
on the interview forms. In case of non-cooperative workers or
subcontractors, we advise him/her with of our experiences and
ask for his/her opinion on these issues. Finally we evaluate our
findings with our external partners and make further appointments about issues that need to be solved.

Final processing of site visits

We gather all kinds of information but our objective is to

detect risks. We therefore need to make a thorough analysis of the data. At the tax office all data will be held in our
various databases. Besides the analysis of the data, all the
interview forms will be entered into a large database of all
the people we have interviewed on our site visits. By doing
this we will get an insight on people that move from one

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project to another project. If we only look at a single project we might miss these people. By moving from project to
project they can avoid taxation. As we follow them during
the years we can send them a tax assessment as soon as we
need to. When all the data has been analysed, we can detect
risks and act on those risks. It could be that we audit a company or we enter a permanent establishment in our administration. Finally we will also send our analysis to our external partners.
The site-visit can also be used in different lines of business
as well. For example:
Retail companies can be observed for the presence of
personnel and cash flow;
Markets and fairs can be observed to track and trace
new entrepreneurs, for the presence of personnel and
cash flow and for trade mark fraud;
Wholesale companies can be observed for cash sales
and invoice obligations;
Hotel and catering companies can be observed for the
presence of personnel and cash flow and the meters of
gambling slot machines;
Taxi entrepreneurs can be observed and we can track
and trace new entrepreneurs, for the presence of personnel and cash flow, for driver sheet data, taxi meter
data, and turnover data;
The Netherlands tax collector takes pictures of cars (special kind of site visit); with the use of automatic license
plate recognition software and in cooperation with the
police force, cars are scanned in real time to see if there
are any tax liabilities or outstanding criminal fines registered against a specific license plate number. Immediate
payment can be enforced and drivers can be arrested, or
the tax collector can take possession of the car.
With this article I have tried to explain the special
approach of the Team Large Construction Projects
Netherlands and how we use the tool of site visit in monitoring large construction projects.

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Facilitators
Makes Tax
Evasion Easier

S weden
Hedvig KRNEKULL
Project Leader/Head of Section,
Large Taxpayers Office Stockholm,
Swedish Tax Agency

SE-116 81 STOCKHOLM,
(46) 10 574 28 42
TEL:
E-MAIL: HEDVIG.KARNEKULL@SKATTEVERKET.SE

Ms. KRNEKULL has been working for the Swedish

Tax Agency for about 15 years. The last four years
she has worked as a project leader. Currently she is
leading a National Project in the Financial Sector.
The previous project was the National Project on
Facilitators.

by Hedvig
KRNEKULL

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T
T

hose less inclined towards compliance, deliberately evading tax

or maybe just needing a hand with money laundering, can find
help, ideas and services supplied by facilitators.
By using a combination of facilitators who cooperate in the various parts of a
transaction, one can optimise the services provided by different facilitators and
make it hard for anyone who tries to follow the money. For example, by using
a factoring company that cooperates with an exchange office (foreign currency
exchange office) the factoring company can offer their clients cash payments on
their pledged invoices (see example below).

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a r t i c l e s
A: The Client sends an invoice (false or real) to the Clients
Client.
B: The Client sells the invoice to a Factoring Company for a
nominal value, in this example 100,000. The invoice is sold
with the right of recourse, which means that the Factoring
Company does not take any risk. If the Clients Client ends up
not paying the invoice, the Factoring Company sends back the
invoice to the Client. At this point, the Client gets no money.
C: The Factoring Company withholds a fee of 4% and transfers
the rest of the money, 96,000, to an Exchange Office. The
Client still gets no compensation.
D: The Exchange Office withholds a fee of 2 % and the Client
or a straw man collects the rest of the money.
E: The money can be passed on to the Client or Clients Client
or used to pay untaxed salaries. The transactions above can
happen in a very short time.
F: The Clients Client pays the invoice of a 100,000 to the
Factoring Company.
In this example the Client has paid 6,000 to get the money
anonymously from an Exchange Office. It is difficult to see
any purpose of these transactions except what we call
money-masking, the purpose of which is to take out
undeclared money from the company and at the same time
conceal the receiver. The money ends up in the pockets of
the business executives or used to pay for untaxed labour or
purchases.
To make this example closer to reality just add lots of
clients, make some of them short-lived subcontractors, or
a chain of subcontractors, hundreds of clients client - some
of them in bankruptcy - and currency carriers and there
you have a set up for example found in audits in the noncompliant part of the construction industry.

Background
In Sweden, the National Project on Facilitators started on
1 January 2006 and finished in 2008.
The decision to start the project was partly because noncompliant companies intending to evade tax were using
different services to facilitate their tax evasion: so called
facilitators (sometimes called service providers).
We needed to investigate why the services of facilitators were
in demand by companies taking part in organised tax evasion.
We also needed to increase our knowledge of how the facilitators were being used and under what conditions they work.
The purpose of the project was to prevent new financial
crime by surveying and dealing with some of the circumstances in which the criminals work. By interacting with
other authorities, the project would be more effective.
The facilitators were divided into three groups.
Money transfers / exchange offices;
Factoring / debt-collecting agencies;
Advisors / consultants.
The advisor / consultant group was divided into subgroups.
Fronting addresses previously known addresses
abroad used in tax evasion activities. We were not look-

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ing for companies with fronting addresses; we were

looking for the advisors that supplied set-ups with
fronting addresses.
Expelled auditors. Our question was what are the auditors that have been expelled due to questionable activities doing today? Our conclusion was that most of
them are still working with their old firm and not
fronting in any questionable activities.
Company brokers. We discovered that they mainly
focused on restaurants. The larger deals were set-up by
lawyers or accountant firms.
Client found accounts. These are bank accounts known
to be used by lawyers for their clients. If you have one
of these accounts no information is given to the tax
authority. We have found that several companies use
these accounts and since there is no insight into these
bank accounts, there is a possibility that they can be
used for money laundering purposes. This suspicion
has proved correct in some audits.
Mail drop companies. The background is that many
non-compliant companies use mail drop addresses.
The problem we found was with vanished client registers. In one of the audits, the company representative
even said that it would be a treat to his life to supply the
tax auditors with the client register.
Saving associations. We had seen an increased number
of registrations of saving associations and wondered
what they were being used for and who supplied them?
A Swedish saving association (Sparkassa) is a very
special Swedish economic association and it is not a
bank and cannot be compared with any other financial
institutes. Our conclusion is that curtain fraudulent
activities abroad in relation to VAT and carousel fraud
have used set up with Swedish saving associations. We
have seen Swedish saving associations being sold on the
Internet Buy Your Own Bank.
Most of the investigation was based on tax audits and collecting information from other authorities.

Conclusions
Our conclusions are that most of the companies in the
above-mentioned branches are compliant. They cooperate
with different authorities on money laundering, tax evasion, etc.
The problem is rather a few people who do not follow
standard accepted business practices. These people are prepared to act in any business activity as long as it supports
the main goal to put transactions in the shade and help the
client to evade tax.
During the time of the project, we have increased our
knowledge of the different areas. The problems we identified concerning the use of facilitators are not only taxrelated. In some cases, the tax evasion is almost non-existent but services provided have been extensive. It is also
quite common that the identified problems are mutual for

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different authorities; for example, transactions for tax evasion and money laundering are usually similar with the
same underlying reason to conceal the real purpose of the
transaction, similar advisors / consultants and a similar use
of offshore companies.
In most of our tax audits, we have come across appalling
accounting standards. This is a very serious problem when
it comes to cash-intensive businesses. Bad accounting standards make it difficult, labour-intensive and in most cases
impossible to identify the clients.
In many of our investigations, we have found examples of
how different facilitators are used in the various parts of a
transaction and how they cooperate.

96

The problems that we have come across in Sweden concerning facilitators do not necessarily need to be an acrossthe-border problem. In Sweden, we have access to a lot of
third party information from banks and other financial
institutions. If you were to use normal methods of payment
for fraudulent activities, you would be caught. This is one
reason why new markets of alternative payment methods
that are more or less outside the controlled financial system
have come into existence.
This article is based on a presentation Facilitators delivered during a meeting of the Area Group Treatment of
Specific Industries Construction held in Paris in France
in October 2009.

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i n t r o d u c t i o n

axation of Individuals

osted by the Bulgarian tax administration in the city of Plovdiv this workshop combined presentations of actual tax cases with working group sessions where participants
shared their views and opinions on the main issues and possible solutions to the problems raised by each of the cases.
In his article Andrew SZCZEPANCZYK reports on the taxation of foreign entertainers and
sportspeople in the United Kingdom.

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Taxation
of Foreign
Entertainers
and Sportspeople
in the UK

by Andrew
SZCZEPANCZYK

United Kingdom
Andrew SZCZEPANCZYK
Investigator Non Resident
Compliance,
Her Majestys Revenue and Customs
ST JOHNS HOUSE, MERTON ROAD, BOOTLE,
LIVERPOOL,
TEL:
(44) 151 472 6498
E-MAIL:
ANDREW.SZCZEPANCZYK@HMRC.GSI.GOV.UK

Mr. SZCZEPANCZYK has worked as Head of the

Foreign Entertainers Unit in Bootle UK. Recently he
moved into a unit investigating non-resident companies who invest in, receive income from and develop
property in the UK.

W
W

hen I was asked to present a subject at the IOTA workshop in Plovdiv,

Bulgaria, on 9 April 2009 I originally prepared a detailed and complex
scenario which involved the interaction between non-resident companies, trusts and individuals who are manipulating their tax residency. It was turned
down as it was Too complicated and a bit all over the place. So what else could I
provide that would be interesting and relevant? As I sat thinking about it, a colleague passed me a newspaper article about a superstar singer who would be touring the UK to sell-out crowds. Make sure you get the tax on that she said. And
it struck me then that getting the tax on that is actually an interesting and intricate process. Interesting enough to present to the workshop, I thought. So I did.

Background to the Charge

Like many countries the UK, under our domestic legislation, charges to income
tax a trade carried on by an individual in the UK even when that individual is
not a resident in the UK. The charge will be limited to the profits related to the
exercise of the trade in the UK.
But this is not the end of the matter. Where there is a double taxation agreement (DTA) with the country of residence of the individual the Independent
Personal Services Article or Business Profits Article1 will normally act to limit
the domestic charge. It requires there to be a substantial presence in the country amounting to what is a fixed base or permanent establishment2 as defined by
the Organisation for Economic Co-operation and Development (OECD)3.
If we left it at that for entertainers and sportspeople (I will call them performers for ease) then we would never tax them where there was a DTA. They would
rarely if ever create a fixed base and, if they did they would probably become
resident in the UK under the residency legislation and become taxable as such.
As this situation was considered by many countries to be undesirable another
article4 (usually numbered Article 17) appears in their DTAs. This specifically
overrides the Business Profits Article to allow the country where the trade is
performed to tax the profits of the trade in respect of that performance. It limits the application to entertainers and sportspeople.
1) Model Business Profits Article and Independent Services Article
2) OECD definition of a permanent establishment
3) OECD Guidelines
4) Model Performers Article

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Applying the Charge

Having established that there is a charge on the performance
we then had to collect it. The UK system for taxing the profits of a trade was to tax in the current tax year the profits of the
previous tax year. This profit was notified in a return which
was issued at the end of the tax year. In practice this meant we
were issuing returns to people who had left the country, possibly never to return and, often as not, without leaving an
address to send the return to. Not a very productive state of
affairs, but a state of affairs that would change in the 1980s.
The 1986 Finance Act introduced a withholding tax obligation on the person who makes a payment to a non-resident performer in connection with a performance in the
UK. The rate of withholding was equivalent to the basic
rate of tax (currently 20%). A specialist unit, the Foreign
Entertainers Unit (FEU), was set up to put into place and
administer the legislation supporting the system5.

Administering the Withholding System

What activity is covered
Any appearance where the performer is appearing in
the UK in his or her character as a performer and is
rewarded in any way for doing so. The person can be
performing alone or with others, in a group or band.
The performer might be an actor in a theatre or a
golfer in a tournament but a performance can be much
wider than this. An actor giving a paid interview to promote a film or a sportsman appearing at a promotional
event for a sponsor. And the performance does not have
to be in front of an audience. The important factor is
that the performance must take place in the UK.
What is included as a payment
Any payment including transfers of assets and benefits
which arises directly or indirectly from a UK appearance
will be within the scheme6. This will include, for example,
appearance fees, tournament winnings, advertising
income, film fees, box office percentage and endorsement
fees for using a particular brand of equipment (of which
more later). It does not matter who gets the payment
(individual, partnership, company or trust). The amount
withheld is based on the gross payment.
Accounting for the tax withheld
Any payer who withholds tax must pay it over to
HMRC within 14 days after the quarterly period in
which the payment was made. The tax is treated as a
payment on account of the final liability which is
arrived at by the submission of a tax return by the performer. This will allow a claim to allowances and identify whether higher rate tax is due.
Reduced rate tax applications
To avoid having to prepare a return a performer can
agree before a performance an amount of tax to

withhold that takes into account the likely relevant

income and expenses, higher tax rates and personal
allowances. The idea here is that the amount withheld is so close to the amount due on a finalised
profit that a return does not need to be submitted at
the year end.
Tax certificate
The performer will be given a tax certificate showing
the tax paid and the income on which it has been paid.
This can be presented to their home country tax
authority to avoid double taxation.

Interesting Issues
There have been many areas that have caused detailed consideration by the FEU technical staff and by the advisors
representing the performers. Some have been decided by
practice others have had to be tested in the courts.
What is entertainment and sport
There are many activities that have elements that could
be seen as a performance. Some religious events can
have very entertaining segments to them as can speaking tours by ex-politicians or well known academics
and thinkers. On the whole these would not fall within
the regime. Those of you who are familiar with the
game of cricket may have a view that, as a game, it is
pretty hard to follow, but not many of you would go on
to argue, as one cricketing nation did, that their players
were not athletes.
Exemptions
No tax exists in a vacuum. And when a tax affects high
profile individuals and businesses it can be an important factor in decisions over what they do and where
they do it. To avoid taxation affecting the London
Olympic Games an exemption to relevant performances from taxation has been given. Other bodies
have argued that similar exemptions should be given
for high profile events that reflect well on the UK to
hold them. These are being considered.
Andr Agassi at the House of Lords
A recent tax appeal that went all the way up to the then
highest UK court the House of Lords was the case
of Andr Agassi7. There it was argued that where a payment is made to the performer by a non-resident payer
the UK legislation was powerless to tax this income.
This was found not to be so.
Another interesting question that was considered during
the case was whether endorsement income, for example, to
wear branded goods, would be taxable if it was paid by
virtue of a connection with the image of the performer
rather than their performance. Essentially the HMRC view
was that it was rarely possible to separate the payment from
the performance, if a performance occurred.

5) Legislation is in Sections 555 to 558 Income and Corporation Taxes Acts 1988 and Income Tax Regulations 1987.
6) Where total payments in any year do not exceed GBP 1,000 tax does not need to be withheld.
7) Agassi v Robinson (HMIT) (2006) 77 TC 686

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For the future

Conclusion and More Information

Some jurisdictions have suggested that the taxation of performers in the country of the performance is bureaucratic and not
cost effective. They advocate leaving the country of residence to
tax the performers. Others, including the UK, are concerned
that tax arbitrage and manipulation of their residency would
enable those inclined not to pay tax to easily orchestrate their
affairs to not do so. There is also the very clear link between
activity in the country and that activity being taxed which provides equality of treatment with those resident in the country.

After my presentation at the IOTA workshop a number

of delegates came to speak to me about the mechanics
of our withholding system. This article only gives a
brief overview of the principles behind the application
of the legislation. If you want more information a good
starting point is the HMRC website8. For those countries that host a lot of performance activity and do not
have a similar system I would strongly recommend its
adoption.

8) FEU website - http://www.hmrc.gov.uk/feu/feu.htm

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ransfer Pricing

ollowing the success of earlier transfer pricing workshops another opportunity was taken
by IOTA to include the topic in the Work Programme 2009. Organised in Berlin,
Germany, two workshops at intermediate and advanced level were jointly organised with
the OECD. The workshops were practical in nature, combining presentations of selected case
studies with the opportunity for all participants to share their own views and opinions on the
approach to resolving issues on various topics arising from the particularities of the area of transfer pricing.

These two articles by Leena AINE and Hanna HGLUND from Finland and Jan
KRAUGERUD and Svein Erik BRNHOLDT from Norway examine cases where issues of
transfer pricing are revealed and discussed.

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Debt Push-Down
to a Permanent
Establishment
- An Approach
to the Question
in the Finnish
Context

Finland
Leena AINE
Senior Tax Adviser,
Large Taxpayers Office

P.O. BOX,
FI-00052 VERO,
(358) 9 7311 6377
TEL:
E-MAIL:
LEENA .AINE@VERO.FI

Ms. AINE works for the Large Taxpayers Office in Helsinki.

The office is a unit for large corporate taxpayers in Finland.
Her work tasks comprise of international taxation issues
and she is a member of the Transfer Pricing Unit. She has
a masters degree in economics and law.

Hanna HGLUND
Senior Tax Adviser,
Large Taxpayers Office

P.O. BOX,
FI-00052 VERO,
TEL:
(358) 9 7311 6317
E-MAIL:
HANNA .HOGLUND@VERO.FI

Ms. HGLUND works for the Large Taxpayers Office in

Helsinki. The office is a unit for large corporate taxpayers in Finland. Her work tasks comprise of international
taxation issues and she is a member of the Transfer
Pricing Unit. She has a masters degree in law.

by Leena AINE
Hanna HGLUND

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Background

his article offers a view on some particular questions regarding permanent

establishments. They arise when a permanent establishment construction
is used to take advantage of the options provided by national legislation.
These aspects are presented in the article by analysing a case. Although the article
involves the particularities of the Finnish tax legislation, it does, however, explain
the more general principles and problems regarding the status of a permanent
establishment and the attribution of profits to a permanent establishment.
The scenario depicts a situation where a group is restructured and a debt is pushed
down to a newly created permanent establishment. In order to crystallise the key
questions, the case is a simplified example and includes certain assumptions. The
European tax law aspects (e.g., freedom of establishment) are excluded from the
scope of this article.
The case presented in this article contains a type of group consolidation factor;
group contribution, which is commonly used in Finnish groups of companies. In
Finland the companies in a group are treated as separate tax subjects for the Finnish
tax purposes. The Finnish domestic tax legislation, however, includes a special
regime, which allows open profit and loss balancing by group contribution between
Finnish companies belonging to the same group. Group contribution is tax
deductible by the contributor and taxable income for the receiver. Among other

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requirements, application of the group contribution regime
requires that both the contributor and the receiver are Finnish
corporate entities. However, it was confirmed, based on the
non-discrimination provisions of tax treaties and the EC
Treatys freedom of establishment principle, by a Finnish
Supreme Administrative Courts decision, that a permanent
establishment in Finland of a company resident in a tax treaty
state or in another EU or EEA Member State has the right to
make or receive a tax-deductible group contribution under the
same circumstances as a Finnish company.
At this time there is no special thin capitalisation legislation in Finland, therefore arms length interest is usually
deductible even in thin capitalisation
situations. The denial of interest deductions could be possible; based on the
general anti-avoidance rule of the
Finnish tax law, by reclassifying a financial instrument and the return on it by
its economic substance over it for tax
purposes. However, in this case the
debt-equity ratio is 1:4 and it is therefore assumed that thin capitalisation is
not a relevant issue.

Facts about the Case

A multinational group, having a parent company in a
European country (later referred to as Country E), contemplated an ownership and financing restructuring in respect of
its Finnish subsidiary. Before the restructuring 100% of the
shares in a Finnish resident Company X Oy were held by a
Company Z resident in Country E. Before the restructuring, the yearly taxable profit of X Oy was approximately
EUR 70 million.

Figure 1. Group Chart before the Restructuring

The restructuring was defined as follows:

1. The European Company Z established a subsidiary
Company Y, resident in the same Country E.
2. Company Y established a Finnish branch (later referred
to as Y PE), which would be treated as a separate
accounting unit. A permanent establishment was deemed
to have been created.

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3. Company Z sold the shares in X Oy to Y PE. The

share acquisition was financed by a loan of EUR 800 million from Company Z to the Finnish Y PE. In addition, equity of EUR 200 million was allocated to Y PE.
The acquisition price was at arms length.
4. Interest payments of EUR 68 million per year from the
Finnish branch Y PE to Company Z was financed by
a group contribution of EUR 68 million paid by X Oy
to Y PE. The interest was also at arms length.

Figure 2. Group Chart after the Restructuring

Functions of the permanent establishment of Company Y

(Y PE) are the promoting of the business activities of X
Oy and coordinating contractual issues over supplies in
Finland. Y PE does not have any rights as regards the decisions concerning X Oy, as all the decisions are made in
Company Z, resident in Country E. The function of
Company Y, resident in Country E is to hold shares, and
there are no business activities at the head office.
Prior to the restructuring, the Finnish
Company X Oy made a remarkable taxable income. After the restructuring, a
group contribution made by X Oy to
Y PE, situated in Finland, was deducted
from the taxable income of X Oy. As a
result, the yearly taxable income of X
Oy was close to EUR 0. The received
group contribution was taxable income of
Y PE. However, since Y PE had considerable interest costs relating to the
share acquisition of X Oy, and Y PE
considered them to be tax deductible, Y
PE advised the Finnish tax authorities
that the taxable income of Y PE was also close to EUR 0.
The interest payments did not lead to taxation in Company
Zs resident Country E either.

Key Aspects
The key question in this case is whether the interest costs
incurred from a debt taken for a purpose of acquiring the

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shares in Finnish Company X Oy were deductible for Y
PE situated in Finland.
The tax treaty between Finland and Country E is in
accordance with the OECD Model Tax Convention.
According to Article 7 of the tax treaty between Finland
and Country E, business profits of an enterprise of a
state may be taxed in the state where a permanent establishment is situated to the extent that the profits are attributable to the permanent establishment, and accordingly,
the expenses incurred for the purposes of the permanent
establishment are deductible in determining the profits.
Income and expenses are attributed to a permanent establishment only to the extent that they are effectively connected with the permanent establishment.
As a consequence, any interest charges may be deducted
from the profits attributable to a permanent establishment
only if the loan on which the interest was paid is effectively connected with the business of the company; carried out
through the permanent establishment. For the loan to be
effectively connected with the business conducted through
the permanent establishment, the shareholding; for which
purposes the loan is allocated to the permanent establishment; should be connected with the permanent establishments business.
The prerequisite that a shareholding should be effectively
connected with a permanent establishment requires that the
shareholding is genuinely connected to the business, which
is carried out by the permanent establishment. Basically, this
requirement means that the shareholding should be necessary for the business to be conducted through the permanent
establishment. The shareholding should accrue the profits
attributable to the permanent establishment.
Since the functions of Y PE were the promoting of the
business activities of X Oy, coordinating contractual
issues and supplies in Finland as well as product development and Y PE did not have any rights with regards to
the decisions concerning X Oy, in the Finnish tax
authorities view, the shareholding of X Oy was not necessary for and was not used in the business conducted via
Y PE. It was concluded that the shareholding of X Oy
should not be allocated to Y PE and as a consequence,
the interest costs incurred by the debt incurred for acquiring the shares in Finnish X Oy were not deductible by Y
PE situated in Finland.
The OECDs Report on the Attribution of Profits to
Permanent Establishments (17 July 2008) corroborates the
above-mentioned approach. According to the report, the
profit allocation should follow a two-step analysis. In the
first step the permanent establishment is hypothesised as a
distinct and separate enterprise. A functional and factual
analysis is then conducted in order to:
Attribute to the permanent establishment, as appropriate, rights and obligations arising out of transactions
between the enterprise of which the permanent establishment is a part and separate enterprises;

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Identify the significant people functions relevant to the

attribution of economic ownership of assets and
attribute the economic ownership of assets to the permanent establishment;
Identify the significant people functions relevant to the
assumption of risks, and attribute the risks to the permanent establishment;
Identify other functions of the permanent establishment;
Recognise and determine the nature of those dealings
between the permanent establishment and other parts
of the same enterprise that can appropriately be identified, having passed the threshold test; and
Attribute capital based on the assets and risks attributed to the permanent establishment.
In step two, the recognised dealings are priced at arms
length through the determination of comparability of
between dealings and uncontrolled transactions. The
OECD transfer pricing methods should be applied taking
into account the functions performed by and the assets and
risks attributed to the permanent establishment.
Although a permanent establishment should be deemed to
be a distinct and separate enterprise, it should be noted,
that a permanent establishment is not a separate legal entity and it has no right to enter into legally binding agreements. Thus, it cannot be a formal owner of shares. The
formal owner of shares is always the company of which the
permanent establishment is a part. Assets are allocated to
the permanent establishment only if they are effectively
connected to a permanent establishment and used for the
purpose of accruing the permanent establishments profit.
The fact that a permanent establishment is, in fact, not a
separate legal entity is also acknowledged in the OECDs
Report on the Attribution of Profits to Permanent
Establishments (17 July 2008). According to the report, the
aim of the OECDs approach is not to achieve equality of
outcome between a permanent establishment and a subsidiary in terms of profits; but rather to apply to dealings
among separate parts of a single enterprise the same transfer pricing principles that apply to transactions between
associated enterprises. According to the report, there are
generally economic differences between using a subsidiary
and a permanent establishment. Application of the authorised OECD approach will not achieve equality of outcome
between subsidiaries and permanent establishments where
there are economic differences between them. The legal
form chosen, permanent establishment or subsidiary, may
have some economic effects that should be reflected in the
determination of taxable profits.

Conclusion
In the case presented in this article a permanent establishment was established instead of a traditional holding company. The purpose of the group was to allocate the interest
costs to the country where the operational profits (created

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by X Oy) were also born. The aim was achieved by intragroup restructuring.
According to our opinion, when determining whether the
interest costs incurred from a debt taken for the purpose of
acquiring the shares in Finnish X Oy are deductible for
the Finnish Y PE, it was important to consider whether
the shares were effectively connected with Y PEs business. After the functional and factual analysis of Y PEs
business; it could be stated that the shares were not effec-

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tively connected with Y PEs business and therefore the

said interest costs were not deductible by Y PE.

Closing Remarks
The question of attributing profits to a permanent establishment is a current topic in the OECD. The reform of
Article 7 in the Model Tax Convention will in all probability provide us with more detailed frameworks for the attribution of profits to permanent establishments.

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Arms
Length
Royalty Rate

Norway
Jan KRAUGERUD
Senior Attorney at Law,
Tax Norway East
SKATT ST, PB 9200 GRONLAND,
N-0134 OSLO,
TEL:
(47) 99227288
E-MAIL: JAN.KRAUGERUD@SKATTEETATEN.NO

Mr. KRAUGERUD has been working with transfer pricing

issues for KPMG and for the Norwegian Tax
Administration since 1997.

Svein Erik BRNHOLDT

Accountant,
Norwegian Tax Administration

TEL:
(47) 22637015
E-MAIL:
SVEIN-ERIK.BARNHOLDT@SKATTEETATEN.NO

Mr. BRNHOLDT works as an accountant at the

Norwegian Tax Administration since 1996 where he
performs audits in large companies. He works within the
transfer pricing area with a special interest in intangibles
and arms length royalty rate.

by Jan KRAUGERUD
Svein Erik
BRNHOLDT

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Background
he company Service X is part of a small company group. Their business model combines knowledge, process and technology expertise.
They also use intellectual assets to formulate and implement technical
engineering solutions for clients who seek to integrate the latest technology and
process innovations into their business operations.
The sister company of Service X whose name is Company IP, contributes significantly to Service Xs ability to charge premium rates for its technical engineering services. The use of intellectual property from Company IP enables the
service teams from Service X to give value to clients faster and with superior
results to those achieved by Service X competitors, or by the clients acting on
their own. Company IP is responsible for the company group IP management
program. This includes the ownership, development, improvement, enhancement
and protection of the intellectual property of the company group. The relationship
between Company IP and Service X is governed by an Intellectual Property
License Agreement. Under this agreement, Company IP grants to Service X
a non-exclusive revocable right and license to use and sublicense within their territory all Licensed Intellectual Property Rights including:
The Service Group name, brand and related IP;
Trademarks, patents, copyrights;
Improvements and intellectual property in and relating to market offerings,
tools and methods.
For the use of the intellectual property, Service X is paying a royalty to Company IP.

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The Transfer Pricing Method Used

by the Service Group
The Service Group uses a profit split method for verification
of the arms length nature of royalty paid by Service X to
Company IP in accordance with the OECD Guidelines.
The method is a form of residual profit split that assigns a
routine profit to Service X for its activities in providing
technology and engineering service solutions to its clients in
Country X. It is important to note that the routine profit is
allocated before any royalties are calculated. All of the residual profit is allocated to Company IP if the local profit margin exceeds the level of minimum routine profit.

The Opinion of the Tax Authorities

The tax authorities approved the selection of the residual
profit split method as an appropriate method in this case,
but were of the opinion that the companys use of the
method is incomplete. The tax authorities contended that
not all the residual should be allocated to Company IP
and that Service X was entitled to a portion of the residual in addition to the routine profit that it had already
received under the Service Groups application. The cornerstone of the tax authoritys position with respect to the
allocation of profits was that all the stages of the production process should be seen as a whole, with no exception
to the production process of services. In the production
process of technical engineering services, the whole
process depends on the execution (locally) of the service to
be able to achieve good results.
A comparison can be made with a cook who uses a cookbook. The results depend on how competent the cook is.
As an example it could be said that a bad cook could ruin a
perfectly good recipe and vice versa. The capabilities of the
cook and the surrounding conditions are therefore crucial
to the result. According to the tax authorities, the cookbook is the intellectual property in Company IP and the
cook is Service X.
As an independent company, Service X is responsible for
selling their technical engineering services to their external

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clients and to making sure that they are performing the

services with the relevant staff and competences.
Service X may disagree with the analogy of the cook and the
cookbook as a rationale as to why Service X should be entitled
to the larger share of the profits because of performing non-routine activities. In the view of Service X the more appropriate
analogy could be the cook with secret recipes/ingredients. A
cookbook is presumably available to all the cooks, which is not
the case of the secret recipes or ingredients. In this analogy, one
could imagine a situation where there are several restaurant
owners who have enough resources to bid and hire highly skilled
cooks and equip their restaurants with the best available equipment. One of those restaurant owners however owns a number
of secret recipes and formulas for ingredients that make several
delicious sauces. It would be a fairly simple conclusion as to what
component is responsible for increased profits if the restaurant
with the secret recipes and formulas earned a profit higher than
the competing restaurants in this example.
With regard to the company analogy, it is the consideration
of the tax authority that this could be the case, nevertheless
the profit would still depend on the skills of the cook.
Furthermore it would be wrong to assume that a cookbook
is available to all the cooks, especially with regard to
Service Xs business. This position could better be clarified if the analogy is changed for example to only deal with
a cookbook that contains the secret recipes.
Service X claims that they should not earn a premium
profit by the use of resources from its affiliates. They agree
that the foundation of any successful business lies in its
ability to use relevant resources, whether developed internally or acquired externally. The company further claims
that Service X would not be entitled to a premium return
for utilising the resources of its affiliated entities.
The tax authorities on the other hand are of the opinion
that Service X is the key to release the potential of the
acquired IP, as without the abilities of Service Xs workforce no premium profit would be achieved. The secret
recipe would not have any value without the skilled cook
to translate it into the relevant local business.

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AT Fraud

rganised in Rome, Italy two case study workshops on VAT fraud gave the opportunity
for discussion of case studies related to VAT fraud in the field of delivery of goods and
supply of services. The first workshop on VAT fraud in relation to the delivery of goods
was aimed at addressing issues around the scrap metal, car trading and fuel and oil sectors,
whereas the second workshop was dedicated to VAT fraud cases in relation to the supply of services (VAT on services, telecom issues and proof of VAT exemption).
Here Tnde STR reports on VAT fraud in the construction sector in Hungary and Oliver
SIVK writes about the metal scrap sector in Slovakia.
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Fraud in the
Construction
Sector
in Hungary

Hungary
Tnde STR
Chief Inspector, Regional Tax
Directorate of Central Hungary,
Hungarian Tax and Financial Control
Administration
VASKAPU U. 33-35,
H-1096 BUDAPEST,
(36) 1 299 4259
TEL:
E-MAIL:
OSTOR.TUNDE@APEH.GOV.HU

Ms. STR, Bachelor of Public Administration and

Master of Economics, began the career as a VAT auditor in 1998. In 2005-2007 she dealt with exchange of
information in the field of VAT between the EU Member
States, and since 2007 she is working as a chief inspector being responsible for VAT audits.

by Tnde STR

T
T

Black Economy in Hungary

he share of the black economy in Hungary is estimated to be up to 1718% of GDP, which equals around EUR 15 billion, but some economists
are of the opinion that this rate could even be more than 30%. In
Hungary the construction industry is considered as high risk, and seems to be a typical area of fraud. If we audit a company working in this sector, we often encounter
unregistered workers and/or fictitious invoices on construction services.
This audit experience is proved by a survey by the European Commission1 in
which 26,755 EU citizens aged 15 and over living in the 27 EU Member States
were interviewed in 2007. In the report on this survey, construction services were
named as the most significant undeclared activity in Eastern and Central Europe.

Fraudulent Techniques in Construction Sector

The object of the fraudulent construction may be wide-ranging: the building of flats,
schools, public institutions, motorways, sports facilities, office buildings and so on. We
can determine many fraudulent techniques in the construction industry, for example:
1. Abuse of the Book on Casual Work
With this book, workers can be employed for a maximum of 90 days, and
the registration procedure of employees and the payment of social securities are lighter. By falsifying this book, the employers/employees seek to
prolong the time of employment. Methods include:
Blank technology: the exact date of the beginning of the work is not mentioned (only the year, or year and month, but no day). If an auditor visits
the place of construction, the employees/employers fill in this book.
Rubber technology: the date of the beginning of the work is usually
erased by rubber, and then a new date is inserted. Some creative workers or employers use a special magic pen. The notes written with this
pen can be made to vanish by heating.
2. Abuse of lending manpower
Multinational companies often borrow workers (unregistered and without
payment of social security contributions). In reality they outsource the risk
of unregistered workers and responsibility for this fact.
1) Undeclared Work in the European Union - Special Eurobarometer 284,
http://ec.europa.eu/public_opinion/archives/ebs/ebs_284_en.pd

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3. Fictitious invoices
In order to hide illegal work the service is not performed by the company issuing invoices, but by unregistered workers.

Motives of Fraudulent Activities

If we look at the motives, we can determine that the tax
burden is relatively high2 in Hungary, which is why the
fraudsters want to:
Reduce the amount of recorded profit, therefore the
tax payment obligation is reduced; and/or
Avoid the payment of social securities on employees;
and/or
Claim for VAT refunds (but unlawfully).
Buying goods/services at a cheaper price, or legalising products manufactured or produced by unregistered workers can
be mentioned as motives for fraudulent activities too.
If we examine the motives of fraudulent activities in the
construction industry, we should also mention the liquidity problem. The level of unsettled invoices in the construction industry is very high and there is an interesting
phenomenon, so-called round debt i.e., the prime contractor does not pay his/her subcontractors, and they in
turn are not able to pay their subcontractors either, and so
on. The Hungarian VAT law does not allow VAT to be
reclaimed on an unsettled invoice. If a buyer does not pay
the total amount of the goods or services till the deadline
for submitting the VAT declaration, he/she can deduct the
VAT, but he/she cannot reclaim it. This means he/she has
to reduce the amount of the VAT refundable, and he/she
can take this amount into consideration in the next taxation
period, and reclaim when he/she has paid.
Some companies try to solve this liquidity problem with
fictitious invoices, which are mentioned in the books as settled invoices.

The Structure of Fraud

Chain transactions, using subcontractors to offer construction services are very typical in this sector. The structure is
quite simple:
In the beginning of the chain the builder mostly claims
for VAT refunds because the invoicing of his/her performance is separated from the receiving of invoices of
his/her subcontractors. During construction, he/she
has realised only the deposit yet (10 to 40%). This
member is the profit maker (broker) of the fraudulent
chain.
Some tax-minimising companies (buffers) are inserted
into the chain. These members take part in the transaction only as mediators; in other words, they only
organise the service (they are at the same time the user
and also the renderer of the service). Consequently,
none of these companies perform real added-value

activities. So the service is only re-invoiced by adding

a minimum profit. The balance of VAT payable and
deductible amounts only to a small positive VAT that is
usually paid into the state budget. The role of buffers
is to distort the investigations, by ensuring that there is
no direct contact between the missing trader and the
builder who is asking for VAT refund.
At the end of the chain there is usually a missing company who does not fulfil its tax obligations (no declaration
and payment of VAT, no payment of other taxes e.g.,
social security contributions on employees). In the case
of some audits at the end of the chain we sometimes
encounter an honest company whose name and tax
number was used unlawfully (i.e., its VAT number was
hijacked).

The Procedure to Find Evidence

The structure is quite simple, but the procedure to find
evidence is quite difficult, because the service in question
has usually been performed, and the outcome of the service
can actually be seen by the auditors, but the service has not
generally been performed by the party issuing the invoice.
During an audit we have to focus on the following main
questions:
1. Was the service actually rendered?
2. Were the companies issuing invoices able to render
the services?
3. Was the service actually rendered by the companies
issuing invoices?
4. Was company A cautious, and did he/she know (or
should he/she have known) that company B is not able
to render the service?
In order to determine the whole chain, all the companies
are audited and the place where the work was actually done
is visited by us. We may also interview any persons living
on or near the premises (e.g., the owner of the real estate,
neighbours, security guards, etc.)
We investigate agreements, contracts, performance certificates, statements, and other related documents, such as
time sheets, the construction diary, documents relating to
worker training on safety provisions.
We analyse data from declarations on registration of
employees, declarations on company tax, and also the balance sheet.
Afterwards we clarify what kind of machinery, tools, equipment (e.g., cranes, excavators, tools, power hammers) and
materials (e.g., bricks, tiles, cement, sand) were needed to
perform the service in question, which company owned
them, and which company transported these physical assets
and materials to the place where the work was actually
done. During the audits, we usually found out that the
companies involved in the chain did not deduct any VAT
on the purchase of materials.

2) Taxation trends in the European Union, STAT/09/92, 22 June 2009,

http://ec.europa.eu/taxation_customs/taxation/gen_info/economic_analysis/tax_structures/index_en.htm

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From the company tax and balance sheet declaration data,
we may realise that these companies did not possess any
assets either.
In addition, the representatives of the companies are
always questioned. During the audit, hardly any of these
persons can provide us with detailed and complete information on the services in question. They are unable to provide exact information on the different partial tasks, or the
precise details (exact name, address, contact details) of the
person(s) who actually did the work. They are not familiar
with the place where the services were actually offered. Or
alternatively, they learnt what they have to say in advance.
When faced with more and more specific questions, they
continue to repeat the same information. We question the
representatives of the companies on how they get in contact with each other, how they check on the ability of their
partners; and of course we request evidence on the gathering of relevant information on their partners.
After hearing all the persons involved and collecting all relevant information, we compare the information (statements, time sheet, documents on performance, etc.) and we
usually find out that it was physically impossible for the
parties involved in the chain to do the job, the company issuing the invoice was unable to render the service (because of lack
of staff, skills, equipment, etc.), so this means that the service was
not rendered by the company issuing the invoice. That is why the
invoice is not valid, and the builder has no right to deduction.

Due Diligence of Parties Involved

in the Chain
During an audit we also focus on the due diligence of companies.
In Hungary, the balance sheet is public and available for
everybody at the Court of Registration. From the balance
sheet, the builder should have seen that his/her partners
did not possess any of the equipment needed to render the
construction service.
In addition, the Hungarian tax administration publishes
information on taxable persons e.g., the name, tax number,
and the number of employees are public, and easily avail-

able on the Internet website3 of the Hungarian tax administration. From this database, taxpayers can check the validity of data on their partners.
According to our Law on Accountancy, if a subcontractor is
inserted in the chain to render the service, there is an obligation to mention this fact (so called mediated service) on
the invoice. If this fact is not mentioned on the invoices in
question, it means the buyer of a service should have presumed that his/her direct partner rendered the service.
With these measures, during an audit we try to prove that
the company that deducted the VAT on a suspected invoice
should have realised by the above-mentioned databases/
facts that his/her partner had not been able to render the
service, and his/her invoice had not been correct. With this
measure we can verify that the company that deducted the VAT
did not act with sufficient caution.

Reverse Charge in Construction Sector

This type of fraud was so typical in Hungary, that from
2008 a reverse charge was introduced for services connected with real estate. These services are listed in our VAT
law: building construction and other types of construction
that are related to the creation, extension, restructuring or
reversal of real estate (if permission for construction is
needed), and providing manpower for these services. So
the taxable person who acquires these services is liable for
paying the tax. The reverse charge is applied only if the
business partners are resident taxable persons in Hungary
with liability for paying tax.
Unfortunately, fraud in the construction industry is a complex problem and not only applies to VAT. For this reason
the reverse charge can contribute to reducing fraud in this
sector, but by itself is not enough. The number of tax declarations with huge negative tax has been substantially
reduced, but nowadays we tend to encounter more fictitious invoices or over invoicing on basic materials.
Fighting against tax evasion in the construction sector
requires a complex approach, in which the above-mentioned audit procedures and reverse charge may form part
of a range of effective measures.

3) www.apeh.hu

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Scrap Metal
Sector in Slovakia

Slovakia
Oliver SIVK
Methodologist,
Tax Directorate of SR

NOV ULICA 13,

BANSK BYSTRICA,
(421) 48 4393272
TEL:
E-MAIL:
OLIVER.SIVAK@DRSR.SK

Mr. SIVK works at Tax Inspection Department of Tax

Directorate in Bansk Bystrica since 1992. His main
duty is coordination of tax inspections made by local tax
offices, in case of VAT fraud suspect at chain of companies.

by Oliver SIVK

D
D

Introduction

uring the last years the scrap metal sector in Slovakia has been widely
developed and is part of the European scrap metal business. The commodities are mostly copper, aluminium, zinc, bronze and iron. The
stages of invoiced processing are raw scrap, semi-products or products.
In Slovakia several smelters and foundries are processing non-ferrous metals
(Cu, Al, Zn and alloys), iron scrap (Fe) and blast furnaces producing iron from
iron ore. These are involved in fraudulent activities mostly as regards cross
invoices (partly real business and VAT fraud).
There are also business companies (mostly cross invoices) only receiving and
issuing invoices for metals at any level of the process, without being in contact
with goods.
The most usual items are Cu, Al, Zn and Fe scrap, which in a case of a suspected
fraud starts either at Slovak missing traders followed by series of buffer companies and finished by the brokers Intra-Community supply or export, or is a
part of MTIC1 fraud.

Reverse Charge
The Slovak Tax Directorate initiated in 2008 the change of VAT legislation
based on Council Directive 2006/112/EC, in the field of metal scrap (Article
199, 1/d), gold and investment gold (Articles 198, 344 356), according to
which the Member State may provide that the person liable for payment of
VAT is the taxable person to whom the supply is made. The Member State may
specify the supplies of goods and services covered, and the categories of suppliers or recipients to whom these measures may apply.
From 1 April 2009 these suggestions have been included in the amendment of
the Slovak VAT Law, which defines goods as follows: all domestic supplies of
metal scrap and metal waste originate from processing metals, and also metal
items no more usable due to their breaking, shearing, wearing, or from similar
reasons.
The first analysis showed that after introducing the reverse charge system the
VAT refund claims at monitored companies have significantly decreased. On
the other hand fraudsters changed commodities, for example, for copper anodes
1) Missing Trader Intra-Community Fraud

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or Zinc bars, which are not scrap but goods, and are not
covered by the reverse charge.

Transport
An important part of Intra-Community supplies of metal
scrap is based on the transport of invoiced goods, which in
many cases remains underestimated by the fraudsters in
order to decrease their transport
expenses or make it simpler. Places of
supply and acquisition are important in
a chain of invoices. Companies in other
Member States participating in this
transport should have been registered
for VAT purposes and should have tax
liabilities in Member States where the
transport starts or ends, according to
ordering and arranging the transport.
Inspections at freight forwarders also
reveal that sometimes cars with false
identification numbers are used (for fictive transport), personal cars declared as
heavy weight lorries (cooperation with
police - registration of cars), or impossible transportation the same car runs more than 24
hours, unreal long destinations during one day, etc.

Case Study
This article is intended to highlight one case study from 2007
related to the transport of copper scrap in a chain of companies.
A tax audit was undertaken in a Slovak company C in relation
to the invoicing of copper scrap many times for 24 tons, from
company B to company C. On the same day company C
invoiced the same goods to company D (Member State (MS)
3). C asked for VAT refund in its tax return IC supply.
Documents submitted by C were invoices and CMR, where
the consigner was company C, place of loading was the town
where C is located (B is in the same city). Recipient was company D (MS3), place of unload was at
company D.
An inspection at the external freight
forwarder carried out by the tax office
revealed that the transport was ordered
and paid by C, who stated the place of
loading beginning of transport at
company A (MS1), place of unload,
receiver of goods end of transport at
company D (MS3), terms of load and
unload, description of goods.
On input invoices (from B) at C the
types of transport, lorries and registration numbers were indicated.
On output invoices at C (to D) the same
types of cars and registration numbers
were mentioned.

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On transport documents - CMR at C the same types and registration numbers and on CMR at external freight forwarder
also the same types and registration numbers were mentioned.
The result was that the transport B C D was carried out
by the same car and there was only one transport.
Findings of tax office based on SCAC exchange and inspection at B:

Figure 1. Invoicing and Partial CMR

CMR submitted by B were only partial CMR issued in

accordance with output invoices, covering a part from the
whole transport, not the whole transport.
These partial CMR from the VAT point of view, did not
match with the place of supply (Art.32 Directive
2006/112/EC) which is the place at the starting point of
transport in MS1.
The place of IC acquisition at company D (MS3) which is
the place where transport ends (Art.40 Directive
2006/112/EC), was correctly declared by D, although not
correctly from MS1, but from Slovakia.
Company B (later became missing trader) showed its input
invoices for these goods from company X (MS3), but was
not able to show the transport from MS3, moreover B did
not declare any IC acquisition in submitted tax declaration.

Figure 2. Moving Delivery

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Tax Audit Results

The sales BCD consist of 2 subsequent operations, 1: B
sells to C, 2: C sells to D with changing in ownership of
invoiced goods.
The sales BC took place in MS when the transport started, in MS1 without transport. C acquired goods in MS1
(non-moving delivery).
Goods were transported from MS1 to MS3 on behalf and
costs of C. The sales CD included transportation from
MS1 to MS3. D acquired goods in MS3 (moving delivery).

114

In one transport there is only one moving delivery, all

other deliveries are non-moving deliveries. It means only
one IC supply (the shown CD from MS1 to MS3) is VAT
exempted (Art.138 Directive 2006/112/EC).
The supply from B to C was realised in MS1 which is not
the tax matter in MS2 (Art.2, 1a) Directive 2006/112/EC).
There is no tax liability for B in MS2.
Consequently there was no right for C to deduct VAT in
MS2 (no liability, no deduction) and the tax office refused
the VAT deduction for C.

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i n t r o d u c t i o n

pplication of Tax Treaties

his case study workshop was jointly organised with the Dutch tax administration, and
took place in the town of Zandvoort, close to Amsterdam. All discussions on the case
studies were facilitated by the experts from Slovak Republic, Germany, and the United
Kingdom; the participants appreciated the excellent work of the experts who highlighted and
explained the key issues related to each case study.
Ulvi YUSIFOV reports on tax treaties and their implementation in the Republic of Azerbaijan.
From Denmark Ivan NIELSEN and Lene SLOTH describe a case study relating to taxation of
income from employment where there is no obligation to work.

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Tax Treaties
and Their
Implementation
in the Republic
of Azerbaijan

by Ulvi YUSIFOV

116

Azerbaijan
Ulvi YUSIFOV
Head of Tax Treaties Division,
International Relations Department,
Ministry of Taxes
16, LANDAU STR.,
AZ 1073 BAKU,
(994) 12 403 87 54
TEL:
E-MAIL:
ULVI.YUSIFOV@TAXES.GOV.AZ

Mr. YUSIFOV has obtained bachelors degree in

finance and credit and masters degree in taxes and taxation. He has six years of work experience in the
Ministry of Taxes. His current job responsibilities are the
issues relating to tax treaties, including negotiations,
interpretation and exchange of information under tax
treaties as well as the expertise of tax provisions of other
international treaties.

I
I

had an opportunity to attend two IOTA workshops on the topic of implementation of the tax treaties which were held in Jurmala, Latvia in
November 2008 and in Zandvoort aan Zee, the Netherlands in June 2009.
These two events were a great opportunity to participate in the discussions on
very interesting cases presented by colleagues from other tax administrations,
ultimately allowing for learning from and sharing experience on specific cases.
The aim of this article is to give some brief information on the tax treaties network of the Republic of Azerbaijan and on some practical aspects of the implementation of these treaties.
When a person carries out economic activities overseas, income from these activities may be taxed twice, i.e., be subject to international double taxation.
International double taxation arises when income from activities abroad is subject
to tax in both countries: the country where the income arises (source country) and
in the country where the person receiving that income is considered a resident for
tax purposes (country of residence). This happens because each country has its
sovereign taxation rights and applies its own taxation rules and there are always
differences between the national tax systems and rules of two different countries.
Mainly double taxation arises because of the following factors:
a) Some countries have territorial system of taxation and tax only the income
derived from sources in those countries, whereas other countries apply
worldwide taxation rule, according to which all the income of the tax resident is subject to tax in that country;
b) Conflict in source rules of two countries, which leads to a result when the
same income under respective regulations of two countries is considered to
be sourced in both of them;
c) Conflict in residency rules of two countries, because of which an individual or a company receiving the income is considered to be a resident in
both countries.
Any potential investor before making investment in that or an other country
considers many factors related to the investment environment in that country.
Favourability of taxation is one of those important factors and usually examined
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International double taxation increases tax burden on
income received from activities abroad and has a negative
effect on cross-border movement of persons, capital and
investment. Unilateral legislative measures taken by a country to avoid this cannot be efficient enough. That is why
bilateral agreements for the avoidance of double taxation or
tax treaties play a role which is hard to overestimate.
The main objective of tax treaties is to provide certain rules
regarding how the source and residence countries are
going to tax the income derived from the source country
and determine clearly the taxing right of each country
regarding the specific type of income.
In this regard, the existence of the agreement for the avoidance of double taxation between the country of residence
of the investor and the source country is one of the most
important facts highly appreciated by the investor.
However, countries do not conclude tax treaties with each
other with the only purpose to eliminate the negative
effects of international double taxation on their own residents deriving income in other countries. Tax treaties are
very efficient instruments to encourage foreign investors to
invest in the economy of a country as well. In this regard
they are of big importance for both capital importing and
capital exporting countries. The former are trying to
attract more investments by providing favourable tax environment to the investors of the treaty partner, while the
latter are trying to secure more favourable tax environment
for its investors abroad.
The Republic of Azerbaijan is a developing country and
like all developing countries it needs foreign investments
for further development of the countrys economy. Since
mid-90s Azerbaijan has attracted big amounts of foreign
investment from a wide range of countries. At the same
time there is an increasing trend that many companies and
individuals from Azerbaijan are carrying out business activities in many foreign countries.
In these circumstances existence of a broad and efficient tax
treaties network plays a vital role for the country and the
tax treaties network of the Republic of Azerbaijan has been
extended significantly within the last years.
First agreements for the avoidance of double taxation were
concluded by the Republic of Azerbaijan in 1994 with
Turkey and United Kingdom.
Now Azerbaijan has tax treaties signed with 39 countries1.
38 of these treaties are national treaties, i.e., they are signed
on behalf of the Republic of Azerbaijan. The treaty applied
in bilateral relations with Japan is the one concluded
between Japan and USSR in 1986. In an exchange of notes
dated May 30, 2005 ministries of foreign affairs of the two
countries informed each other that both sides agree to
apply this treaty until a new bilateral treaty is signed
between the two countries.

Including the treaty between Japan and USSR, 32 of 39

above mentioned treaties are currently in force.
Treaties with Greece, Iran, Italy, Jordan, Kuwait,
Netherlands and Pakistan have been ratified by the
Parliament of the Republic of Azerbaijan and waiting for
the finalisation of internal procedures in other countries.
These treaties will become effective when these procedures
are finalised and a notification to this effect will be received
through diplomatic channels.
Agreement has been reached on the texts of the treaties
with Spain, Serbia, Croatia, Oman, San Marino and
Singapore. Negotiations are going on with Denmark,
Slovenia, Slovakia, India, Ireland, Kyrgyzstan, Saudi
Arabia, Syria and Sweden.
As a developing country, Azerbaijan includes in its tax
treaties provisions from both, United Nations Model
Double Taxation Convention between Developed and
Developing Countries and OECD Model Tax Convention
on Income and on Capital.
The competent authorities in the Republic of Azerbaijan
for implementation of tax treaties are the Ministry of Taxes
and the Ministry of Finance.
The implementation of tax treaties is regulated under
Regulations for Administration of International
Agreements for the Avoidance of Double Taxation
Concluded between the Republic of Azerbaijan and Other
States. These regulations which are approved jointly by
the Ministry of Taxes, Ministry of Finance and the
Ministry of Justice have been introduced in 2007.
The procedure of implementation of tax treaties under the
above-mentioned regulations is the following, in brief.
Regulations consist of 15 sections, first of which defines
the terms used in the regulations.
Sections from 2 to 6 determine the procedure of implementation of tax treaties with respect to the residents of the Republic
of Azerbaijan and describe the procedure for all three cases:
a) When under the treaty the income is subject to tax
only in Azerbaijan;
b) When it should be taxed only in the other country;
and
c) When the income may be taxed in both countries.
Sections from 7 to 11 determine the procedure of tax
treaties with respect to non-residents. These sections
describe the cases when the activities of a non-resident in
Azerbaijan are carried out through a permanent establishment and when there is no such permanent establishment.
Remaining sections determine the procedure for refund of
overpaid taxes, certification of the documents, special provisions
and responsibilities of the tax authorities, as well as taxpayers.
Briefly, a non-resident can benefit from the provisions of
the treaty relating to the taxation at reduced rate or an
exemption from taxation in the following way.

1) Austria, Belarus, Belgium, Bulgaria, Canada, China, Czech Republic, Estonia, Finland, France, Georgia, Germany, Greece, Hungary, Iran, Italy, Japan, Jordan,
Kazakhstan, Korea, Kuwait, Latvia, Lithuania, Luxembourg, Moldova, Netherlands, Norway, Pakistan, Poland, Qatar, Romania, Russia, Switzerland, Tajikistan, Turkey,
UAE, UK, Ukraine and Uzbekistan.

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With regard to dividends, interest and royalties, the taxpayer can file a special form which has to be certified by a
tax authority first and then presented to the withholding
tax agent. It is based on that certified form who will not
withhold respective tax or withhold it at the reduced rate
indicated in the treaty. With regard to other types of
income treaty benefits are applied in a way of refund.
There are six forms approved together with the above-mentioned regulations. Here is their brief description:
1. Form DTA-01 is a form of the certificate of residency.
Residency in the Republic of Azerbaijan is confirmed
by the tax authority by which the taxpayer is registered.
2. DTA-02 is an optional form which can be used when
other country in which a resident derives income does
not have a special form for confirmation of taxes paid.
In this case tax authorities of Azerbaijan require this
confirmation either in form DTA-02 or in a free form
covering the information requested in form DTA-02.
3. DTA-03 is a form of claim for initial application of
exemption from tax or a reduced tax rate with regard
to dividends, interest and royalties. The form also
includes, along with informative sections, where a taxpayer provides details of income and respective tax, a
section for certification of residency by the other
countrys tax authority.
4. Form DTA-04 is for initial application of treaty benefits to a non-resident when his/her activities are not
carried on through permanent establishment.
5. Form DTA-05 is a form which is used to confirm the
amounts of taxes paid by a non-resident in Azerbaijan

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or withheld from his/her income at the source of payment.

6. DTA-06 is a form of claim for refund of taxes over
paid by a non-resident or over withheld from his/her
income at the source of payment in Azerbaijan. This
form, like form DTA-03 has a special section for certification of residency by a foreign tax authority.
May readers require more comprehensive information on
the Regulations for Administration of International
Agreements for the Avoidance of Double Taxation
Concluded between the Republic of Azerbaijan and Other
States; they can find an English version of the document as
well as the text of the tax treaties concluded by Azerbaijan
on the official website of the Ministry of Taxes of the
Republic of Azerbaijan.
As I mentioned before tax treaties play a very important
role in the perspective of economic development of the
Republic of Azerbaijan just as of any other country. These
treaties are encouraging cross-border movement of capital,
investments and technologies. But the conclusion of tax
treaties is only the first half of the process when the second
and not less important part is the existence of a good mechanism for implementation of concluded treaties.
In this regard arrangement by IOTA of workshops on the
topic of implementation of the tax treaties is a very fruitful
initiative which allows tax treaty experts from IOTA
Member tax administrations to share their views and learn
from each others experience. In my point of view the idea
of discussions on presented cases in small groups and presentation of the conclusions of the groups to all the participants proved to be a fruitful mechanism at last two events.

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Application
of Tax Treaties
Article 15
Taxation of
Income from
Employment
Periods without
Obligation
to Work
by Lene SLOTH
Ivan NIELSEN

Denmark
Lene SLOTH
Tax Officer,
SKAT - Danish Tax and Customs
Administration
STBANEGADE 123,
DK-2100 COPENHAGEN,
(45) 72 37 46 76
TEL:
E-MAIL:
LENE.SLOTH@SKAT.DK

Ms. SLOTH has been working in the Danish tax administration since 2002 as an expert in international taxation of individuals.

Ivan NIELSEN
Adviser,
SKAT - Danish Tax and Customs
Administration
STBANEGADE 123,
DK-2100 COPENHAGEN,
TEL:
(45) 72 37 46 76
E-MAIL:
IVAN.NIELSEN@SKAT.DK

Mr. NIELSEN has worked with MAPs and other international tax issues in the Danish tax administration since
1991.

I
I

Introduction

n cooperation with the Dutch tax administration, IOTA organised a case

study workshop in Zandvoort an Zee, the Netherlands, 3 5 June 2009.
The theme of the workshop was Application of Tax Treaties and the aim
was to provide an opportunity for colleagues working in the field of the application of tax treaties to meet and to exchange knowledge and experiences
through a series of participative working group sessions.
The delegates of the 24 Member tax administrations attending had prepared a
case study of their own choice within the topic of the workshop. Nine of the
case studies were selected to be presented by the delegates and later discussed
in both working groups and plenary session. The delegates from the Danish
tax administration presented a case study on the application of Article 15 of the
OECD Model Tax Convention (MTC) on Taxation of Income from
Employment.
The choice of the case study was made on the presumption that tax administrations have different opinions as to how to apply Article 15 when it comes to
income from employment which is received during periods where there is no
obligation to work (maternity leave, term of notice, etc.) The discussions in the
working groups showed that the presumption was correct.

Facts of the Danish Case Study

A Danish taxpayer was given notice of dismissal by her Danish employer and
stopped working a week later on 1 November.
During the term of notice (4 months) she was exempted from any work obligations.

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She was given maternity leave from 9 February to 31 August
the year after and was entitled to receive her usual salary from
the employer during this period despite being dismissed.
The taxpayer and her husband gave up their residence in
Denmark on the 8 February and became resident in the UK.

Danish Domestic Tax Law

Non-residents
According to Article 2 of the Tax at Source Act, employment income is subject to tax in Denmark if the income
constitutes payment for work performed in Denmark for a
Danish employer.
The tax liability also comprises of income acquired after
cessation of work performed in Denmark, if the income is
derived from that work. This applies to income received
during maternity, sick or garden leave, severance pay, etc.

OECD Model Tax Convention

The general rule as to taxation of income from employment is laid down in Article 15, Paragraph 1. This provision stipulates that salaries, wages and other similar remuneration, derived by a resident of a contracting state in
respect of employment, shall be taxable only in that state
unless the employment is carried out in another contracting state. Employment is carried out in the place where the
employee is physically present when performing the activities for which the employment income is paid. This
appears in Commentary 1 to Article 15.
Paragraph 2 of Article 15 contains an exception to the general
rule (the 183-days-rule) which was not applicable in the presented case and which is therefore not dealt with in this article.
Article 21 applies to other income and has the following
wording: Items of income of a resident of a Contracting
State, wherever arising, not dealt with in the foregoing
Articles of this Convention shall be taxable only in that State.

Approach of the Danish

Tax Administration
The Danish tax administration is of the opinion that the
employment income, as a whole, should be deemed to
derive from work performed in Denmark before the taxpayer ceased to work for the Danish employer.
Denmark therefore has the right to tax the income according to Danish domestic tax law, even though the income
was acquired by the taxpayer after cessation of work and
after she has given up residence in Denmark.
The income is deemed to be received in respect of an
employment and is therefore covered by Article 15 in the
tax treaty between Denmark and the UK.
The employment income was related to work exercised in
Denmark and was therefore taxable in Denmark according
to Article 15.

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Approach of the Taxpayer

The taxpayer requested tax exemption in Denmark in
respect of that part of the employment income from the
Danish employer which was received after she had given up
her residence in Denmark.
She claimed that Denmark could not tax the employment
income, since no work had been performed in Denmark
during the period from 8 February to 31 August.
Alternatively, she claimed that the income should be treated as other income in Article 21 in the tax treaty between
Denmark and the UK. This provision would give the UK
the right to tax the income after she had become resident
in the UK.

Issues for Discussion in the

Working Groups
The delegates were invited to discuss to what extent the
state of residence must accept that the state of source has
the right to tax income under Article 15 in cases where the
income from a former or existing employer is received by
the taxpayer after expiration of the employment or during
a period where there is no obligation to perform work in
the state of source.
The key issue of the discussions focused on the interpretation of the term in respect of an employment.

Summary of Discussions
A small majority of the delegates agreed with the Danish
point of view that Article 15 should be applied to the
income received from the Danish employer, although no
work was performed during the maternity leave.
These delegates found that the right to receive the income
was directly connected with the taxpayers contract with
the Danish employer and with the services formerly rendered in Denmark.
Other delegates expressed the point of view that Article 15
was not applicable since the income was received without
connection to the performance of work in Denmark or
elsewhere. The right of taxation should therefore be given
to the state of residence according to Article 21.

Conclusion
The delegates attending the IOTA case study workshop on
application of tax treaties could not agree upon the allocation of the right to tax employment income received by a
taxpayer during any periods without an obligation to work.
Some delegates were in favour of applying Article 15 which
gives the source state the right to tax the work that has previously been performed, whereas other delegates were of
the opinion that Article 21 should apply.
The only way to solve such a conflict seems to be by mutual agreement.

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i n t r o d u c t i o n

-Audit

hese two case study workshops were held in the German Federal Tax Academy
(Bundesfinanzakademie), Brhl, Germany, and were structured around a series of selected case studies that highlighted issues in the area of e-audit and e-audit software.

Radim VLACIHA and Roman KLAR report on the implementation of e-audit in the Czech
tax administration.

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E-Audit
in the
Czech Tax
Administration

Czech Republic
Roman KLAR
Methodologist of Tax Audit, Manager
of E-Audit Group in CTA,
Ministry of Finance
LETENSK 15,
118 10 PRAGUE 1,
(420) 257 042 852
TEL :
E-MAIL:
ROMAN.KLAR@MFCR.CZ

Mr. KLAR has been working in the Czech tax administration

for 11 years. Since 2008 he has been working as a tax
methodologist at CFTD (Ministry of Finance). He is a specialist and a lecturer of analytical tools, such as software
IDEA, Analysts Notebook, etc. He is a manager of E-Audit
Group of CTA and a member of E-Audit Fiscalis Team. Mr.
Klar has a Bachelors degree in Taxation.

Radim VLACIHA
Methodologist, Member of E-Audit
Managing Group, Financial
Directorate in st nad Labem

VELKA HRADEBNI 61,

400 21, ST NAD LABEM,
RADIM.VLACIHA@UL.DS.MFCR.CZ
E-MAIL:

Mr. VLACIHA has been working for the Czech tax

administration for almost ten years. He has three years
audit experience at the local tax office. Currently, he is
responsible for the implementation, support and
methodology of e-audit techniques. He trains auditors
in use of the special software. He received a bachelors
degree in economics in 2008. He is going to graduate
at the University of Economics next year.

by Roman KLAR
Radim VLACIHA

OO

Implementation of E-Audit in the Czech Tax

Administration (CTA)

n the basis of a massive investment in information technology to aid in the

processing of tax data from taxpayers, the CTA initiated the modernisation
process that leads to an improvement in the client approach to taxpayers
with the gradual introduction of e-audit techniques into the control procedures.
Within the terms of international cooperation the CTA has looked for constructive assistance and mutual cooperation. The CTA accepted the basic recommendations defined by an E-Audit Project Group and started the gradual
process of implementing the defined standards in order to ensure the opportunity of cooperation with other countries and at the same time avoiding breaching any internal control mechanism or legislation that the CTA uses.

What Does E-Audit Bring to Us?

The implementation of e-audit procedures to control activity and the use of
analytical software has reduced the total time an auditor spends at a taxpayer

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a r t i c l e s
and also shortened the time of the overall control. Thanks
to the use of specialised software it is possible to carry out
tests on the basis of presented accountancy which expose
possible discrepancy and errors caused by a taxpayer very
quickly and conveniently. The specialised software also
provides the opportunity to examine all accounting and tax
transactions within the period of the audit.
During the common audit, the tax auditor used to rely on
the random selection of dubious transactions from the presented accountants. By means of the use of e-audit techniques, the problem with large volumes of data presented
by a taxpayer is solved.
CTA is aware that demands placed on the auditors of CTA
will increase not only in a professional respect, but also in
respect of their skills. New technologies bring both technological progress and change in the way of work. Not
only manpower, but also the support systems will need to
be involved in the learning and innovation all the time.

Description of the Structure

of Czech Tax Administration
The structure of the Czech Tax Administration provides
for a standard implementation of e-audit methods with
some restrictions due to local jurisdiction legislation.
The structure of the Czech tax administration is divided
into three levels:
Central level represented by the Central Financial and
Tax Directorate (CFTD);
Regional level represented by 8 financial directorates
(FD);
Local level represented by 199 financial offices (FO).
The Tax Act No. 337/1992 on Administration of Taxes and
Fees, as amended, and VAT Act No. 235/2004 on Value
Added Tax, as amended, rank among the fundamental legal
norms that define the conditions for using e-audit procedures within the CTA.
A steering group, following the structure of CTA has been
established in order to ensure the implementation of e-audit
within the bounds of CTA. It is formed by auditors of CFTD,
from the Department of Methodology of Tax Audit, auditors
of the Financial Directorate and selected auditors from tax
offices. All the members of the group have a lot of experience
in tax audit, the use of PC and language skills.
In connection with the implementation of e-audit methods
the steering group has defined the following objectives:
To guarantee the smooth introduction of e-audit procedures;
To provide technical and practical help to all users in
tax offices;
To introduce automation into electronic tax audit (to
form integrated automated procedures);
To organise training for new users on how to use analytical software - auditors of tax offices.
In order to be able to process electronic data provided by
taxpayers the Czech tax administration purchased within

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the pilot project the following analytical tools: IDEA software; from the company i2: i2Analysts Notebook, i2iBase,
i2iBridge, i2TextChart, i2ChartReader; from the company
TOVEK: software TovekTools; and from the company
Microsoft: SQL Server.
After finishing the test period CTA decided to use the analytical software IDEA in control activities of taxpayers.
Considering the previous decision, the fundamental question concerning how quickly to implement e-audit techniques into the normal work of an auditor has arisen.
Therefore, CTA has produced an educational module for
control auditors and trained a group of lecturers who are
specialists in the IDEA software.
Following on from the assumption that PCs are predominantly used by large taxpayers (see Article: pickov, Iveta.
Auditing of the Large Taxpayers in the Czech Republic,
Tax Tribune, Issue 25, 43-45), the first step was to equip a
special department responsible for auditing large taxpayers
with IDEA software.
The principal aims of implementing e-audit as part of the
activities of the tax administration are to shorten the period of the tax audit itself, shortening the time an auditor is
on the premises of a controlled taxpayer and the last but no
less important is the ability to control a much larger volume of data than is possible during a manual tax audit.
CTA understands that e-audit techniques are bringing new
possibilities of working with the information available. On
the basis of this approach, the Czech tax administration
audit staff are not divided into common tax auditors and eaudit tax auditors, as it is in some other countries. After finishing the implementation of e-audit, up to 95% of all tax
auditors will be using the IDEA software and at the same
time it will be possible for them to use other special analytical tools at a basic user level.

Automation of Control Processes

We have started to introduce automated control processes in
order to guarantee a standard approach to e-audit within the
CTA. The principal part is represented by macro and recommended e-audit techniques, such as: control of correctness of
VAT deductions, control of cash payments, etc. (Macro used
to control cash payments: this automated procedure is based
on the existence of cash payment limits that are determined by
the European Commission and reach up to EUR 15,000. The
Macro defines a current rate that is set by the Czech National
Bank (CNB) for a current month.)

Access to Information
for Tax Auditors
CTA has opened official websites regarding e-audit on the
Intranet. They provide an information exchange between
IDEA software users and the e-audit group. The Intranet
websites are accessible by each auditor within the CTA and
contain all the documents relating to e-audit in the Czech
tax administration such as: a complete procedure manual

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on the Electronic Data Processing (EDP), a list of control
procedures carried out within each EDP, the manual
describes each function of IDEA, including examples of its
use on the relevant tax data as well as reports containing
information about established accounting software used by
taxpayers.
Another area concerning the system of data processing
relates to the use of data which can be found on the
Internet. We have started to use e-audit techniques during the audit of companies, which focus on e-commerce. We have now started to make a few attempts in
this area. Although CTA does not have any special software meeting the requirements of automated data processing from the Internet, the results are more than
encouraging.
We have been testing specialist software ECEyes by the
Swedish tax administration and a manual SAP application by the German tax administration in specialised
analytical and searching departments of the financial
directorates.

124

Future Development of E-Audit

in the Czech Republic
The priority of the Czech tax administration is the introduction of EDP, the formation of automated control procedures,
especially automation of tax-relevant data processing presented during a tax audit by a taxpayer or data obtained by a search
process. As mentioned above, the process of modernisation
and the improvement of the client approach to taxpayers
together with the gradual introduction of e-audit techniques in
the control processes are inevitable.
The development of e-audit is also necessary in order that tax
administrations are able to detect not only intentional errors,
but also the unintended ones during the accounting review and
on that basis keep tax morale at the highest level.
On the one hand, CTA supports international cooperation,
but on the other hand it is aware of the many difficulties
that can appear during the process of introducing e-audit
techniques. Undoubtedly, the experience of foreign tax
administrations concerning the implementation of e-audit
is a valuable resource for the CTA.

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i n t r o d u c t i o n

ontact Centres

he workshop was held in Budapest, Hungary and the event combined presentations and
working group sessions covering experiences in the implementation and running of
contact centres as well as future ways of communication with taxpayers.

Dirk VYVERMAN describes the Infofin project in the Belgian Federal Public Service Finance,
which deals with the modernisation of interaction channels with citizens and companies.
The contact centre of the Finnish tax administration is the subject of an article by Raimo
KARHU.

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Multichannel
Services: Contact
Centre - Infofin
Project in the
Belgian Federal
Public Service
Finance
by Dirk VYVERMAN

Belgium
Dirk VYVERMAN
Programme Manager Multichannel
Services, Belgian Federal Public
Service Finance
NORTH GALAXY TOREN A17 KONING
ALBERT II-LAAN 33 BUS 20, B-1030 BRUSSELS,
(32) 257 66 486
TEL:
E-MAIL:
DIRK.VYVERMAN@MINFIN.FED.BE

Mr. VYVERMAN started his career at the Belgian tax

administration in 1978 and he has worked in several
local and central departments of the Belgian tax administration. He has been director at the Office of the
Administrator General of Taxes and Tax Collection and
in 2004, he was appointed as programme manager
Multichannel Services.

T
T

Introduction
o be able to better organise the provision of services by the Belgian
Federal Public Service Finance, further development of the interaction channels was required. These interaction channels can be divided
into three major types:
Internet;
Contact centre (CC);
Personal reception (information centres, i.e., walk in enquiry centres in the
various offices).
This way, the Federal Public Service Finance can offer its services through
multi-channel architecture.
The results of the previous years (improvements to the Internet,
contact centre and information centres in various offices) have
undeniably resulted in both citizens and companies finding their
way to the Federal Public Service Finance much easier.
It is a long and tough process in which different management components are involved
(business proper, organisation, processes, logistics, human resources, ICT, etc.)
Although other domains are no less important than ICT, we will go into more
detail below on an ICT project that has had an impact on the contact centre the Infofin project.

The Infofin Project

Antecedents
A pre-study on multi-channel services showed that it was necessary to implement a
technical platform to support the service-providing activities in the Federal Public
Service Finance. Therefore, specifications were published, the tenders were examined by a committee (comprising persons of both business and ICT) and the contract awarded. Through the Infofin project, the new applications for this technical platform were implemented.

Infofin
The aim of Infofin was to provide the citizens and companies with still better
services. This also met the needs of the CC staff members.

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a r t i c l e s
Indeed, the increase in the number and variety of ques- As the information centres in the office buildings are
tions put to the CC required such a technical platform extended, opening up the application to those local inforthat could cope with interaction and question manage- mation centres as well will be considered.
ment. That way, the services provided to the citizens and The Infofin solution is remarkable for the following reathe companies are improved and the processing of the sons:
We can track the complete lifecycle of questions, from
questions is optimized.
start to solution, through a complete chain;
As far as purely theoretical questions are concerned, we
Multiple channels are managed centrally: citizens and
do not need to identify the person asking the question. In
companies can ask their questions by telephone, ethose cases, it is enough to retain a minimum amount of
mail, fax, web form, letter and (in the future) by visitdata. Most of this is done automatically (e.g., the subjecting our information centres;
matter about which questions are asked). As far as other
Knowledge can easily be built up, shared and kept upquestions are concerned however, research may be needto-date, specifically for the CC and later for the infored in order to be able to help and then it is necessary to
mation centres;
identify the person asking the question. In those cases, it
Information can quickly be exchanged with nearly
is useful to retain the
4,000 back offices in a user-friendly way and at an
questions in the general
acceptable cost in terms of ICT;
system in order to

The built-in flexibility: transfer of questions, validation

ensure that the person
of answers (e.g., e-mail), possibilities for identifying
concerned does not have
persons, evolution of the legislation, etc.;
to repeat his/her ques A planning tool was developed, which takes into
tion during a following
account all factors, such as expected number of quescontact, or in order to
tions, flexible working hours, leave, etc.;
avoid the question not
To measure is to know: this was also thought of; it is
being available.
important for an efficient management to build up
Therefore, Infofin provides the integration of certain idenknowledge of the problems taxpayers are faced with,
tification databases (secured, of course), however, for the
which must enable us to even further improve our sertime being, the existing access to the dossiers remains
vice.
unchanged. The integration of the Infofin platform with
the new applications (the applications for integrated processing) will not be made available until the new applica- After the start of Infofin
tions are operational and stable.
Since the Go Live date, some technical adjustments were
The possibility of communicating with the nearly 4,000 carried out and at present the initiatives for answering
back offices in a user-friendly and efficient way is an impor- some of the additional business questions are being prioritant innovation. In this respect, the emphasis is on a very tised within the project.
user-friendly and simple cooperation
between the CC staff members on the
one hand and the back-office staff
members on the other. This means
that the CC can forward the questions in a standardised way to the
office concerned (it involves a very
limited number of questions per
office), which can take the further
steps necessary.
As the application is not entirely new
(a small-scale test was conducted initially), the Infofin project was not
considered as a deus ex machina, but it
was looked at in a very pragmatic way
by the persons in charge of the CC.
In this respect, the point of view of
the citizen, the company, the CC staff
members, the management, the
organisation and the legislation of
Brief overview of the technology of Infofin.
General: a chain of different components ensures that the contacts can be tracked from start to solution
course, were all taken into account.

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Conclusion
Close cooperation between the FPS Finance (both the persons in charge of the CC and ICT) and consultants using
an effective methodology has ensured that the project
remained on schedule and started in 2009. Any constraint
was recognised and the scope adjusted so as to achieve the
goal within the time allotted (start in March 2008 and
acceptance of the tools in May 2009, after evaluation of the
pilot) and with the resources provided.
Infofin offers sound support to the staff members.
It should be stressed that although technology is extremely important, these are the staff members who help the
external clients every day who remain the most important
link in the chain of provision of services.
Brief overview of the project methodology of Infofin
For the Infofin project, the Prince2 and Agile project methodologies were used.
Some characteristics of these methodologies are: involving both staff members and management in the solution, paying the
necessary attention to the aspect of change and gradually building up the functions in consultation with the end-users. For the
uninitiated: the phase plans (also known as sprints) were built up in such a way that work was done both iteratively and incrementally so that insight grew and attention was paid to cooperation.
The users were not confronted with a translation of the systems specifications by programmers, but they were still able to adjust
the application as it took shape. So, the implementation evolved on the basis of joint cooperation and transparency.

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The Contact
Centre of the
Finnish Tax
Administration

Finland
Raimo KARHU
Tax Manager,
Western Finland Tax Office, Support
Unit, Contact Centre
KORSHOLMANPUISTIKKO 44,
65370 VAASA,
(358) 6 2125632
TEL:
E-MAIL:
RAIMO.KARHU@VERO.FI

Mr. KARHU has worked within the tax administration for

30 years most of the time as a leader of local tax
office. Since 2002 he has, among some other projects,
developed and coordinated the call and contact centre
function at the national level. He has a LLM degree
from Turku University.

by Raimo KARHU

T
T

Customer Service Channels of the Finnish Tax

Administration
he Contact Centre (CC) of the Finnish Tax Administration (FTA) was
launched in its present form some six years ago. Initiated at the beginning
of 2004, the CC expanded during the years from 2004 to 2006, extending
its service to cover the whole country at the end of the period. At present the service handles around 1 million phone calls yearly together with some 13,000 written
questions posted through forms on the administrations website. The CC also participates in solving a number of technical issues faced by customers who approach
the FTA through a number of e-services as well as handling the customer feedback
about the services. The number of the latter ones rises to more than 20,000 a year.
Todays customers face a number of options when dealing with the FTA or
other government agencies. The more traditional ways of posting a letter or
paying a personal visit at an office are quickly losing popularity. Despite the creation of a number of customer-friendly e-services, taking care of ones business
on the phone is still a favoured choice of many people.
The e-services of the FTA are partly creations of its own, partly cooperative efforts
with other agencies. Some of them are targeted towards individuals, some towards
enterprises and corporate bodies. The Finnish tax system is to a great extent based
on information gathered from enterprises. Approximately 90 to 95% of the annually collected information is received in an electronic format. Through the Tax
Account, which is due to be launched at the beginning of 2010, even monthly
returns and payments will be transformed into an electronic format.
Most individuals do actually not have to face the FTA at all. Their annual
income tax is calculated solely on the basis of information received from
employers, pension companies or social security funds. One in four of the individual customers do, however, return their pre-filled tax return. Only a third of
these are returned electronically. The reason for returning the tax return is
most often a missing piece of information regarding some deduction, which is
not automatically reported to the FTA in advance.

Tax Card Service

At the beginning of each year, individual wage-earning customers of the FTA
receive a tax card (or in case they are retired, a notice of the prepayment tax due

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a r t i c l e s
to be withheld from pensions). The tax card (or notice)
states how big a percentage of the employees salary (or
pension) the employer (or pension company) will withhold
each month. The percentage is calculated based on the
known income and deductions of the individual.
In case a persons income or deductions change, the customer can ask for a revision of the tax card. A revised tax
card can be ordered online, by phone or at a customer service desk. The CC takes care of all revisions made over the
phone, the number of which rises to around 600,000 annually. By comparison, the online service receives some
350,000 requests and the local tax offices face some
600,000 customers at the customer service desks.
The seemingly great number of visiting customers is partly explained by the fact that the FTA still runs a great number of local service offices. On the national level, the number of tax offices (for individuals) is 23 while corporate customers are served by 7 offices. These offices still run some
100 local service desks at different municipalities throughout the country. On the other hand, Finland is one of the
largest countries in Europe if measured by land area.

Local Tax Office, Helsinki

tion from poorer regions. In this area the workload of the FTA
has therefore increased while at the same time the administration faces tougher competition for skilled labour. Partly because
of this, the CC was localised in areas outside of Southern
Finland. Since the offices in these regions are relatively small, the
CC was established as a Virtual Contact Centre, which links
together smaller offices through VoIP2-technology and a common call handling, routing and reporting system (Siemens
ProCenter). Luckily, issuing revised tax cards and providing oral
tax guidance at
other tax offices
than the tax
office of the
c u s t o m e r s
home municipality is allowed
by the Finnish
tax legislation.
The picture
clearly shows
the main offices providing
workforce for
the CC. Outside of these
offices some
calls are routed
to offices in Northern Finland. During peak hours or weeks
tax card revisions are also handled by tax offices working in
larger cities in Southern Finland. Due to the virtual nature
of the CC the shifts in the number of calls is easier to handle, avoiding the need to hire extra personnel during peak
seasons. As a matter of fact, the CC itself has employed only
a handful of people in the initial stages of the service even
though it demands yearly more than 150 person-work years
by the FTA employees.

Range of Services

The Goals of the CC Activities

As mentioned before, the CC answers both phone calls and

questions posted through the website. Calls are equally priced
throughout the country. The customer is presented with a
choice of more than 20 nationwide phone lines (each with
unique numbers) dealing with specific topics, taxes or customer groups. All services are provided in both Finnish and
Swedish, which partly explains the great number of lines.
Three of the service lines are reserved for English-speaking
customers. So far, the FTA has made a decision not to make
use of any IVR1-based techniques. All the service numbers
where in use already before the CC was launched.

Keeping the customers queuing-times at a reasonably

short level has been one of the main goals of the CC.
With the exception of last year, this target has been met
most satisfyingly. The average waiting time on the phone
has varied between 30 to 50 seconds. During the last year,
the situation on the tax card lines has unfortunately
degraded, mainly due to the effects of the general economical downturn. The number of new recruitments
replacing those who are retiring from service has fallen
drastically. The supply has simply not met the demand for
the service. Customers also face more severe economical
situations which in turn affects the degree of difficulty of
the incoming calls.
Another important goal relates to the content and quality
of the service. The CC aims at providing its customers with

Work for the Regions

During the last decades the population of the Helsinki metropolitan area has increased significantly due to domestic migra1) Interactive Voice Response
2) Voice over Internet Protocol

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a r t i c l e s
This rotation has proven to be a very good means of
developing and keeping up skills and knowledge.
Answering phone calls at the CC one is put in the midst
of current issues needed to be solved. During working
hours at control tasks the employee can keep up his/her
competences regarding tax assessment. Shifting between
different tasks has also proven to be less strenuous than a
full day CC occupation. The perceived danger with the
model is the creation of shattered job descriptions and
concentration problems. The focusing issue is being
eased by allowing people to move to a different space
when answering calls, even if this would not be technically necessary. Phones can very well be received at the own
work desk, but this was not favoured in the beginning of
the CC operations.
guidance as qualitative and thorough as the service provided physically by the local tax offices or corporate tax
offices. In addition to this, all tax card revisions that do not
require the presentation of any physical documentation are
being calculated by the CC. The service provided is therefore much more varied and qualitative compared to basic
phone guidance.
These facts also lead to the consequence that CC employees are required to have a similarly deep knowledge of taxation matters as the tax clerks working with assessment and
control tasks. This has proven to be particularly demanding regarding the service provided to the corporate customers. Giving someone guidance on VAT requires many
years of experience and good training. When the CC was
relocated and centralised to smaller offices in just three
years, the re-education of the personnel was of great
importance.

Development of Skills and Knowledge

The following were chosen as main methods for the
development of the staffs skills and knowledge; rotation
of duties at the office, common training in legal matters,
provision of e-learning facilities, further education at the
Tax Institute and the utilization of previous taxation experience. A special training course regarding service skills
was tailored especially to suit CC workers. Swedish services were concentrated to locations with the greatest
number of Swedish-speaking personnel. For the Englishspeaking phone lines people were handpicked from several offices.
The rotation of duties was perhaps the most exceptional of
all chosen means. The method is applied especially regarding the guidance of corporate customers. Shortly
described, a person rotates between different duties at the
office working in shifts of 4 hours at the CC every two or
three days. After one such work shift at the CC the person
can add one or two hours finishing off possible tasks created by the answered calls. During the rest of his or her
working hours the employee will participate in assessment
or control work depending on the personal skill level.

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Conclusion

The steering and coordination of a virtually organised

Contact Centre, where the employees participation is
based on day-to-day job rotation has proven to be a very
demanding task. The functional model demands the creation of common forums, where it has been possible to
negotiate working hours and targets. The calculation and
assignment of needed resources and agreeing on these
demands both skills of interaction and creativity. The
common values of the FTA; reliability, equality and a high
standard of professionalism provide good backbone-support for the CC. The importance of the support and
encouragement of the board of the FTA can not be
underestimated.
A well functioning CC needs to be supported by up-todate equipment and working IT systems. When the FTAs
CC was founded the organisation tried to make use of
existing equipment avoiding too costly investments. The
CC was therefore left without some quite necessary tools
regarding the development of its capabilities. One of the
most needed tools lacking would probably be an IT system based on CRM (customer relationship management)
for the tracking and management of incoming questions

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a r t i c l e s
(and the provided answers) through a number of different
channels. The work on analyzing the CCs needs and
developing a system to meet those has luckily already
started; some new ideas have been gained by looking closer at the work of other tax administrations, mentioning
especially the Belgian experience.
The most important success factor in CC-related work is,
however, the right attitude. The work consists by its
nature of providing service. IT systems and equipment
are by all means helpful tools, but the most relevant thing
is the desire and skill to help the customers. At times the
work can by no means be called easy. Pretty often it does,
however, reward you and speed up the learning of new
things. At peak hours it can be annoyingly stressful.
Therefore one most put a lot of effort in improving the
job satisfaction and wellbeing of all participants.
The article is based on presentation given in IOTA workshop Contact Centres in Budapest, 7 January 2009, by

132

Mr. Raimo Karhu and Mr. Mikael af Hllstrm from

National Board of Taxes.

Mikael Rantala, Carola Rajamki and Heidi Jrvinen at work.

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i n t r o d u c t i o n

raining Forum

he annual IOTA Training Forum took place in Budapest, and the topics discussed over
the two days included the quality of training to, amongst other things, explore what can
be done to improve the quality of training processes to bridge the gap between learning
and performance.
Here Karl WAPPEL, the director of the Academy of Finance, Vienna, Austria, looks at the
needs analysis process in training.

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Needs
Analysis
Process
in Training

Austria
Karl WAPPEL
Director,
Federal Academy of Finance

ERDBERGSTRAE 186-190,
A-1030 WIEN,
(43) 1 71744 4404
TEL:
E-MAIL:
KARL.WAPPEL@BMF.GV.AT

Work experience of Mr. WAPPEL: head of Desktop

Auditing in a tax office for 4 years; head of Internal Audit
in the regional tax authority for 10 years; project manager in the Ministry of Finance for 2 years; and director of the
Federal Academy of Finance for 7 years.

by Karl WAPPEL

A
A
Introduction

t the IOTA Training Forum in March 2009 I gave a presentation Needs

Analysis Process in Training Concerning the Future Role and Structure of
the Academy of Finance: A Philosophical Contemplation and Reflection
- a topic discussed regularly between colleagues working in the training field.
Since the presentation more than six months has passed by and so it may be interesting to have a look on the current situation.
Please take into account, that the remarks in the article are only outlining main steps.
To clarify this at the beginning, the article is not about:
Methods and designs;
Other kind of learning, core competences or human resources (HR) activities;
Self-responsibility of employees and their managers.

Starting Position
The Academy of Finance is the central training unit and learning developer in the
Ministry of Finance (MoF) in Austria. As most training units are characterised by a
seminar/classroom oriented approach, training needs are therefore often concentrated on this method and needs communicated by various areas of the ministry are
related to this approach.
Because of fundamental changes in the organisation (e.g., IT infrastructure,
involved expertise, enhanced technical learning methods, more awareness of budget and time resources) in 2008 a project was launched which considered all modern elements with the goal to place the Academy and the learning activities in a new
position and role within the MoF.
Besides working on a new organisational structure and the definition of key products a focus was also set on the analysis processes not only from a technical point
of view but also positioning the Academy as a business learning partner and involving it in the strategic actions.
One basic issue was the definition of key products offered by the Academy.

Definition of Key Products

The services of the Academy are oriented to key products. Key products are quality activities set by the Academy under the guidance of the contract, trainers and
learners as well as line managers.

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Figure 1. Key Products

In particular further training on behalf of strategic goals has

been the focus of a new quality drive. To promote this goal the
present process in analysing the strategic needs was
redesigned.

Needs Analysis Process

The right participants at the right time attending the right
topic delivered by best trainers - a perfect picture of learning
actions!
All of these (and maybe even more) elements are needed to
make an investment in training activities fruitful and participants developing in their technical or personal competences.
But what aspect in this lets say - formula is the most
important? All of them we may say and of course thats right,
but having a closer look it is the right topic, the right issue
which is really relevant for the organisation, and the development of the employees is the most relevant one.
The diagram below shows the redesigned process which was
created in the project mentioned before. For the first time it
came into use partly concerning the analysis process for the
program 2010.

Diagram 1

The Academy is supported by an Advisory Board and currently, deputy directors of the main departments and the
director of the Academy belong to the board which has a consulting function. The members nominate experts from their
units who are contact persons for the needs analysis process in
strategic issues.
A redesigned procedure contains formalised regulations such as:
The training activities proposed by the MoF are determined as strategic training offers;

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All proposed training activities by the

MoF must be linked to the departments strategic goals;
The target group of participants must
be explicitly outlined;
A clear plan for all needed activities has
to be defined;
Participation is compulsory for the target group;
The proposal for the activity has to be signed by the head
of unit which is putting forward the topic;
Learners have to announce their application via the
Learning Management System (LMS).
With all these elements the Academy and decision makers
want to focus training activities at a strategic level and clarify
the relevance in a clear way.
The Advisory Board finally decides the activities after all
the proposals are collected, rehashed and quality controlled. At this stage of the process the budget which is
available is checked with the quantity of activities and the
money required.
At the end of the process a special catalogue which contains
only these kinds of strategic training activities is published
via the Learning Management System. Beside that another
catalogue containing the general topics is also available.
After the first pilot in 2009, in which this process was used
to focus on strategic training activities, the following
lessons learned emerged:
Not all counterparts in the MoF analysis process follow
the idea of focus on strategic goals completely;
There are too many strategic goals
which exacerbate the finding of relevant training activities;
The departments consider their own
training needs as the most relevant
ones;
The outlined standards and regulations for defining activities are not fully
complied with;
The members of the Advisory Board
are often represented by substitutes.
To support the whole process in planning and deciding training activities
completely new technology came into
use from October 2009 Announcement on Demand.
All employees can use the learning platform to announce strategic or personal training needs. These requirements can be
analysed by the Academy as well as the leaders in the departments and offices. Both gain important information for deciding
about needs or relevant planning data. This tool is absolutely
new and first experiences are now being reviewed. More about
the project results, the new LMS tool and further goals will be
presented in the IOTA Training Forum in March 2010.

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A udit Techniques for Small

and Medium Enterprises

he workshop was held in Budapest, and was designed to provide an opportunity to share
experiences of current approaches to new and innovative audit techniques for small and
medium enterprises.

Martin ZLLER from Germany looks at methods of validation of data provided by the taxpayer, especially comparison to the average and cash flow validation.
Vito DAMBROSIO and Franco IABONI report on IT selection tools and audit techniques of
the Italian Revenue Agency.

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Methods
of Validation

Germany
Martin ZLLER
Tax Auditor,
Tax Office Augsburg-Land
SIEGLINDENSTR. 19-23,
D-86152 AUGSBURG,
TEL:
(49) 821 506 3819
E-MAIL:
MARTIN.ZOELLER@FA102.STV.BAYERN.DE

Mr. ZLLER is working as a tax auditor since 1999. He

is a local specialist for e-audit and other EDP and a
member of the instructor team for new auditors in
Bavaria since 2007.

by Martin ZLLER

C
C

ontrary to the audit of large taxpayers, in which, normally, questions of

law or interpretations of contracts are in focus, the main point of interest in the audit of small and medium enterprises (SMEs) is the completeness of the receipts. To solve the problems resulting for an auditor from
this fact it is necessary to become aware of the reasons behind this.
Within the scope of SMEs are at least two different kinds of enterprises, which
hold a very high risk of losing receipts.
One is those enterprises with a very large portion of cash receipts where obviously the risk of losing receipts is very high. Everybody can imagine that the
cash register and the trouser pocket can be mixed up very easily!
The second kind is small family enterprises without any or with only few staff.
If the enterprise is operated only by the taxpayer, his/her spouse and/or other
relatives, one can assume matching interests. One of these interests CAN be to
pay less tax. Staff not related to the taxpayer means a kind of control because a
third person not involved in tax fraud may become a witness.
Many SMEs belong to both categories!
In the course of time some methods of validation have been developed to verify the data provided by the taxpayer. In the following article I will try to explain
the commonly used methods:
Comparison to the Average;
Cash Flow Validation.

Comparison to the Average

Every year the customary ratio structure in regard to gross profit, intermediate
profit and net profit is determined by numerous tax audits specially carried out
to get information about this structure. Every year a booklet containing this upto-date information about the customary structure of more than seventy different lines of business is published by the Federal Ministry of Finance.
The first figure given is the gross profit. There is a differentiation between
trading and industry. For trading the Gross Profit I is given as ratio between the
sales and the goods purchased. For industry and handicraft the Gross Profit II
is given as ratio between sales and the sum of material used and wages related
to production.
Beside the Gross Profit (I and II) intermediate and net profit are provided as
well. The intermediate profit takes into account additional costs like depreciation (without operational buildings) and office cost. The net profit considers all

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other costs, e.g., depreciation/rent for operational buildings, wages related to administration and sales department.
The average enterprise is considered to be operated only
with own capital so interest on debts are not taken into
account.
All ratios are not only given as one fixed figure but as a kind
of corridor with an upper and lower limit.

Table 1. Example for Trading Enterprise (Gross Profit I)

Table 2. Example for Industry/Handicraft (Gross Profit II)

The disadvantage of this method is that the blur is relatively large, as the difference between the upper and lower
limit is very large. If the figure in a real audit is at or below
the lowest figures given, this is not accepted as proof of tax
fraud. But of course the risk of tax fraud is even higher
when then real figures are at or below the lower limit than
if they are at the upper limit!
The advantage of this method is that only a little information is needed and these figures can be derived directly
from the bookkeeping which is handed in together with the
tax declaration. So it can be used in a very early stage of
audit. The Gross Profit I or II can be one of the criteria
used for case selection for example. The auditor will normally use these figures to get a first impression of the case,
so he can imagine how long the audit may last.

tioned above some information about the application of

funds is given in the tax declaration. Other facts are known
to the tax administration because they cause other taxes,
e.g., tax on owning a vehicle or real estate transfer taxes.
The normal costs of living are estimated. Thereby the figures determined by the Federal Office for Statistics every
year are the basis.
Many costs auditors will get only by chance: the acquisition
of the apartment in Manhattan, the Finca at the Costa del
Sol (including the Ferrari in the garage) or the 15-metersyacht cruising in the Adriatic Sea is usually unknown to the
auditor!
Also the banking accounts, saving accounts as well as debts
and loans are necessary. Whether they are representing
available funds or application of funds depends on the
development during the audited period of time.
Increasing saving accounts means application of funds and
vice versa.
Increasing debts and loans means available funds and vice
versa.
To take this into account the saving accounts at the beginning of the period are available funds, at the end of the
period they are application of funds.
The debts and loans at the end of the period are available
funds, at the beginning they are application of funds.

Example

Cash Flow Validation

The fundamental idea of this method is that the taxpayer
can not spend more money than he/she has at his/her disposal in a certain period of time.
Contrary to the above mentioned method this method
needs a lot of information to become convincing. In
Germany a lot of this necessary information is given in the
book-keeping and the income tax declaration, for example
the paid insurance contributions, costs caused by illness or
other private costs that have an influence on tax.
On the one hand the available funds must be determined.
Available funds are the taxable and tax-free income. In case
of a balance, real cash flow available to the taxpayer is easy
to determine, as it is the withdrawals. In most other cases
the taxable income must be adapted because it consists of
parts that are not represented in cash, e.g., depreciation.
This applies to taxable and tax-free income as well as to
other funds inflow.
On the other hand the application of funds must be determined. This part is more difficult for the auditor. As men-

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Table 3

Result
The taxpayer spent more money than he/she had at his/her
disposal. It is up to the taxpayer to explain the expenses
surplus. If he/she is not able to do so, it is assumed that the
expenses surplus is additional taxable income.
In the course of time an auditor will be told a lot of different stories about the origin of the money needed to fill the
gap between available and spent money. The most common ones are:
Payments from insurances or saving agreements.
In this case normally adequate documents can be presented. This case is normally unproblematic.
Jackpot from casino or lottery.
In Germany private games of chance are illegal. All casinos and lotteries are carried out under jurisdiction of the
fiscal administration. So adequate documents can be

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obtained. Otherwise there are very
strict requirements to evidence.
Loan or donation by relatives.
The data will be checked in accordance to the tax files of the
lender/donor.
In many cases the lender/donor
is, for example, the 86 years old
grandmother without any fortune
and a pension close to the poverty level who is able to support her
nephew with a loan/donation of
EUR 100,000!

Limits
Both methods, Comparison to the
Average and Cash Flow Validation, are
limited. If receipts AND expenses are
shortened, the gross profit might be at the upper limit but
there still is tax fraud. If receipts are paid to banking
accounts of third persons (relatives) and spent in a clever and
careful way, there will be no expenses surplus visible for the
auditor. And as mentioned already above, most things happened abroad are normally not visible for the auditor.

Mathematical/Statistical Methods
Since 2002 book-keeping must be presented in a digital
form. At the same time the auditors
were equipped with the software
IDEA for e-auditing. As a consequence there was a change in carrying
out an audit.
The digital form of the book-keeping
in interaction with the appropriate
software enables the auditor to apply
mathematic/statistical methods. In
former times those methods were theoretically possible to be applied but
this failed due to the required time to
prepare the data accordingly.

Time Series Comparison

Figure 1

really convincing. A time series comparison with regard to

sales, goods purchased and wages is shown in Figure 1.
The peak in July is the first thing everybody will notice.
This could be easily cleared up. It was a special event
(parish fair) with additional receipts.
In most months the development of receipts and goods
purchased seems to be more or less equal. To make this
more expressive the development of the relation receipts goods purchased can be displayed in Figure 2.

Figure 2

Here it becomes obvious that something could be wrong!

Such large differences in Gross Profit I during the year can
not be explained by seasonal fluctuations!

The time series comparison is the visual display of the relationship of two or more figures from the book-keeping
with regard to time. This visual display must be interpreted by the auditor. The figures from the book-keeping can
be for example sales volume - goods purchased, sales volume - staff costs. Data from other sources can be considered, too. Imagine a traditional Bavarian beer garden. Why
not to compare the sales volume and meteorological data
like temperature, rainy days, or daily sunshine duration?

Chi Square Test and Benfords Law

Real case: tavern

Chi Square Test (x = f (fi-Fi)/Fi)

The comparison to average showed a Gross Profit I at the

lower limit. The cash flow validation was in addition not

This test is based on theories about the ending digits of a

figure. It is assumed that the frequency distribution of the

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Both of these methods are scientific methods based on theories about the frequency distribution of the figures 0 to 9
within a main unit. Because a closer look to these methods
would fill an article itself, only an overview is given.

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figures 0 to 9 is theoretically equal within the main unit. In
addition everybody has unconscious preferences and
antipathies to some figures.
As a result the theoretical and the actual frequency distribution will differ if the figures are not built by chance.
There must be an individual influence. This influence
CAN be tax fraud!
German tax courts accept this method as proof for incorrect book-keeping if the probability for an individual influence is 95 or 99%.

Benfords Law
Contrary to the Chi Square Test Benfords Law is based on
theories about the leading digits. It expects that there are
more numbers beginning with lower digits then with higher ones. Simplified: 1,234 is more likely than 9,876!
Both methods have two great advantages:
1. We are using exclusively figures given by the taxpayer
or his/her tax consultant!

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2. They are acclaimed scientific methods and not developed by or for the tax administration!
So there are no weak points, e.g., individual calculations by
the auditor, which could be attacked by the taxpayer or
his/her tax consultant!

Summary
There are several possibilities to validate the provided
book-keeping. They can be used at every level of the audit.
Every method has its own advantages and disadvantages, so
it is up to the auditor to choose the best method for the
purpose and the stage of audit. To reject a formally correct
book-keeping, more then the application of only one
method is necessary.
All methods of validation are limited, so they are nothing
but a technical aid. They never will substitute the experience and cleverness of a skilled auditor. If the auditor does
not know the goal, then none of these methods can show
him/her the way.

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Selection and Audit

Activities for Small
and Medium
Enterprises (SMEs):
IT Selection Tools
and Audit
Techniques of the
Italian Revenue
Agency

by Vito DAMBROSIO
Franco IABONI

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Italy
Vito DAMBROSIO
Officer of Analysis and Strategy
Division, assigned to Small
Enterprises and Self-Employees
Office, Italian Revenue Agency
VIA C. COLOMBO, 426 C/D,
00145 ROMA,
TEL:
(39) 06 50545225
E-MAIL: VITO.DAMBROSIO01@AGENZIAENTRATE.IT

Mr. DAMBROSIO has studied accounting in the high

school and finished graduated studies in economics. He
is working in the Italian Revenue Agency since 2004.
He has a masters degree in tax law.

Franco IABONI
Coordinator for Risk Analysis
Unit of Small Enterprises and
Self-Employees Office,
Italian Revenue Agency
VIA C. COLOMBO, 426 C/D,
00145 ROMA,
TEL:
(39) 06 50545345
E-MAIL: FRANCO.IABONI@AGENZIAENTRATE.IT

Mr. IABONI has finished graduated studies in economics

and business with the specialization in fiscal law. He is
working in the Italian Revenue Agency since 2000. He
develops models of control and investigation in particular
towards small enterprises and self-employees.

T
T

Introduction

his article is based on the presentation given by the authors during the
IOTA Workshop Audit Techniques of Small and Medium Enterprises
(SMEs) in Budapest in March 2009.
The article describes how the Italian Revenue Agency acquires and manages tax
and other economic information used for the selection of taxpayers for audit
and the IT tools used.
The Italian economic system is characterised by a huge number of enterprises
compared with many of the other major industrialised countries.
In Italy, there are over 8 million VAT identification numbers of which 6 million
are operative, with the following distribution:
1.1 million are self-employed;
4.9 million are enterprises.
The criteria for defining a small enterprise is the amount of the VAT turnover: in
Italy the small enterprise has a VAT turnover less than EUR 5,164,569. These
enterprises are largely micro-businesses and often they are personal concerns.
These represent the majority of Italian enterprises, while the medium enterprises, with a VAT turnover of between EUR 5,164,569 and EUR 100,000,000,
are only 1.2% of the total.
The control of such a large number of enterprises requires a variety of data processing systems to assist the auditors in selecting the taxpayers that will be
examined.

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Information Collection

IT Tools

The Italian Revenue Agency has the legal power to acquire

information on population and enterprises; not only
through the tax returns but also through other public
administrations and external sources.
This power allows the tax administration to plan and
realise its control activity, achieving at the same time two
goals:
The strong reduction, in comparison with the past, of
mistakes made against taxpayers and the subsequent
improvement of relationships with them;
The prevention of tax evasion phenomena.
The legal power of the Italian tax administration is
defined by the laws of Parliament based on proposals
made by the Government and in conformity with the
European directive.
In addition to the definition of tax systems, the Italian tax
normative establishes and limits the power of the Italian
Revenue Agency in acquiring and managing the information.
Often the tax administration itself proposes the change or
the introduction of new laws useful to improve the efficacy
and the efficiency of its own administrative actions.
All the information acquired by the Italian Revenue
Agency is stored in the tax register.
The main information is taken from:
Every tax return (internal data);
Other sources of external data.
All the data contained in a taxpayers return is filed in the
Italian tax register and is available to the tax auditors.
Other information of internal data derives from the:
Registration fee: raised on the transfer of wealth;
Registration of deeds: recording the essential elements
of a written deed or verbal contract in public registers
in order to record the date for civil purposes;
Registration of lease contracts: all lease contracts of
any amount must be registered, providing their validity exceeds 30 days in a year.
Other external information is obtained from public or private
bodies (e.g., social security agencies, chambers of commerce,
credit institutions or other public and private institutions).
The main information consists of:
Bank account and deposit register;
Financial contract and operations;
Pension and social security contributions;
Utility contracts;
Professional order registrations;
Insurance contracts;
Interest paid to bank for loan contracts;
Capital transfers to/from abroad;
Real estate details;
Boat owners;
Airplane owners;
Car owners;
Building permissions.

Starting from the different information sources, the

Central Assessment Department offers several software
and methods of investigation that allow offices to improve
the quality of controls carried out.
The main software used is:
RADAR (application for risk analysis on enterprises
and self-employed individuals);
GERICO sector studies (software for the analysis and
calculation of the taxpayers income);
APPLE (application for risk analysis on individuals);
DIVA (data mining IVA).

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RADAR
RADAR is a data warehouse, which provides details of
enterprises and self-employed individuals based on fiscal, social security, economical and structural information.
The application allows the auditor to identify homogeneous groups of taxpayers, to analyse particular fiscal
behaviour and identify anomalous situations that require
control.
RADAR contains the main information of all taxpayers
with a VAT identification number who have filed a tax
return in a specified financial year (about six million taxpayers every year).
The application has four lines:
Enterprises and self-employees;
Import/export operators;
Sector studies;
Tax credits.
Each of them pays attention to a particular group of taxpayers.
The two principal functions of the software are:
Multidimensional analysis;
Research data related to a specific subject.
The multidimensional analysis allows fiscal behaviour
analysis of a group of taxpayers, based on information from
internal and external sources.
This function ultimately allows the extraction of lists of
taxpayers in order to plan the audit activity.
To define the preliminary criteria it is necessary to consider the distinctive features of the case that the user wants to
analyse and to choose the variables that represent the specific elements to be examined.
Some possible selections are:
Financial year (reference period); this is the primary
key;
Territorial environment;
Activity sector;
Sector studies;
Taxpayers size (on the basis of turnover or proceeds);
Type of prevailing income (based on the amount of
proceeds);
Income.

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Some examples of variables are:
Tax information acquired from annual returns, sector
studies, models, etc.;
Welfare information (withholding agent, public pension institute);
Economic information (financial ratios, transactions
regulated by contracts, grants, etc.);
Structural information (chamber of commerce data,
employees data, etc.);
General information (verifications carried out by the
tax authority, territorial competences).
The first result of the analysis is a report that shows the
number in the homogenous group. It is then possible to
either display the taxpayers information or apply further
filters to refine the selection criteria in order to reduce the
number of subjects obtained to make the group more
homogeneous.
The final result is a list of taxpayers with their fiscal code
and their accounting and fiscal information that the user
has defined.
Both the first report and the list can be extracted as an
Excel file so that it can be subsequently modified.
It is also possible to research data related to a specific
subject.
This function allows for the verification of the presence of
a single taxpayer in the database using the fiscal code, the
VAT identification number or the company name.
A link to the general tax register can also be used.

GERICO
An important tool, with distinctive features for the selection of taxpayers for audit is sector studies. Sector studies
are the statistical process, analysis and economic evaluation
of the normal turnover of small enterprises and selfemployed individuals with particular reference to the specific territorial features of each enterprise and how the
business is operated.
The process of approval of sector studies is the following.
The first phase consists of the design (in cooperation with
industry associations), sending out and collection of questionnaires.
From 1998, taxpayers with a VAT turnover under EUR
5,164,569 each year provide the Italian Revenue Agency
with their accounting data and other information about
their business by filling out a questionnaire that is an integral part of the tax return form.
These questionnaires ask for a large amount of information
about their business and the sector they are working in and
they change according to sector, industry or line of business.
Some information requested is, for example, the production capacity of the company, the power of its electrical
installation, the opening hours, the number of employees
and so on.
Secondly, there is the construction phase of the sector
study which consists of:

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1. Definition of the turnover function (and presentation

to the trade and industry associations);
2. Validation (verification by a committee of experts) and
publication;
3. Monitoring (analysis of trends of national economy, of
the market and of innovations of productive processes).
An econometric function enables the system to estimate
the normal level of turnover and compare it with the
turnover declared.
GERICO (the acronym GERICO stands for GEstione dei
RIcavi e COmpensi - management of revenue and remunerations in Italian) is an IT tool used to evaluate the
capability of small enterprises to generate revenue.
The software also allows a statistics-based tax assessment.
By inserting the values of the accounting and extraaccounting variables in the GERICO software, it is possible to evaluate the taxpayers position.
GERICO application supplies information regarding the:
Reliability of the income and remuneration declared;
Correlation of the main economic indicators (such as
productivity per employer, stock rotation, etc.) that characterise the taxpayers activity, with respect to the minimum and maximum values that can be assumed considering the normal behaviour of the operators of the sector
who carry out activities with similar characteristics;
Comparison with economic normality indicators.
By using GERICO the taxpayer calculates the normal
turnover referred to his/her activity and is informed about
the rules applied for tax assessment in the case of a divergence of actual from normal turnover.
If taxpayers declare lower income/remuneration than that
established by GERICO for their category, they are
defined as inadequate.
The Italian Revenue Agency can proceed with verifications
on the basis of the results of GERICO when a taxpayer
declares a lower income or remuneration even if only for a
single tax period.
For this purpose, the local office must invite the taxpayer
to submit an alternative estimate.
The number of the sector studies for the settlement of
assessments is being substantially increased. Now there are
over 200 approved sector studies.
Generally the statistics-based tax assessment like sector
studies, allows the tax administration to operate in the field
of control and verification with a greater degree of efficiency through the use of two fundamental steps:
1. Selecting the subjects that will undergo control;
2. Facilitating verification for the agents.

APPLE
APPLE is an IT tool designed to detect non-compliant
taxpayers based on cross-references between information
on their taxable capacity and risk indicators.
APPLE provides the ability to identify residents who
receive income from independent business activities or

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other sources, who completely evade or who do not pay the
right amount of taxes. There are about 55 million fiscal
codes loaded in APPLE.
The population of the database consists of all living individuals over 18 years old, having an Italian identification
fiscal code.
It is possible to select homogeneous groups of taxpayers
with common characteristics.
Tax auditors may select various pieces of information and
cross-reference them.
In particular, they can perform cross-references between
information from internal sources (such as tax returns, taxable income declared, turnover, information on each part
of the tax return, payment of taxes, social security contribution) and external sources (such as utility contracts, commissions, registered contracts or transactions, registration
of professional associations, payment of insurance premiums, transfer of capital abroad, ownership of aircraft, craft,
luxury car, ownership of property (land, buildings, etc.),
transactions subject to registration, licenses like authorisation to carry on activity, interest paid on a loan).
Users can apply their own selection criteria (queries) within the data warehouse, depending on the specific activity
they are conducting.
The output of the query will be a list of subjects (fiscal code
numbers) showing relevant details. A link to the General
Tax Register can be used to examine individual cases.
It is also possible to use some of this information to apply the
synthetic method. The synthetic method is based on the
spending capacity and the growth of capital of the taxpayer.
Italian law (Art. 38 d.P.R. 600/1973) allows the Italian
Revenue Agency to base its assessments on large discrepancies between the reported income and the estimated
income calculated on the basis of tax liability expressions
(richness indicators).
In particular, coefficients are established by law to translate
the purchase or simply the possession of certain assets (real
estate, cars, boats, horses, etc.) into a calculated income.
This is called the Income Meter (Redditometro). These
standard indicators are periodically revised.
If certain expenditure could not be paid from the declared
income, the tax office can correct the income if there is a
difference of more than 25%.
The taxpayer has the burden of proving a lower income
and must supply evidence to the contrary, for example by
demonstrating that the expenses were paid from exempt
income.
During 2009, the information of sector studies relating to
enterprises and self-employed workers was improved with
other information from RADAR and APPLE.

DIVA
Three years ago, the Italian Revenue Agency set up a
working group charged to study the problems related to
VAT credits.

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The task of the group was to suggest measures and instruments useful for detecting non-entitled VAT credit.
Some members of the group were given the task to study a
statistical instrument that, learning from the experience of
audits, constructs a model that counters the determination
of likely fraudsters, by improving the quality of controls.
The model, named DIVA, applies risk analysis to VAT
credits using data mining methodology.
The model was constructed with the joint cooperation
between the Italian Revenue Agency, IT enterprise SOGEI
(data processing partner of Ministry of Economy and
Finance) and two academic institutes of the Italian
National Research Council (ISTI and ICAR).
In the exploratory phase, several data banks of the Italian
Revenue Agency were merged in order to obtain as much
information as possible in relation to the economic and fiscal behaviour of the taxpayers included in the sample.
The key factor was that the taxpayer would have the attributes or behaviour patterns similar to the ones of the identified fraudster.
A set of rules was determined characterising the fraudster
and testing the reliability of the forecast. Each rule was given
by a set of conditions (joint stock companies, companies acting in trade sector, companies with a negative income, etc.)
In the end the best rules are applied to the whole database in
order to obtain the taxpayers list to check.
The principal guideline of the process is in maximising
three factors:
Profitability;
Equity;
Efficiency.
The profitability is calculated by the amount of VAT
recovered.
The equity is obtained by assigning the deterrent effect of
the audit activity.
The efficiency is the rate of recovery on the amount of the credit.
In this way, the fraudster is defined as a taxpayer to whom
an assessment has reduced his/her return VAT credit.
The values of the three factors define the threshold for the
interesting fraudster.
The interesting fraudster is the taxpayer presenting all the
three criteria or very interesting values for one of the criteria.
The three criteria have the same weight.
The model not only considered the dichotomic forecast
fraudster/non-fraudster, but it has also attributed a danger
score class to every taxpayer.
The model is driven by a set of rules attributing to every
taxpayer a score class between 0, 1, 2 and 3.
For every taxpayer the score is given by a formula combining the three targets.
The bigger the score is, the more interesting the taxpayer is for the tax administration.
The four classes of the danger score are:
Zero: no interest;
One: not much interest;

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Two: interesting;
Three: very interesting.
The construction of the predictive model has been finished. It maximises the use of the information contained in
the administrative databases, providing indicators on the
probability of VAT fraudsters by examining the information already available at the Italian Revenue Agency on
individual taxpayers.
The model is still in the experimental and testing phase but
has already reached a stage where a list of taxpayers has
been sent to local offices to test the model in a live environment.
We are attending the review phase of all audits after which
the results will be examined to evaluate the fairness of the
method.

Inductive Method and SIC

Where there are large discrepancies between reported and
estimated income the Italian tax administration has the
legal power to base its assessments on the activity conditions and characteristics (Art. 39 d.P.R. 600/73).
If the taxpayer has not complied with his/her accounting
obligations, or if he/she has partially or completely concealed the books and accounts, the inductive method can
be applied. This is also done if the errors and shortcomings
in the accounting system are so numerous that the books
and records can be qualified as unreliable.
The inductive method requires profits to be estimated by
using the information the tax administration has at its disposal without taking into account the data as stated in the
book and records.
The type of audit defined above is usually carried out on
small enterprises and it is normally based on the calculation
of cost of sales and of the average price increase of sales,
relative to a specific year.
In order to calculate these amounts, purchases and sales
invoice data is needed.
In these methods the simple and legal suspicions play a part
in respect to the burden of proof.
Sector studies that we have seen before are a kind of inductive method.
On the notebook PCs at disposal of the Italian Revenue
Agencys auditors there is the software SIC (that means

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Interactive Audit System) capable of estimating the yearly

income of the audited company using an inductive method.
SIC is configured to import all electronic accountancy data
and in particular purchase and sales invoice data.
SIC was created in HTML by the Central Assessment
Department of the Italian Revenue Agency, together with
SOGEI, in order to help auditors during their normal
activity.
The software has been created to improve the quality of
audit activities of all tax administration offices.
The result is the standardisation and the speeding up of the
audit activity.
SIC leads the auditor through the different steps of the
audit and, after the import of specific data, creates the final
report automatically.
When an audit is concluded, the auditor files the final
report (and all annex documents) online in the central database of the tax register.
This function allows the Central Assessment Department
to read point by point every report produced by local
offices and to prepare statistics based on the information.
For example, it is possible to verify the audit quality and
effectiveness in a given period or in a particular area or in
relation to a specific economic classification.
These analyses are very important for planning future
audit activities.

Conclusion
The Italian Revenue Agency recently invested large
resources in the development of information technology.
In particular, with the help of its informatics partner, the
Italian Revenue Agency created:
Computerised procedures that allow the online and just in
time acquisition of all tax returns and tax payment models, through its website www.agenziaentrate.it;
Software for control activity that allows selection and
matching information for the identification of high risk
subjects with a high level of precision.
In the last 10 years the results of this process, together with
the increase in the fight against tax evasion, allowed an
important growth of tax compliance and as a consequence
the Italian Revenue Agency is today considered as one of
the most efficient public administrations in the country.

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i n t r o d u c t i o n

enchmarking Activities
in the IOTA Membership

rganised in Budapest this was an interesting and informative workshop on benchmarking activities in IOTA Member tax administrations. This was a follow-up workshop to
one that took place 12 months ago and through a series of presentations and discussions
it sought to review the practical applications of benchmarking and what outcomes were emerging from ongoing benchmarking activities, both internal and international.
As a benchmarking coordinator in the Estonian Tax and Customs Board Maret LAANES shares
some of the administrations experiences in participating in benchmarking exercises.
Stefan ZIMMERMANN writes about the federal experience in Germany of performance comparisons between tax administrations.

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Benchmarking:
Practical Aspects

Estonia
Maret LAANES
Chief Expert, Benchmarking
Coordinator,
Estonian Tax and Customs Board
LKKE 5,
TALLINN,
(372) 676 2188
TEL:
E-MAIL: MARET.LAANES@EMTA.EE

Ms. LAANES joined the Estonian Customs Board in

1997. Since then she has been working as a project
coordinator for different projects Phare, Twinning,
Transition Facility, etc. Since May 2008 she is working at
the Development Division of the General Administrative
Department of the Estonian Tax and Customs Board
planning and coordinating foreign aid.

by Maret LAANES

B
B

eing a benchmarking coordinator in the Estonian Tax and Customs

Board, I would like to share some of our administrations experience participating in the benchmarking exercises. So far we have been involved
in three activities:
1. Feeder benchmarking exercise known as Fried Sheep;
2. Auditing traditional own resources and common agricultural policy
issues;
3. Risk management for customs clearance process, including organisational
structure, working methods and IT systems of risk management.
All the three aforementioned exercises have been arranged under Customs
2007 and Customs 2013 programmes. All of them are at their final implementing stage, and some conclusions can already be drawn, especially in the
light of practical aspects and based on the Customs 2007/2013 Benchmarking
Guide.
Every benchmarking project should be treated as a project with its limited
resources (time, people and money) and a clear objective. Also project methodology suits well for the implementation of the benchmarking exercise.

Plan
Benchmarking is a technique used to seek specific information based on the
practices, procedures and processes carried out, in order to compare them and
to stimulate innovative practices and improve performance, efficiency and
effectiveness. Before making a benchmarking proposal to the possible partners,
it is essential to undertake some planning and preparatory work. A nice slogan
with a humorous touch Keep It Simple and Stupid could be of use here. It is
wise to concentrate on a topic neither too complicated nor wide as it will be easier to manage the whole project afterwards.
Before presenting the benchmarking topic to the potential partner countries,
the initiating country should think of not only of the objectives but of the
expected results as well; project timescales; location and number of planned
meetings or other ways of communication (e-mails, video conferences, etc.);
estimated costs. It is useful to have a previously agreed proposal form or at least
a checklist not to forget important issues.

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Executing
All benchmarking exercises (projects) involve the gathering
and exchange of information. It has to be decided in the
planning phase already whether to use site visits or questionnaires, or both. Our benchmarking teams used both
and found it really useful to have the questionnaire ready
before the site visit not to forget the key issues in the area
to be benchmarked. It is essential to make sure that you
have agreed on terms you are using as the comparisons
should be made of like with like. Use a glossary of terms, if
necessary. It is also of utmost importance that the benchmarking team fully understands what their organisation
does in practice.

Report
After the practical benchmarking work, information gathering and analysis, a joint report should be prepared by the
benchmarking partners that contain all the performance
data and analysis together with the teams conclusion on
what constitutes good or better practice - that is the list of
best practices.

Implement
The final reports including the identified best practices of our
three benchmarking projects have been submitted to the
Commission and thus our administration has stepped into the

148

implementation phase which means that our senior management has to analyze the benchmarking reports recommendations in order to identify areas of improvement.

Review
Once the improvements identified by the benchmarking
project have been implemented, an evaluation meeting
should be held between the partners. The evaluation
should focus on the benchmarking process itself and the
success of the benchmarking exercise measured against the
objectives agreed at the beginning as well as the overall
improvements of efficiency and effectiveness achieved as a
result of implementing improvements.
As said before, the three benchmarking projects the
Estonian Tax and Customs Board are participating in are at
the implementation stage which means that one third of
the work has yet to be done. However, the experts of the
benchmarking teams can already state that the process of
benchmarking has been interesting and educating. The
project work, especially in the planning phase has helped
our experts to understand their own work better. They also
gained some basic knowledge of project management, not
to mention the lovely aspect of meeting many interesting
people and/or making new friends.

Happy Benchmarking!

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Benchmarking:
Performance
Comparisons
between Tax
Administrations
The Federal
Experience in
Germany
by Stefan
ZIMMERMANN

Germany
Stefan ZIMMERMANN
Head of Controlling Division,
Regional Finance Office Chemnitz
BRUECKENSTRASSE 10,
D-09111 CHEMNITZ,
TEL:
(49) 3714571200
E-MAIL:
STEFAN.ZIMMERMANN@OFD.SMF.SACHSEN.DE

Mr. ZIMMERMANN was research assistant for criminal

law and desk officer at the Ministry for Higher
Education. He has been working within the Saxon tax
administration since 2001. As head of the Controlling
Division he is now responsible for comparative performance management activities both internally and on
the federal level. He is also lecturer at the Saxon
University of Applied Sciences for Administration.

T
T

ax administration in Germany is governed by the general rule that the

16 federal states are free to organise their tax administrations on their
own. A few common standards are in force for all German tax offices,
but they do not consist of more than rough outlines and still permit a considerable variety of organisational structures and processes. On the other hand the
legal framework is almost completely the same and the statutory mandate to
assess and collect taxes evenly (Article 85 of the German General Tax Code)
commits the German tax administration as a whole. Add to this the highly complex system that determines the distribution of tax revenues and the calculation
of financial compensations between the federal states, and you will agree that
performance comparisons between the 16 tax administrations in Germany are
indispensable.
This article is based on a presentation given in Budapest at the IOTA workshop
Benchmarking Activities in IOTA Administrations (17-19 June 2009). It highlights the recent developments in Germany relating to comparative performance
measurement on the federal level and between the 16 federal states. It does not
deal with specific benchmarking approaches and tools that have been developed
by the federal states for their internal management purposes.

Where We Came From

Comparative performance measurement is not a completely new subject in the
federal system of Germany. To a certain extent collecting and assessing output
data from all states has always been part of statistical analyses made from a federal point of view. Two important restrictions, however, were characteristic of
these comparisons:
Performance criteria mainly focused on quantitative aspects, above all the
rate of processed tax assessment cases in relation to the expected tax assessment cases. Only in the field of tax audit monetary indicators received more
attention. All things considered, there was a quite limited understanding of
the state administrations performances.
The gathered information did not serve as a starting point for a permanent
and structured benchmarking process between the federal states. There was

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no systematic presentation, evaluation and analysis of
the collected output data. Cross state cooperation in
this area was selective and temporary.
This has changed.

Performance Comparisons on the

Federal Level: Recent Developments
Performance benchmarking activities between all 16 federal
states have gained importance and quality within the past
five years. Three particular aspects deserve to be mentioned:
Intensive and at times quite controversial discussions
stretching over several years have led to an agreement
on common standards with regard to definitions of
performance criteria and methods of data collection.
This process has not yet come to an end and probably
never will do so, because changes in the legal framework, the technical conditions and the strategic focus
constantly require adjustment of the indicators and
measuring methods.
Quantity as well as quality related criteria have been
defined for relevant fields of activity within the
German tax administration such as tax assessment
(income tax, corporate tax), tax collection and tax audit.
These indicators not only include the rate of processed
tax returns, but also the space of time between the tax
declarations submission and the resulting tax assessment notice, the rate of deviations of tax assessments
from tax returns, the rate of tax audits with no or only
minor monetary results and many others.
Measurement of economic efficiency is also practised
and focuses on the working time and the money spent
on producing the tax administrations outputs.
All the scores are held in a database. It contains average
annual results as well as important general facts, i.e.,
the total tax yield, the number of staff members and the
number of inhabitants. It is available online and updated yearly.
On the basis of this data a permanent cross-state working team compiles annual reports about the average
efficiency and effectiveness of the 16 federal states tax
administrations. They feature narrow descriptions of
significant results and remarkable trends with a focus
on selected key performance indicators. Data visualisation by means of bar charts, scatter plots (see Picture
1), box plots, etc. is an essential ingredient of these
reports. They are distributed to the senior executives
and chief officials and have proved to be very useful
when trying to understand and evaluate the current
position of a federal state in relation to the other federal states.

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Picture 1. Turnover According to the Size of the Company

Commonly organised surveys among external and

internal stakeholders are carried out, e.g., a nationwide
questioning of tax consultants via the Internet took
place in autumn 2009.
In 2009 these efforts to establish a systematic and permanent benchmarking process on the federal level were greatly supported by two statutory amendments:
A new Article 91d of the Basic Law for the Federal
Republic of Germany now explicitly mentions comparative performance measurement as an item of federal
cooperation.
A new Article 21a, Paragraph 2 of the Fiscal
Administration Code now obliges the Federal Ministry
of Finance to make bilateral target agreements with all
16 state ministries of finance on the basis of measurable
performance indicators. A pilot project with three federal states started at the end of 2009.
All these developments are crucial steps in the process of
establishing a comprehensive controlling system in
Germanys tax administration founded on performance
measurement and management within the federal states on
one hand and performance comparisons between the federal states on the other.

Conclusions With Regard to

International Benchmarking
Reviewing the different types of benchmarking (compare
Lindseth, Frode, Good Practice in Search for Best Practice,
Tax Tribune, Issue 25, 182-185) and being aware of the difficulties in finding appropriate performance indicators and measuring methods even within the homogenous legal and linguistic framework of Germany it is probably a good idea for
international benchmarkers inside and outside IOTA to compare processes and organisational structures first before tackling performance benchmarking. Otherwise the risk of misunderstandings and wrong conclusions might be too big.

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he Use of Information in
Selecting Taxpayers at Risk

his workshop organised in Budapest was designed to address the use of information in the
risk analysis process and was dedicated to examining the use of information in the risk
analysis process, with the overall objective of highlighting and sharing good practice.

In his article Jochen FRITZ writes about risk analysis in Austria, and Susan WALSH examines
risk analysis in the Irish Revenue Commissioners in tackling non-compliant customers.

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The Use of
Information for the
Purpose of Selecting
Taxpayers at Risk:
State of the Art of the
Case Selection
Procedure in Austria
by Jochen FRITZ

Austria
Jochen FRITZ
OR Mag. / Deputy Head of
Department, Centre of Risk,
Information and Analysis

BREHMSTR. 14,
1110 VIENNA,
E-MAIL:
JOCHEN.FRITZ@BMF.GV.AT

Mr. FRITZ has worked as an auditor for about 12 years,

graduated in Vienna at University of Business
Administration in 2006, deputy head of the Centre of
Risk, Information and Analysis since 2006.

T
T

he pivotal question is What is the information used for? What is the

final objective? These are questions that have not always been completely answered before starting the analysis of the data. We are all
struggling against a rising volume of data. A particular type of over information can not be denied. It is up to the experts and development specialists to
refine the masses of data so as to focus on the required core information.
The uncertainty of the accuracy and completeness of available data is also a big
problem. It is obvious that any analysis will fail if it is based on incorrect information. We have to recognise these issues - only then can a reliable outcome be
possible. Despite the risks the use of IT-assisted techniques for modern quality
management is indispensable.

Completed Controls
The Austrian fiscal authority employs about 8,400 persons of which about 700 individuals work in the field of customs. Approximately 100 of the 2,300 auditors are specialists for customs examinations and audits. In total more than 15,000 tax audits,
over 10,000 audits of wage-dependent levies and more than 32,000 other control
measures were carried out in 2008. In the same period more than 1,000 customs
audits and about 66,600 mobile checks were completed. Additionally, more than
26,000 companies were checked for illegal employment. Synonymous with the efficiency of the resources deployed is the hit rate achieved from the various controls.
The use of risk analysis based on available information improves the efficiency and
is used by the Austrian tax authority in many areas.

Risk Analysis Tax

Risk analysis is the basis of case selection in the Austrian revenue department.
It takes into account that taxpayers with a higher tax risk should be audited
more frequently.

Value Added Tax

Starting with VAT, the project steps are shown as below.
Risk teams (RIA) starts its work from step two.
Step 1 VAT screening
This first step is carried out by the Federal Computing Centre of Austria (BRZ)
where arithmetical routines are carried out automatically to check the accuracy

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a r t i c l e s
of the data. At this point there is nothing to be done by the
RIA.
Step 2 VAT monitoring
On the basis of the data provided, all identified risk factors
were evaluated and suitable analysis tools were developed.
The passing-on of the data to the tax offices is linked to the
data transmission of the stand alone single selection (Step
3). The first transmission started with data from January 2007
and formed the so called monthly VAT monitoring list.
Step 3 VAT risk analysis
All data regarding resident companies and taxpayers is made
available to the tax offices on a monthly basis (see above). Case
selection is done by the tax offices themselves using special
tools which were developed by RIA. These tools make it possible to filter cases using specific risk factors.
Step 4 VAT interpretation
Nationwide data analysis and interpretation of the global data
is carried out. The data is analysed and national trends and
distinctive features can be detected. The results are sent via
the Anti-Fraud Department at the Ministry of Finance.

Profits tax and audit plan preparation

A further project that was started is the analysis of income tax,
corporation tax and wage costs. The data is analysed according to specific risk criteria to allow for the development and
implementation of accurate and effective case selection. From
2007 the target has been to select about 10% of the audit cases
from the audit master plan with the help of risk analysis.

Internet Monitoring
Nowadays the Internet is a major part of business. Goods
and services are offered directly to the customer via the
Internet (e-commerce). There is a possibility that taxes and
other financial obligations are not assessed, or that persons
and companies are not appropriately registered.
At the moment there are three kinds of Internet activities,
which have different kinds of information:
Information about the company and:
Information about the articles and/or services;
Information about the articles and the prices;
Information about the articles, the prices and the available quantity of articles for sale (e.g., eBay).
The data is analysed using a specific software application,
developed in the Netherlands along with other software tools
developed within the Austrian tax authority itself. The results
of the analyses are then made available to the tax and customs
offices. This information can be compared with audit data
when available, or can in itself lead to an investigation.

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Risk Analysis Customs

The preparation of audit plans pass through regular
processes that include risk management. All these functions are carried out in close cooperation with specialist
departments from the Federal Ministry of Finance, the
customs collector and the audit departments. All extant
risks are identified and divided into specific risk areas and
risk factors.
On the basis of the collective risk areas and risk factors, a
risk analysis is carried out on the data of individual companies and those that fail are selected for audit. Mathematical
random sampling (e.g., monetary unit sampling) and separated selection procedures are the most important screening techniques. The result of the analysis forms the basis of
the draft audit plan. After approval by the Department
IV/3 of the Ministry of Finance the Austrian-wide audit
plans are transmitted to the audit departments.

E-Customs
Since 1 April 2006 all declarations are submitted through
the e-customs system. For this reason paper declarations
are a thing of the past. For participation in e-customs prior
authorisation is required.
Data is sent via the World Wide Web using the Customs
Electronic Data Interchange (EDI) system to the particular customs office. A parallel process provides information
about the calculated risk, based on validation of the data
and comparison against profiles created by the RIA. If a
particular threshold value is exceeded, the system, using a
traffic light indicator, switches from green to red.

Risk Scaling
Risk scaling is an attempt to use all available data and other
information to rank taxpayers in respect of their risks. In
Austria the project is still in the planning stage with only
basic assumptions and ideas of the technical requirements
being made.
Scaling is the indexing of taxpayers in relation to their risk,
based on their business activity, their entrepreneurial
behaviour and payment history.
The scaling procedure includes mathematical risk scaling
based on account analysis, the taxpayers behaviour and of
other uncontrollable factors. The second part of the
process is based on information, which is not useable in a
mathematical process. These are called red flags.
So as to avoid complicating the mathematical processes in
any way, the scale of individual risk factors were set to
between 1 and 9. There are options to allow the user to use
stratification and to set thresholds, but the most important
part of the scaling procedure is the process of weighting to
ensure that the relevant objectivity is applied.

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Risk Analysis in the

Irish Revenue
Commissioners:
Equality across the
Board Tackling
Our Non-Compliant
Customers
by Susan WALSH

Ireland
Susan WALSH
Manager of Risk Analysis Unit,
Irish Revenue Commissioners
REAP UNIT, ST JOHNS HOUSE, HIGH ST,
TALLAGHT,
DUBLIN 24,
(353) 14149772
TEL:
E-MAIL:
SUWALSH@REVENUE.IE

Ms. WALSH works for the Irish Revenue Commissioners

as an assistant principal. She was promoted to manager of Revenues National Risk Analysis Unit - REAP Unit
in October 2008. In 2002 she was selected to join
Revenues newly created National Risk Analysis Team.
Prior to joining REAP she worked, for the Irish Revenue
as an inspector of taxes auditor for 11 years.

W
W

ith the expansion of IT facilities, new procedures for analysing and

data matching have become a reality for the Irish Revenue
Commissioners.
The Revenue Online Service, ROS, launched by the Revenue in 2000, an
Internet-based system that provides facilities to file tax returns, make payments
and, view customer information, has enabled Revenues risk analysis system,
called REAP (Risk Evaluation Analysis and Profiling), to electronically screen
returns over several years of data.
Traditional functions within Revenue including reviews, checks and audits have
been targeted at our business customer base. The introduction of knowledgebased risk analysis, REAP, to our business customer base has assisted our officers in not only identifying our riskiest customers but, as importantly, has
enabled us to do something we were not in a position to do before i.e., deselecting the bulk of our customer base who are deemed compliant.

Getting the picture

Revenue takes pride in making it as simple as possible to pay taxes and duties.
However, despite Revenues best efforts, a minority of its customers are still
unwilling to play by the rules. Some underdeclare the amount of their income
and others seem to be able to have extravagant lifestyles while apparently earning very little. Revenue, rightly, wants to focus its attention on these non-compliant customers. To do this, intervention officers need a wider and more
informed view of their customer base.
Revenue is in a position to implement this
approach because of the increased availability
of data not previously available to it, both internal and third party, and the facility to data
match this third party data e.g., payments made
by other state bodies which should be treated as
taxable income / bank deposit interest accounts
/ property purchase documentation, etc.
To enable intervention officers determine the type of compliance intervention
required, which can range from a simple phone call to clarify an issue, a postal

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campaign, or an actual audit, they need to be made aware
of the type of customer they are dealing with and the issues
attaching to that customer.
This is where risk
analysis
comes
into its own. Risk
analysis can build
a fuller picture
for each customer
by analysing the
available data and
quantify the risk
attached.
Risk analysis provides our officers with a clearer picture of each customer by
producing a risk profile of each case.
A risk profile does exactly what it says; it builds a profile of
each customer by attaching all data available to that customer. By running a set of queries or rules through the
database, analysing the various sources of data, scoring the
results and ranking the cases according to those scores, an
individual risk profile is produced. The ultimate aim is to
identify the customers who are most risky or non-compliant and so more deserving of Revenues attention.
This risk profile will assist in:
Identifying customers who require a closer look and
conversely deselecting the more compliant customers;
Identifying the risk present and the type of risk;
Effectively allocating our scarce
resources
to
where they are
most required
and directing
them to address
the types of risk
presented.

Knowledge-Based Risk Analysis

To understand what risk analysis is currently doing it is
important to explain the process of how knowledge-based
risk analysis actually works; this is the process which
enables us to carry out our work.
The software being used to mine the data is only as good
as what it is asked to do. The whole process of mining, collation, sifting, evaluation and dissemination of knowledge,
which is at the heart of the risk analysis approach, will be
valueless unless the knowledge to analyse the data is harnessed correctly in the first place. Revenue captures a huge
and growing amount of customer information electronically and stores it in a virtual data warehouse. This is the raw
material on which risk analysis operates. The brains behind
risk analysis are the rules it applies to that raw material.
These rules have been derived from the collective knowledge and experience of Revenue staff expertise.

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To facilitate this work we have built up a network of experts

throughout Revenue. This in itself has been an innovative
approach within Revenue and is an intricate and vital development to enable the harnessing of the information that is
required to produce a quality product. This process takes
officers from their comfort zones and requires them to
share their expert knowledge and evaluate the outcomes of
their suggestions. They provide the risk team with their initial insights into what value to place on various data elements, and how to attach worth to that data. They are
encouraged to share their insights on what catches their
interest in a case, what signs of non-compliance they look for
and what thresholds they set before selecting customers for
intervention. Their work is continuous as they evaluate the
outcomes providing the risk team with vital data on what
works, what does not work, new ideas, new types of intervention, success stories and indeed practical operational suggestions. All of this enables us refine our model in accordance with their requirements and best working practices.
It is as important that this feedback process works both ways.
This ensures officers are aware that they are being listened to
and, that the value of their work is appreciated. These are the
people we are dependent on for our knowledge and without
their continuous insights this system will become stale. If the
risk analysis product is not kept up-to-date, reflecting current
experiences, officers will become disillusioned with it and
revert to other means of risk management.

Bringing Value to Data

I have written about obtaining expert knowledge and
attaching worth to data, so how does risk analysis do that?

Expert knowledge
Risk analysis converts the expert knowledge into what are
called rules. These rules are then used to interrogate the
data. Of course, I am not going to release our state secret
rules here, but in general rules focus on issues like, failure to file returns, patterns of late filing or late paying,
underpayments, patterns between returns, financial
accounts figures outside norms, low payments of tax compared to high levels of turnover, third party information
which may provide evidence of underdeclaration, previous
audit history, and many others.
Using our software, ESKORT, we apply these rules and
analyse our complete business customer base, which currently stands at in excess of 830,000 customers. Data is
analysed over a 5 year period and at a rate of 15 customers
per second. The data is a constant flow, and new sources
are regularly being added. We believe there is enough
information in five years of data to develop an informative
and revealing risk profile for every customer.

Attaching worth
It is not fair to say that every rule carries the same weight
in this process of identifying risk to Revenue. For that rea-

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son there are mechanisms built into each rule, that carry
the weighting required in order to add value to the risk
being identified.
These mechanisms, or scoring methods, are called Profiles.
The profiles are only activated if the hypothesis within the
rule proves true. By adding the scores from these profiles,
an overall risk rank score is attached to every customer in
our complete customer base. Thus we provide a listing
with the risky customers identified as the top ranking cases.
Here is an explanation of the three primary profiles currently in use by REAP:
Notionally, we calculate the potential tax at risk.
The customers behaviour is calculated using a pointsbased scoring system. This marks the customers
behaviour, based on the track record of the customer,
in their compliance with their tax obligations.
A quality score that indicates the strength of the results
being presented. This overall quality score is based on
a combination of sub-profiles, which includes a Hits
score. The Hits score reflects that over-riding principle that the worse the disengagement, the higher the
potential risk.
The scores are totalled for each case and a list of these cases
is produced ranked in accordance with their scores. The
worst offenders the riskiest cases appearing at the top
of this risk ranked list.

Focusing on Risk
The mantra for officers involved in the risk analysis process is
to know our customers by what they do, not by who they are.
By this we mean one should accept the data being analysed
as pure, do not manipulate it to produce what one is
expecting the results to be, do not bring any preconceived
notions of risk into ones thinking when trying to identify
risk. For example, do not presume everyone in a particular
sector will have the same issues or risk, let the analysis do
that thinking for you. By analysing pure data with generic
rules a fairer, more equitable results set should be produced and the end result - that of delivering a risk focus to
non-compliance - will be achieved.
By providing a risk rank to all customers, risk analysis will
also have identified a substantial amount of the customer

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base that does not require an in-depth interrogation.

However, for those identified as risky, the system also
directs officers to the areas where issues have arisen that
require an intervention. The key to identifying risky cases
is in the combination of the rules that have fired within a
case. It is at this point that experienced officers take over,
analyse and assess the risk in each case, bring local knowledge and their experience to bear and select suitable cases
for appropriate intervention.

Benefiting All
Using REAP to identify and quantify risk has many advantages. It represents a quantum improvement in the way we
identify, prioritise, and deal with non-compliance in all of
its forms. It will risk rate our complete customer base. It
will prioritise customers based on their risk and the scores
attaching to that risk. It is comprehensive it analyses all
data over an extended period. It is fair and equitable the
same rules apply to every case and the scores are applied
consistently. It is flexible the software used allows for any
changes required to the likes of threshold, ceilings, scoring,
to be made easily - and it will constantly evolve based on
past experience.
The vast majority of tax and duty payers in Ireland play by
the rules, those who do not need to be identified and dealt
with accordingly.
We will be evaluated more than ever in why we do what we
do, thus the need to identify our core objectives and seek to
optimise our resources in pursuit of those objectives. With
customer bases expanding in tax administrations, the ideal
situation of having our resources interact on a case-by-case
approach is but a dream. The complexity of our case base
and the increased availability of data, in particular third
party data, are drivers in the wider use of technology to
assist with what were previously traditional manual operations. Risk analysis provides the solution in offering statistical analysis which produces informed results that direct
our scarce resources to non-compliant customers i.e., those
who require an intervention, it also informs them when
and what intervention to make. Used correctly risk analysis satisfies all the criteria required to assist in tackling our
non-compliant customers.

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inancial Instruments
and Services

wo workshops on financial instruments and services were held in Budapest, one at intermediate level, and the other at advanced level. They were very practical in nature the
content being selected to highlight issues in the area of financial services.

A Portuguese case related by Joo Adriano SARDINHA looks at combining financing transactions in foreign currencies with currency rate swap contracts to reduce taxation.
Markus KPFER from Switzerland describe in their article the Swiss experience on dividend
stripping.

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Financing
Transactions in
Foreign Currencies,
Combined with
Currency Rate Swap
Contracts in order to
Reduce Taxation: A
Portuguese Approach
by Joo Adriano
SARDINHA

Portugal
Joo Adriano SARDINHA
Junior Tax Auditor,
Portuguese Tax Administration

AVENIDA DUQUE DE VILA, N. 71, 2 PISO,

1000-139 LISBON,
(351) 21 368 48 61
TEL:
E-MAIL: JASARDINHA@DGCI.MIN-FINANCAS.PT

Mr. SARDINHA has a degree in financial management

and organization.
He began his professional career in the national
telecommunications company. Then he worked, as
junior auditor, in two international audit companies.
Before entering the Portuguese tax administration, he
taught at the college of management in Lisbon in the
area of corporate finance.
Since 2005, he works in the Portuguese tax administration.

T
T

Introduction
his article was written following the participation of the Portuguese
tax authorities, represented by two inspectors of the Tax Directorate
General of Taxes (Claudia Marina Santos and Adriano Joo Sardinha),
at the IOTA international meeting, in November 2009.
This meeting was titled Taxation of Financial Instruments - Intermediate
Level, which took place in Budapest (Hungary), had a number of very interesting presentations by the various participating tax administrations.
The Portuguese participants gave a presentation entitled Financing
Transactions in a Foreign Currency, Combined with Currency Rate Swap
Contract to Reduce Taxation.

Conceptual Framework
Before proceeding to the description of the case study itself, detected by a
Portuguese tax audit, we will give a brief conceptual introduction.
A Swap leads to a financial transaction, which is the exchange of a contract or
a financial product with another. As an example often is mentioned the Swap
interest rate by which a company agrees with a bank to exchange, for example,
a loan interest rate for a fixed interest rate or vice-versa. Thanks to its AngloSaxon origin, the Swap or Swap contract is essentially an exchange.
Moreover, it was the reference to the origin, which perpetuated the strange
term, and probably the Swap contract would otherwise be called a financial
contract or another exchange based on its basic element: the actual exchange.
Indeed, Swaps, close relatives of forwards and futures contracts, result in an
exchange agreement established between two counterparts, two cash flows for
a predetermined time period. A target of increased sophistication, thanks to the
increasing competitiveness in this market, the Swap can be not only an excellent tool for hedging, but also an interesting derivative financial instrument for
investors.
So, the deep financial derivative changes are not surprising, which have become
apparent in recent years, both nationally and internationally.

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Thus, with the growth and diversification of such products
(and corresponding increase in technical complexity), the tax
authority has had to adjust to meet the current situation, resulting in a growing complexity of tax treatments.

Currency Rate Swap

A currency Swap contract consists of a simultaneous transaction in two ways - spot and forward, one or more currency
exchange rates against the other party or exchange rates, either
fixed or variable.
This is a structured product tailored to the needs of the parties involved and whose main characteristic is to transfer the
responsibilities in terms of currency exchange rate, according to the corresponding expectations, on a rise or fall in
exchange rates.
In this type of contract the following exchanges are implied:
A counterpart to the purchase orders a certain exchange rate
in the switch to another exchange rate B;
This same counterpart sells the
exchange rate B for switch, the
exchange rate in a forward transaction specified with a future value
date.
Thus, in the Swap contract exchange
rate, the gain or loss for each party will
be the difference between the
exchange rate transaction futures and
exchange rate on the spot transaction
(Swap point).

Additionally, the interest paid to the bank is also subject to

withholding tax according to Council Directive 2003/49/EC
of 3rd June 2003 (10% until 30th June 2009 and after that 5% until
30th June 2013).
Despite the operation being performed in a traditional manner
and of course more predictable (instead of the normal loan previously described), the management decision that accomplished
the operation that was really carried out, is described below.
In spite of agreeing to receive EUR 1,000, the company contracts with a bank to finance the transaction in Japanese
yens (JPY) (similar amount to EUR 1,000 and an interests rate of
1.5%, for example).
However, in a simultaneous event, the company initiates
another contract Currency Rate Swap - with the initial
bank with the following conditions:
Company gives JPY to the bank and receives interests at
the rate of 1.5%; and
It borrows EUR 1,000 and pays interests of 5% rate.

Facts
The initial context of the situation presented is related to the fact that a
Portuguese company needs funding of
EUR 1,000 (fictionalised and simplified
value in order to give a better understanding of the case).
Then, a normal operation would be to contract with a bank the
financing amount and interest rate of 5%. So the Portuguese
company would pay EUR 50 of interest per year.

Tax Consequences
Due to the facts previously mentioned, it is important to identify the effects of the transactions as they relate to Stamp Tax
and Withholding Corporate Tax
that focus on this kind of financial
operations:
Stamp tax is calculated on interests
of 1.5% (lower), instead of 5% (first
and main contract);
Withholding is allocated on interests of 1.5%, instead of 5% (main
contract).

Final Conclusions
It should be noted that, in Portugal, interest is subject to taxation in Stamp Tax (specific Portuguese tax for financial transactions) 4% (EUR 2, in the described case).

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In conclusion, it is important to
summarise the two major findings and the consequences
to the tax that result from the fact that the company has
opted for a combined financial product rather than go

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a r t i c l e s
through a traditional mortgage from a financial institution.
First, the company pays 1.5% of interests due to the main
contract (JPU), but receives the same amount due to the
second contract Interest Rate Swap; and
On the other hand, due the combination of funding and the
Swap contract, the company globally pays 5% interest
which corresponds to exactly the same situation that would
have happened if the loan was originally negotiated in EUR.
Thus, it becomes clear that the main objective of this operation was to achieve a double reduction of taxation, in terms of:

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Stamp taxation; and

Interests withholding.
The situation described above, as well as the tax consequences
identified, succeeded due to the fact that the following is
applied in the Portuguese tax system:
Interest Rate Swaps are not taxed in Portuguese Stamp Tax
(Swaps are not considered an operation of funding and
then a financial transaction); and
Swap outcomes are not considered of interest in the
Portuguese tax system (the interest is with the withholding
tax which is not applicable in this case).

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Dividend
Stripping
A Swiss
Experience

S witzerland
Markus KPFER
Head of Team of Legal Division,
Swiss Federal Tax Administration

EIGERSTRASSE 65,
CH-3003 BERN,
(41) 31 322 73 63
TEL:
E-MAIL:
MARKUS.KUEPFER@ESTV.ADMIN.CH

Mr. KPFER has been working for the Swiss Federal Tax
Administration as a lawyer since 2001; since 2006 as
head of team of the Legal Division.

by Markus KPFER

T
T

Introduction
here are two types of direct taxes within the Swiss tax system on a federal level: an income tax for private purposes and a corporate profits
tax for business purposes.
Besides the mandatory disclosure regime operating in Switzerland, an anticipatory tax guarantees that the taxpayer declares all his/her/its incomes deriving
from movable property such as dividends. This tax is based on the principle of
self-declaration and self-payment. The tax rate is currently 35% and it is calculated on the gross benefit. Hence, a Swiss company paying a dividend to a
shareholder is the debtor of this tax and it has two main obligations:
It has to deduct the tax from the gross dividend paid and to transfer it to its
shareholder (tax shifting);
It has to pay the tax to the Swiss Federal Tax Administration.

Basic Principles Concerning the Anticipatory Tax Claim

The main goal of the anticipatory tax is to guarantee that the income tax and
the corporate profits tax are paid.
In cases where the recipient is a Swiss resident and the beneficial owner of the
income, he/she/it is entitled to a refund of the tax withheld, if he/she/it properly declares income and capital for the purposes of direct taxation.
For non-resident taxpayers, the anticipatory tax represents a final tax burden.
Partial or total refund is granted only based on a double taxation convention
(DTC) which Switzerland has concluded with the country of residence of the
recipient of the income.
Of course, the applicant of the tax claim has to be the beneficial owner of the
income and the tax refund should not be qualified as an abuse of law. In this
case, there is no possible refund and the anticipatory tax becomes a final tax
burden. The anticipatory tax rate is higher than the income and the corporate
profits tax rate. That is why the shareholder has a strong interest to declare
his/her/its income in the tax return and to be eventually tax compliant.

The Anticipatory Tax Refund under Double Taxation

Conventions
DTCs generally provide for reduced rates of withholding tax on dividends,
interest and royalties. Typically, the rate of withholding tax on dividends which
could be final depends on the non-resident recipient and his/her/its quota in

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the share capital of the company paying the dividend. If the
non-resident recipient controls (directly or indirectly) at
least a given percentage of the voting power (or holds a
given portion of the capital shares) of the dividend-paying
company, the withholding tax rate could be reduced or the
taxpayer could even be fully exempted.
Every DTC is the result of a negotiation between two
countries and the outcome concerning tax rates of withholding tax is often different among the conventions a
country has signed.
Therefore, as an example, if a British shareholder receives
a dividend from a Swiss company, in which he/she/it holds
less than 20% of the capital shares, this recipient should
claim for a refund of the Swiss withholding tax of 20%.
This means that the difference between the Swiss withholding tax rate (35%) and the refund allowed under the
Switzerland - UK DTC in such a case (20%) becomes a
final taxation in Switzerland for the shareholder.
If the same person was a resident of Denmark, he/she/it
could be fully exempted from the Swiss withholding tax
under the Switzerland - Denmark DTC (even with a shareholding of less than 20%).
The Swiss anticipatory tax turns out to be a withholding
tax on an international level and its domestic guarantee
character becomes final for a non-resident recipient (fully
if there is no DTC between Switzerland and the country of
residence or reduced if there is a DTC providing a reduction or an exemption).

Dividend Stripping Cases

As aforementioned, the country of residence of the shareholder has great influence on his/her/its tax burden.
In order to take advantage of this situation, some banks
started to implement an arbitrage strategy related to the
country of residence of the recipient of dividends paid by a
Swiss company using the DTC with the minimum rate
concerning the withholding tax.
In 2007, the Swiss Federal Tax Administration received
much more refund claims from Danish banks concerning
dividends paid by Swiss companies than in previous years.
Therefore, the Swiss Federal Tax Administration started to
pay more attention to these claims and asked for more specific information from the applicants.
The outcome of these inquiries showed that the Danish banks
had bought the Swiss shares only a few days before the Ex-dividend date (cut off point for the buyer to purchase stock in the
company and still receive a dividend payment).
The analysis of the shares books confirmed that the sellers
of the Swiss shares to the Danish banks were people who
could not claim for a refund (full or partial) of the Swiss
withholding tax.
The Swiss Federal Tax Administration can typically refuse
a refund if:
Applicant has no beneficial ownership of the shares
generating the dividend;

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It can prove that the refund could lead to an abuse of

law.
In the first case, the applicant has to be the real owner of
the shares at the moment of the Ex-dividend date.
He/She/It has to prove this fact. Beneficial ownership does
suppose that there is no obligation to transfer fully or partially the dividend to a third person (so called untroubled
property). However, this situation can be qualified as dividend stripping by the Swiss Federal Tax Administration if
such a contract exists between the applicant and the original owner of the shares.
In the second case, we can talk about an abuse of law when
the tax purpose is more important than the economic one.
This happens when a particular transaction has an unusual
form and the choice of this form is abusive and it leads to
significant savings on tax.
In order to bypass the issue arising from the beneficial
ownership and the consequent denial of the refund from
the Swiss Federal Tax Administration, false applicants
started to apply a different strategy:

In this case, the Danish bank issues call options on particular

Swiss shares only a few days before the Ex-dividend date. All
those options are bought by a British bank. The pricing of the
option incorporates the dividend (shares traded before the Exdividend date are termed cum-trading shares because they

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have a dividend attachment from the company). At the same
time, the British bank issues put options which are purchased
by the Danish one. In order to hedge the risk of these options,
the Danish bank purchases the underlying of the options (the
Swiss shares). Incidentally, the Danish bank buys the shares
from the British bank. The put and call options have the same
strike price and the same expiry date.

A few days after the Ex-dividend date, the transactions are terminated. This means that the Danish bank buys the call
options from the British bank and sells the put options to the
same counterpart. The hedging of the shares is now pointless
and the underlying is sold back to the British bank.
This situation has the following result:
Danish bank is entitled to receive the dividend from the
Swiss company and will claim the withholding tax refund;

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Pricing of the call options includes the implied dividend; therefore, the British bank receives the dividend
via this transaction (minus the bank fees);
Danish bank takes no financial risk (due to the hedging
transaction).
Under this situation, it is more difficult for the Swiss
Federal Tax Administration to deny the beneficial ownership of the Danish bank, which will then claim for a withholding tax refund. However, the Swiss Federal Tax
Administration would emphasise that the Danish bank has
a contractual obligation to transfer the dividend to the
British bank. In fact, the British bank is entitled to receive
the dividend by means of the transactions managed with its
counterpart (implied dividend). Nevertheless, such a situation has to be qualified as an abuse of law. There is no economical reason to pursue other than for tax purposes. The
form of the whole transaction is clearly unusual and abusive and it results in a considerable saving of tax if accepted by the tax administration.
As presented in this article, a dividend stripping case
should be easy to solve. In reality, such cases could be more
complex than that explained above:
The international connections make it very difficult for
the Swiss Federal Tax Administration to gather all the
important information needed to examine a refund
claim;
The complexity of the transactions (structure, number
of counterparts involved, different countries and various DTCs) makes the work of the Swiss Federal Tax
Administration to find out the truth very hard.

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i n t r o d u c t i o n

he Economic Crisis and Its

Implications for Tax
Administrations

zczecin in Poland was the venue for this workshop organised in collaboration with the
Polish tax administration and it consisted of a series of presentations and discussions organised to review three aspects of the current global crisis: compliance and tax collection, taxpayer services and assistance and organisation and management of the tax administration.
The global financial and economic crisis challenge and responsibility for the tax administration
are the subject of two articles.
Cristina BERGNER reports on the economic crisis and its impacts on the Swedish Tax Agency,
and Jasmina CVETANOSKA describes the effects of crisis on the tax administration of the former Yugoslav Republic of Macedonia.
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The Economic
Crisis and Its
Impact on the
Swedish Tax
Agency

by Cristina BERGNER

S weden
Cristina BERGNER
Business Development Officer,
Swedish Tax Agency Head Office

SKATTEVERKET,
171 94 SOLNA,
(46) 10 574 81 05
TEL:
E-MAIL: CRISTINA.BERGNER@SKATTEVERKET.SE

Ms. BERGNER is Business Development Officer at the

Head Office of the Swedish Tax Agency. She manages
STAs operations and strategic planning regarding tax collection and tax payment including the effects of the financial crisis on the STA. Cristina is also involved in STAs work
regarding tax evasion and international risk areas.

T
T

his article summarises the economic crisis and its impact on the
Swedish Tax Agency. It originates from a presentation made at the
IOTA workshop Economic Crisis and Its Implications for Tax
Administrations, which took place in December 2009, in Szczecin, Poland.

Sweden has the Best Taxpayers in the World!

In Sweden we are very proud of our taxpayers and often send this message
through the media. The message is important since we believe that it has a good
effect on compliance.

Why the worlds best taxpayers?

The compliance level in Sweden is about 90% and the tax gap, i.e., the difference between total tax that theoretically should be paid by all taxpayers and the
tax that is actually paid, is only about 10%. We are very pleased with this result,
but we work continuously on improving our efficiency, maintaining a high level
of compliance and to reduce the gap. The fact is that almost 100% or 99.4% of
all determined taxes were paid voluntarily in 2009, although the loss in tax collection increased by more than 60% in the last two years. This indicates that
the best taxpayers in the world now seem to have more problems in paying. To
decrease the loss and help taxpayers with payment problems will be one of the
biggest challenges for the tax administration in the next few years.
The collection costs and effectiveness of the tax administration is also depending
on compliant taxpayers. The collection cost is approximately 0.5% of the total
revenue. It means that the cost to collect SEK 1000 is only SEK 5 in Sweden.
The Swedish Tax Agency produced the tax gap map in 20071 and we plan to update
it in 2012. There is also a report on the map, which shows the content of the gap
or, more correctly, our knowledge of it. We estimate that the tax gap so far has been
rather stable over the decades. The tax gap is approximately a tenth of the total tax
revenue or 5% of GDP (Gross Domestic Product). It is interesting to note that
the results from compliance checks, which means both field and desk audits, is only
SEK 22 billion or 1.5% of the total tax revenue. The conclusion is that auditing and
checking is not enough to reduce the tax gap.
1) The tax gap map 2007, www.skatteverket.se

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The economic crisis only threats or...
The Swedish economy has, so far, been in fairly good balance during the economic crisis. Some tax reductions that
had already been planned before the crisis have been put
into force and a low main interest rate has kept consumption at a high level. Maybe we have not yet seen the full
effect of the crisis. The forecast for the GDP for 2009 is
approximately a 5% decrease and there will be around 10
12% unemployment.
We are also seeing a trend of increasing organised crime
in society. We have noticed that organised crime and
criminals are infiltrating more and more into everyday
life, both in ordinary businesses and in the tax system.
The trend is that small businesses come into contact with
criminals and criminal activities more often. This is both
a threat to the tax system and to the tax administration. It
has also become a security problem for our tax auditors
and inspectors.
Another topic is the shadow economy and hidden
income. In Sweden we estimate that half the tax gap, about
SEK 66 billion (EUR 6 billion), is related to hidden
income from work and illicit work, or as we call it the
black market income. We have found that a large part of
this is related to unreported income from small businesses
and self employed persons. Information tells us that it is
the same situation in other countries in both Europe and
North America.

... opportunities as well?

Globalisation is a trend that can bring both threats and
opportunities for the tax system and the tax administrations. The general risk picture indicates that it is a threat to
the tax base in different countries. The problem is related
to unharmonised taxes and different tax rates, which means
the risk of tax avoidance, for example, through transfer
pricing and cross-border tax planning. Globalisation also
has an impact on taxpayers behaviour.
The trend of globalisation also highlights a need and
opportunity for more international cooperation between
tax administrations and better exchange of information. A
good example is how new agreements have opened up and
reduced the number of tax havens. It demonstrates a positive trend with further possibilities for tax administrations.

Risk Management
At the Swedish Tax Agency we have worked with risk management for many years, mostly focusing on identifying
risks and risk assessment. In the Table 1 you can see an
illustration for risk assessment that we used in our strategic
planning this year.
In the red boxes (for the purpose of this article - black) are
the risks with a high probability of happening and which
would have a serious impact on our ability to achieve our
long term goals, for example, to halve the tax gap.

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Table 1

Identified risks
In the perspective of the economic crisis several risks have
been identified.
We believe that there is a very high probability of leakage
of cash from the tax system and we also believe that this
leakage will have very serious impact on tax revenue and
the taxpayers trust in the Swedish Tax Agency (and the tax
system). Refunds of VAT and other taxes are a target for
this risk. When access to credit is low or unavailable, credit-constrained taxpayers may be tempted to use tax evasion
as an alternative source of financing their operations. For
example, businesses can fail to pay the government the
taxes they have collected from their customers. It can be
either VAT or employees payroll taxes.
There is also a very high probability for an increase in tax
collection losses during the economic crisis. It is likely
that it will be bankruptcies that affect the tax collection
losses the most.
We do not believe that there is a very high probability for
an increase in tax fraud or the shadow economy as a
whole, but we do believe that the trend and causes for fraud
may change.
Another example is changed behaviour in aggressive tax
planning. Earlier tax planning was based on reducing profits whereas now we are seeing efforts to create deficits for
future tax deductions when the recession is over.

Early warning systems and indicators

We consider it important to observe not just the numbers
but also the size of the amounts. For example, a few bankruptcies in large companies can result in a large amount of
tax loss. These are some examples of indicators that we are
monitoring during the crisis:
Expected VAT payments and refunds;
Amount of employment taxes and social fees;
Amount of preliminary taxes;
Patterns of tax payment and unpaid taxes;
Number of bankruptcies;
Number of redundancies.
In the Swedish Tax Agency each region has a separate
analysis unit which monitors and reports regularly
(monthly) to the Head Office. If necessary the Head
Office will take decisions on changes to national action
plans to prevent tax losses.

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What do the indicators show?
Some interesting observations have been made during
2009. First we observed an increase in unpaid taxes
handed over to the enforcement authority. The total
number of unpaid taxes for the period has increased by
approximately 5% and the total amount has increased by
13% (or approximately SEK 1.1 billion) compared to the
same period in 2008. Most of the amount relates to a few
private individuals. If we look at the businesses, the numbers have increased but the amount has decreased in 2009.
In Sweden taxpayers pay preliminary taxes in advance and
the Swedish Tax Agency decides about preliminary taxes for
the next year in December. Our legislation states that preliminary taxes for businesses should be adjusted upwards by
10% of the final tax figure for the previous year if no preliminary tax return is given to the tax administration. This
automatic adjustment works well when we do not have a
recession. Most businesses normally do not file preliminary
tax returns; they just accept the adjusted amount. However,
due to the economic crisis, the Swedish Tax Agency in
December informed them of the possibility of adjusting
their preliminary tax to better correspond with their expected profits. The crisis indicated that we had reasons to believe
that the profits for businesses were going to decrease in
2009. A large number of companies followed the recommendation and applied to reduce their preliminary taxes.
It was noticed that the number of applications for reducing preliminary taxes due increased by 20% and the
amount of reduced taxes is 57% higher than last year.
We also noticed an increasing number (+ 6,000 or 66% of
a total of 15,000) of applications for an extension of the
payment period.
The number of applications for bankruptcy is an important indicator. In 2009 we saw an increase of approximately 25%. As has been mentioned before, we observed many
bankruptcies in large companies, which can have a marked
effect on the financial situation and activities of their
employees. This indicates another risk for an increase in
tax collection losses in the coming months.
Another effect of the economic crisis is the increased number of redundancies in both the private and public sectors. It is most frequent in large companies, for example,
the car manufacturing industry in Sweden.

Preliminary tax
The amount of reduced preliminary tax for companies is,
as mentioned above, more than 57% higher than last year.
This reduction has increased from approximately SEK
52.3 billion in 2008 to almost SEK 81.9 billion in 2009.
The question is, does the reduction correspond to the
development of business profits for the year? If not there is
high probability for tax collection losses at the end of the
year in the final tax assessment. There is also a risk that
businesses may be tempted not to report all income in
order to avoid high taxes and a tax debt.

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In spite of the economic crisis, statistics from some industries, especially service industries and retailers, indicate
that the turnover is not reducing as much as expected and
so are probably the business profits. People seem to be
spending more money than predicted on consumables.
This may also indicate a risk for unexpected tax debt and
tax collection losses from those individuals who will declare
their incomes accurately in their tax returns. There is also
a risk of change in the taxpayers behaviour to become
more non-compliant. For example, some may try to avoid
tax and any tax debt by not reporting the right income on
their tax returns.

VAT
The indicators also compare VAT payments and the development of Gross Domestic Product (GDP). Lower VAT
payments than reflected in the decrease in GDP can indicate tax losses and should be analysed. Monthly, the VAT
returns are analyzed together with the cost of employment
to see if there are trends and/or effects that can be prevented. Depending on the results of these analyses the
regions within the Swedish Tax Agency are prepared to
change priorities in their work and/or in their organisation.

Legislative Changes in 2009

As a tax administration we can take appropriate measures,
but stronger tools may be necessary; such as legislation
changes to help the situation. The Swedish government
has, in late 2008 and in 2009, made some changes in legislation to help the taxpayers during the economic crisis and
also to stimulate economic growth.

Temporary deferral of tax payment

Legislation changes have been made to allow for the temporary deferral of tax payments for a maximum period of
one year. This legislation could only be used in 2009 and
there is a fee plus interest to be paid on the amount. The
temporary deferral could be used for two declaration periods without the taxpayer giving specific reasons as to why
it was required.
The Swedish Tax Agency in 2009 made more than 12,000
of these decisions on a total amount of approximately SEK
5.9 billion.

Reduction in tax payable for renovation

of private houses
The government also, in December 2008, introduced an
immediate reduction in the amount of tax payable for renovation of private houses. The aim of this legislation was to
stimulate the economic growth and to reduce the shadow
economy and hidden income.
The owner of a house gets a 50% reduction in tax on
labour charges. The reduction of tax is allowed up to SEK
50,000 (or EUR 5,000) per year and person. A married
couple who together owns a private house can get reduc-

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a r t i c l e s
tion of tax up to SEK 100,000 per year (or EUR 10,000).
Surprisingly this legislation is very popular! Since December
2008 we have received many more applications than expected.
From 1 July 2009, the law again changed and now the owner
of a house no longer has to apply to the Swedish Tax Agency
for the tax reduction as they now get the reduction of labour
charges directly on the invoice for the work done and the
company doing the work instead applies to the tax administration for the refund. The legislation was changed to make it
easier for the private person to get the reduction, but it means
more administration for businesses.
It has been a real challenge for the tax administration to
inform and answer all the questions from both private individuals and construction companies and to also make the necessary changes in our IT systems. We believe though, that the
effect of this legislation is that a lot of hidden income from
work on houses has now been brought to light.

Action Plan in Practice...

Due to the economic crisis the Swedish Tax Agency used
every available measure to create the appropriate action plans.
As mentioned before, our 7 regions each have an analysis unit
which regularly analyzes and monitors indicators to provide
an early warning. Several tax regions have taken on an assignment to analyse and monitor different risk areas and indicators. For example, one tax region regularly monitors the
development of tax arrears and tax collection losses. Another
tax region monitors the development of VAT refunds and
payments. A group was formed at the head office with the task
of creating more detailed action plans as a result of these
analyses. This is a normal part of the tax administrations business. The aim is that these plans will apply to all tax regions
and set a focus on equal and effective treatment of taxpayers in
the whole country. During 2009 we were forced several times
to change our compliance plan and reassign the work load
throughout all regions.
The plan is based on a compliance strategy, which means
that we try as hard as possible to help and inform our taxpayers. We also have an opportunity to do checks and
audits if necessary. We believe that in times of economic
crises it is more important than ever not to disturb the
compliant taxpayers with unnecessary and costly tax audits.
Therefore our audit selection is carefully focused towards
those we have reason to believe are trying to evade taxes.

Information to taxpayers
One of the first things in our revised action plan was to
send letters to taxpayers with a reminder of their tax debt.
The next step was to follow up the letters with a phone
call. This we found was a cheap and effective way to communicate. As we had many taxpayers who had reduced
their preliminary taxes and many who had applied for
deferral of tax payments it was necessary to keep in contact.
Through a phone call we could ask them how their business was going and how their economic situation had

168

developed in the last few months. We also took the opportunity to discuss the risk of tax arrears and to answer their
questions.
Next in the plan we used visits. An important part of our
compliance strategy is to work closely with the taxpayers.
Therefore, we now, more often than before, pay visits to taxpayers to help keep them informed and to discuss different
issues regarding declaring and paying tax. These visits are
not the same type of visit that we do for tax audits or the
inspection of businesses. We started making more frequent
visits last year as a result of the new legislation introduced in
2008, to try and reduce tax evasion. In 2009 a survey was
made which showed that a good trust in the tax administration had been established as a result of these visits.
Throughout the year we also informed taxpayers on our
website and worked proactively with the media.

Organisation
The creditors business had already been centralised within
each region to ensure a high level of professionalism and an
ability to cope with the high volumes. The creditor units
are involved in many issues to ensure that tax arrears and
tax debts are not increasing. We have also centralised the
work with large businesses and the investigation of crossborder transactions for the same reason. Our experience is
that we need highly skilled and flexible staff in order to be
successful.

Action plan - summary

Early warnings are crucial to be able to handle changes in taxpayer compliance. The sooner the tax administration can
identify an increase in non-compliance, the better it can
respond. It is very important to have a high level of awareness
and the capacity to be able to respond with suitable actions.
But why do some taxpayers comply and others dont? Our
conclusion is that it all comes down to human behaviour.
Trust in the tax administration is a crucial factor for compliance. In the last years we have completed a number of
studies which emphasise the importance of how we carry
out our work, not just what we do, but how we do it. The
result of the studies shows that how we treat the taxpayers
is the factor that most affects their trust in the tax administration. The conclusion is that we need to improve the
treatment of the taxpayers in all circumstances, especially
when we audit or make tax checks.
This is an important message that we send to all our staff as
the financial crisis demands more contact with the taxpayers.

Topics for Common International

Investigation and Analysis
In order to stimulate compliance and to prevent and combat non-compliance we need knowledge about causes and
effects. These are most likely common for many countries
and therefore suggested as topics for cooperation in international investigations and analysis.

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a r t i c l e s
In Sweden we continue our analysis on new patterns of
payments, for example, VAT. We also focus on the changing behaviour in aggressive tax planning, for example, new
ways of creating deficits. It is interesting to find out what
intermediaries and consultants are doing. Through a special project in our National Compliance Plan we have
established a dialog with a few compliant consultants to
receive more information about their business area.
In cooperation with other government agencies we study
organised crime within the economic area. One of the
reasons is to find and improve our approach to combating
tax crime and tax fraud. For example, we try to create higher insurance costs and to make it as difficult as possible
for the criminals and criminal activities in order to minimise their profit from crime. Insurance cost in this situation is their cost in cash or effort to hide information and
money from their criminal activities.
In 2009 the Swedish Tax Agency received money from the
government to develop a special unit manned by experienced
staff skilled in financial markets and the special instruments
involved. The aim was to keep up with developments where
these instruments are used for aggressive tax planning.
Electronic currency is increasing on the Internet and we
are closely following that development. Intangible assets

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being transported around the world is also an important

issue for improved international cooperation among tax
agencies.

Finally
The economic crisis in Sweden is no longer called crisis
but rather times of recession. It is expected to take some
years to recover but we see this as an opportunity to learn
for the future.
The final analysis will focus on measures and changes we
did, should have done or should not have done. What are
the effects of our measures and what were the effects on
our collection of taxes. We see that cash and assets are
being transported around the world and we do not want to
be left behind. We also want to improve our work with all
compliant taxpayers who are still in the majority in
Sweden.
This article is a summary of the situation in Sweden and
the role of the Swedish Tax Agency in the context of the
crisis. So far good progress has been made in improving
cooperation between tax administrations, but there is still
more to do. It would be interesting to cooperate more with
other tax administrations in any future analyses of the topics and effects of the economic crisis.

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a r t i c l e s

The Global
Financial and
Economic Crisis:
Challenges and
Responsibilities
of the Tax
Administration

by Jasmina
CVETANOSKA

170

The former Yugoslav

Republic of Macedonia
Jasmina CVETANOSKA
Head of International Cooperation
Sector, Public Revenue Office

BLV. KUZMAN JOSIFOVSKI PITU 1,

1000 SKOPJE,
(389) 2 3299 500
TEL:
E-MAIL: JASMINA.CVETANOSKA@UJP.GOV.MK

Ms. CVETANOSKA has been responsible for managing

the Euro-integrative process and the international cooperation within the framework of the tax administration
since 2006. From 2008 she is a coordinator of the
Central Project Office and the first liaison officer with
the International Monetary Fund.

he trends of the world economy did not miss the Macedonian economy and they shook it badly. According to internal analyses and statistics the first indicators about the influence of the worlds economic
effects on the domestic business were detected by the tax administration and the
herald of the economic movements in the former Yugoslav Republic of
Macedonia was the Public Revenue Office (PRO). The statements of the first
tax official, predicting a fall in revenues as a result of the global economic crisis, met with a negative response from the business community and from governmental institutions. Macedonian optimism created an image where the
country was represented as a protected bear from the world economic cycles.
The desire for increasing profits did not for a moment change and companies,
continued as usual having become greedy to double their manufacturing capacities, in order to prosper from the collapse of the world giants. This resulted in
an increase of imports in the metal industry, which is a primary element within
the framework of large taxpayers in the former Yugoslav Republic of
Macedonia. Such statistics were presented to the public in a populist way reassuring everyone that the budget would not suffer re-balance and the economy
would keep rising in the future. This ambitious theory supported continued
growth, however, although delayed, the crisis inevitably hit the economy and
tax revenues. Linked with the primary effects from the shocks of the New York
Stock Exchange, we knew that something serious was happening and the effects
from the situation would continue, however it is hard to believe that as a result
we had to enter a new way of thinking and acting.
As always the coin has two sides and in our case there are the taxpayers on one
side and the tax officials on the other. Both are led by the demands of the wider
world within their own sphere of activities. The global crisis imposed the need
for a completely new way of acting for both groups. The previous good practice was no longer applicable neither useful, and because of this the tax administration management team, consisting of experts and professionals, began to
create a new strategy for acting, in consequence of the economic crisis.
This new strategy caused severe disruption within the internal order of the
Public Revenue Office. One part of the management team created by the spe-

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a r t i c l e s
cialised strategy in terms of economic crisis, saw it as a
challenge and they strongly supported the ideas of the
director general. There were other colleagues who did not
want to change the traditional way of acting by the tax
administration. However, the decision to change was
adopted and in less than two weeks the new strategy of the
PRO was created.
The Strategy In Terms of the Global Financial and
Economic Crisis is not only a declarative document, its
pages contain the basic directions that are prescribed for
tax officials to act in the period of economic crisis and subsequent recovery from the consequences of the economic
crisis. The document is based on five basic principles:
Assistance to taxpayers who face major problems as a
result of the world economic crisis;
Refocusing of the taxpayer compliance section of the
tax administration;
Improving communication with taxpayers and developing educative programs according to their needs;
Developing special tools for external audit;
Reforms in the legislation.
The changes in the current operation of the tax administration were introduced as a result of the following indicators:
Percentage decrease in the rate of voluntary compliance;
Number of taxpayers who have passed from the formal
to the informal sector;
Increase in companies that delay submission of their
tax returns;
Increase in new debts, and an increasing number of
taxpayers who do not meet their tax liabilities in order
to retain more of their own income.
The Public Revenue Office to successfully meet the new
strategic goals had to make changes in the organisational
structure. New systems and a new organisational structure
were introduced, distinguished by two contradictory features:
Strong centralisation of the basic functions of the PRO
(external audit, enforced collection, tax assessment and
collection); and
Strong decentralisation of the taxpayers services.
Such an organisational change overshadowed the harsher
elements of the tax administration and gave primacy to taxpayers services. The tax officials refocused the risks
according to the new analyses and they started with active
advisory visits to the companies that were directly affected
by the economic crisis.
Similarly, new organisational units for direct assistance of
the taxpayers were introduced information points were
established in each municipality throughout the country, as
well as the development of the existing call center into a
modern contact center.
In parallel with the new organisational scheme, the PRO
employees that were formerly civil officials got the status of

TAX TRIBUNE

tax officials. Such status provides them with more authorisations, opportunities for progress in their professional
career, as well as increasing the salaries by more than 30%,
compared with the other employees in the state administration.
The director general of the tax administration created in
each regional office committees for hurried collection
for more effective management during the global economic crisis and through these committees all activities contained in the new strategic plan were conducted.
The stimulation of business using the mechanisms available to tax officials can be achieved by building the partnership between payment and return of Value Added Tax
(VAT). However the crisis has tempted some taxpayers to
register higher demands on their VAT returns and for such
fraud, tax officials have enforced rigorous mechanisms of
punishment. For companies that belong to the lowest risk
group i.e. with the highest degree of voluntary compliance,
they are entitled to Gold Card for VAT Return and these
taxpayers get 90% of their VAT returned in seven days and
the remainder within fifteen days, despite the actual legislative term for VAT returns being thirty days.
The shrinking of the economy leads to non-submission of
tax returns, presenting higher losses for the taxpayer and
ultimately this results in the accumulation of old debts and
the creation of new tax debts. The tax rules were not flexible and the existing legislation provided only two possibilities, either pay the debt by instalments and at the same time
the companies submit such a guarantee or face enforced
collection. But the reality in the economic sector showed
there was reduced liquidity of the companies due to the
world economic crisis. There was a clear problem and it was
necessary to find a suitable solution. The Macedonian tax
administration as well as other tax administrations all over
the world has a basic function to achieve the budget targets
for tax revenues. This particular situation required the need
for suggesting the Law on Writing-Off of Interest as an
incentive for voluntary compliance for paying old debts. So
for only one year, the companies were given the opportunity for writing-off of interest:
100% writing-off of interest if the payment of the
main debt and the secondary tax expenditures (except
interest) is made by 30 April 2009;
75% writing-off of interest - if the payment of the
main debt and the secondary tax expenditures (except
interest) is made in the period from 1 May 2009 until
31 August 2009;
50% writing-off of interest - if the payment of the
main debt and the secondary tax expenditures (except
interests) is made in the period from 1 September 2009
until 31 December 2009.
Increased tax collection demonstrated the success of the
implementation of the Law on Writing-Off of Interest
and the appliance of this law had the effect of financial
stimulation for the businessmen.

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a r t i c l e s
The tax administration within the frame of the new
strategic goals has redesigned the External Audit Sector.
Tax audit as a result of the crisis got a new look and all
tax auditors started applying the long-time methods for
company auditing. The new audit techniques are gathered into one software solution called Tool Kit, which
provides unified procedures, equal treatment to all taxpayers, pooling of knowledge of tax auditors, increased
efficiency and effectiveness and a high degree of professionalism. The Public Revenue Office has shared with
the tax administrations from the region and beyond the
positive experiences from the appliance of the Tool Kit
for the tax authority.

172

The basic advantage of the new technique is the improvement of the audit quality and the speedier way for the education of the young staff for complete independence in
conducting the external audit of the companies.
The economic crisis shocked all our citizens but the situation has arisen and the consequences of recovery are coming soon. The tax administration felt the effects of the crisis but instead of panicking it reacted positively by the creation of new business models for increasing tax collection.
It has taken proactive steps for improving the procedures
and directing business processes; it stimulates the responsibility of the taxpayers and provides open space for flexibility in arriving at the best solution for the challenges ahead.

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i n t r o d u c t i o n

mproving the Quality

of Operations in Tax
Administration Units

udapest was the location for this workshop that addressed the issue of improving the quality of operations in tax administrations and over the two and half days, the management,
measurement and improvement in quality in the public sector were addressed. The event
aimed to demonstrate the value of various quality management tools currently in use in some
IOTA tax administrations.
Ernst DE LANGE from the Netherlands examines how innovative intellectual capacities are
used by the administration through the creation of a Future Centre.
From the Norwegian tax administration Trine Louise DAHLEN and Lucie AUNAN
describes how LEAN is used to drive a culture of continuous improvement in quality in the
organisation.

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a r t i c l e s

Future Centre De
Werf (The
Shipyard) of the
Dutch Tax and
Customs
Administration
by Ernst DE LANGE

Netherlands
Ernst DE LANGE
Senior Officer,
Dutch Tax and Customs
Administration
DELPRATSINGEL 23,
4811AP BREDA,
(31) 76 526 01 71
TEL:
E-MAIL: PER.DE.LANGE@BELASTINGDIENST.NL

Mr. DE LANGE was the initiator of Ideamanagement

(2001) and Future Center De Werf (2004), both new
concepts for the Dutch Tax and Customs Administration.
They started on experimental base, by now they firmly
contribute to the primary process.

L
L

Introduction

ike all other tax authorities, the Dutch Tax and Customs Administration
is mindful of its employees innovative intellectual capacities. But the
question remains: how do we make best use of those capacities? Or, how
do we strengthen the organisations intellectual capital in such a way that we constantly renew and improve the primary process?
To answer that question the Dutch Tax and Customs Administration has set up a
Future Centre, which has for some years been finding different ways of strengthening the organisations intellectual capital. Six years ago that took a lot of nerve:
seeing was believing!
In this article we take a closer look at the
questions why? and how? But first
of all:

What is a Future Centre?

We define our Future Centre as follows:
The Future Centre is a total concept that
sets out to devote the intellectual capital of
employees to improving the primary
process.
That means tackling themes related to
social innovation that are recognised as
being usable for the primary process.
Where possible, the Future Centre
experiments with those themes in partnership with the regional offices.
Additionally, the Future Centre provides employees with specific support
Using the Innovative Intellectual
Capacities of Employees
for innovation issues as a sparring partner, process designer and/or coach. De Werf is a special location that is
based on the internationally accepted concept of a Future Centre and serves
as the context for all of these innovation processes. This total concept has a
certain attraction for universities, local authorities, private companies and
research institutions, which results in outside knowledge being drawn into the
organisation.

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a r t i c l e s
use of the Future Centre. We use various methods to facilitate
our (internal) clients as effectively as possible.

Supporting and Speeding Up Innovation

That largely answers the why question. Perhaps needless

to say, the form of this Future Centre has changed since its
inception. It started out mainly as a session studio, where
thinking out of the box was facilitated by means of its layout and creative thinking techniques. That remains
unchanged, but with an important difference: the concept
has undergone an organisational development and has
appropriated a seemingly recalcitrant Licence to Disturb
image of its own, which has been accepted within the organisation all the same. Even appreciated! But that connects up
seamlessly with how this Future Centre is organised; how it
operates and communicates. The organisation as a small
company makes the team decisive and flexible, which is of
vital importance. With 4500 employees who monitor our
progress every month through our own newsletter
Eigenwijs. And with the primary process as a source of
inspiration time and time again. For that is something everyone surely identifies with: work never fails to fascinate!

How?
A Future Centre is always basically recognisable by the physical
layout of the various areas. The layout exerts a conscious but
also subconscious influence on those taking part in creative
thinking sessions. It is important to make sure that people truly
get a feeling of being out of office. For that reason we functionally lay out the various areas in such a way that your use of
them each time depends on the process step you are currently
taking. Brainstorming is of course something you do in a completely different place than when you want to immerse yourself
in a subject, to converge. We make a conscious choice to use
equipment only for specific reasons and in a central area in
order to avoid transmitting too much information to participants. Our aim is rather to have participants transmit information. Each year about 4000 employees with various needs make

TAX TRIBUNE

Plenty of Space for Experiments

Licence to Disturb
In a large organisation such as the Dutch Tax and Customs
Administration there is no getting away from the need to
create clear structures, parameters and accordingly rules.
But there are of course constraints, too. The Future Centre
is a small island within the Dutch Tax and Customs
Administration, where we keep rules and yes, but thinking
as far away as possible. From the Future Centre we set up
experiments on a small scale for regional offices, for
instance. Preferably with students and/or scientists who
regard science rather than the existing frameworks as the
limit of what they can achieve. That means plenty of space!
The results are startling. Experiments such as these might
disturb current assumptions, but there is lively interest in the
results and people enjoy the dynamism that such experiments generate. That way, disturbing is regarded not as
being negative, but as something very positive. All the more
so given that the strategic goals of the Dutch Tax and
Customs Administration always serve as our source of inspiration. That is a constraint that we impose on ourselves.

Being Out of the Office

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a r t i c l e s

Continuous
Improvement
as a Means
towards
Predictable
Quality

Norway
Lucie AUNAN
Project Manager,
Directorate of Taxes Norway

FREDRIK SELMERS VEI 4,

N-0603 OSLO,
(47) 22077242
TEL:
E-MAIL:
LUCIE.AUNAN@SKATTEEATTEN.NO

Ms. AUNAN has been working with establishing a programme for continuous improvement in the Norwegian
tax administration since summer 2008. The programme
today consists of six projects. Her role as programme
manager is to ensure that the project meets its goals.
Ms. Aunan has worked as a consultant in change management for the public sector for several years and has
a Master of Management degree.

Trine Louise DAHLEN

Head of Management Staff,
Directorate of Taxes Norway

FREDRIK SELMERS VEI 4,

N-0603 OSLO,
TEL:
(47) 22077110
TRINE.DAHLEN@SKATTEETATEN.NO
E-MAIL:

Ms. DAHLEN has been head of Management Staff in

the Norwegian tax administration since 2008. She has
been working with development of strategies, performance management, risk analysis, long-term planning,
organizational development and improvement, budgeting, accounting and follow-up since 1992. She holds a
major in Political Science.

by Lucie AUNAN
Trine Luise
DAHLEN

T
T

he Norwegian tax administration is in the process of making predictable

quality a central element of its quality strategy. In the autumn of 2008, a
project programme was established with the aim of improving work processes
within the administration and at the same time establishing a culture, inspired by
LEAN thinking, for continuous quality improvement. The work of the project programme will be reinforced in order to become an important tool for the realisation of
the quality strategy.

The Way towards New Strategies

From 2000 the Norwegian tax administration has gone through several reorganisation processes. The central objectives have been efficiency and the building up of competent units to ensure high quality products. The last reorganisation was completed in January 2008, and marked a temporary end to a process
where the administration had reduced the number of local tax assessment
offices from 400 to 100 and which are now organised within 5 regions. The
central objectives of the reorganisation were as follows:

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a r t i c l e s
1. To give the image of a unified administration;
2. To improve quality and efficiency;
3. To improve cooperation between tax assessment and
tax collection.
The reorganisation has left a number of challenges that
have yet to be solved:
1. 63% of the employees work with new or partially new
work tasks;
2. Discrepancies in working methods and ways of carrying out procedures were revealed;
3. Achievement results in 2009 were less than expected;
4. There is little time to work with improvements.
Towards the end of the reorganisation the administration
decided to initiate a process to help decide upon a number
of strategies that would clearly point out the future direction of the work of the administration. The final meeting
took place at the end of 2009. Growing awareness of the
need to focus on quality, revealed through several reorganisation processes and challenges identified during and following the stages, resulted in a quality culture strategy.
Even during the reorganisation work had started in order
to meet this challenge.

Process Improvement Programme as a

Tool to Implementing Quality Strategy
In 2008 the Norwegian tax administration started a programme of process improvements as a means to increased
quality, efficiency and standardisation of service across all
five regions.
The programme was inspired by LEAN thinking and the
concept of continuous improvement; yet at the same time
working from traditional quality thinking and quality management systems.
Efficiency: By working smarter, it is possible to achieve
both shorter processing times with the right quality with
fewer resources. The only way to measure whether one
is actually working smarter is by measuring efficiency
and effectiveness. Processing times and volumes are not
enough to gauge whether improvement efforts are actually working they may only reflect a shift of resources
and priority.
Standardisation: Another goal is standardisation in order to
ensure a greater degree of predictability and equal quality
for customers regardless of where and who processes the
case. We should be equally as good at reaching service
requirements throughout the country. Standardisation
requires that the overall level of service requirements have
the same work processes and equal standards of quality but
to still retain a degree of freedom as to how to solve tasks
at an operational level.
Culture of continuous improvement: The long-term goal
is for a culture of continuous improvement, where employees are the driving force behind improvement efforts.
Continuous improvement requires that you are in control
of the process, and have an overview of the production. It

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also requires that managers delegate responsibility to their

employees and take on more of an advisory role.
By working in this manner, we can create workplaces
where employees thrive and are productive. Employees
are, after all, the key to success.
Commitment and involvement are key success factors to
improving the way we work. This is a great challenge in a
large organisation. We rely on managers and employees
who are involved and who are capable of teaching and
involving their colleagues in implementing measures.
Continuous improvement is therefore the main focus for
all management training this year.

The Three Dimensions of Continuous

Improvement
Continuous improvement is a way of working and thinking
to constantly improve the way we carry out our user services... The clue is to make this an integrated part of the
daily routine.
In the Norwegian tax administration we work with three
dimensions to implement continuous improvement:
Process, Leadership and Work Culture.
Processes must continually evolve and have clear quality standards with the focus on customer needs;
Management with a focus on the continuous improvement of processes and development of employees;
A culture of continuous improvement developed gradually through the managers and employees commitment and involvement.
If we are to achieve self-driven continuous improvement it
is essential to work with culture in the long term and establish commitment and involvement from all employees.

Process and Quality Improvement

In LEAN thinking and continuous improvement there are
five central principles for process improvement:
Specify value (for the customer);
Identify the value stream;
Make the workflow without queues;
Pull do the task when needed;
Perfection further improvements.
Quality is usually defined as satisfying the customer
delivering value. In terms of quality in the tax administration we think it is important that there is an emphasis on
minimal variation of correct and predictable quality. This
includes delivering on time. It is therefore essential that the
process is set up so that services can be delivered with minimal variation as regards both time and level of quality.
To succeed in defining an appropriate level of quality, it is
essential to identify the taxpayers expectations and needs
in combination with what the tax administration can deliver in a cost/benefit relationship. Once we have defined the
correct quality of service in terms of both time and quality
(performance), this must be communicated to the taxpayer
so that we can manage their expectations.

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a r t i c l e s
Traditional quality thinking is much about building standards,
measuring and correcting discrepancies... To ensure efficiency
at the same time it is important to build quality into processes and to correct errors/variation when they occur:
Ensure that errors surface and learn from them;

178

Reducing the number of errors/variation by simplifying and preventing the opportunity for errors to occur;
Make it easy to act correctly;
Discover errors/discrepancies as early as possible in the
process.

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w e b s i t e

Web Portal
In summer 2007 the IOTA Secretariat
launched a new user-friendly IOTA Web
Portal with the key objectives:
To present the specific identity and
image of our Organisation;
To provide up-to-date practical tax
administration information for the
IOTA Membership;
To promote communication amongst
the IOTA Membership.
The main idea of the Website is to provide
a broad spectrum of information concerning practical tax administration issues as
well as information about IOTA to the
IOTA Membership.

g
r
o
.
x
a
t
a
t
o
i
.
w
w
w
The IOTA Web Portal is divided into two parts - Public Area and Members' Area:
The Public Area can be accessed by any visitor. The information in this part of the Website is limited to
basic and general information concerning IOTA, its Membership, public news, and an IOTA calendar
of events.
The Members' Area can be accessed only by tax officials of IOTA Member tax administrations who become
registered users of the Portal. This area is providing the registered user of the website with additional information and materials - IOTA news exclusively for IOTA Membership, materials on practical tax administration issues and a database of relevant links within the Reference Library, complete materials from IOTA technical and administrative activities, summaries of enquiries, IOTA publications and administrative documents,
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IOTA news exclusively for IOTA membership

Materials on practical tax administration issues from IOTA Members and Summaries of
IOTA Technical Enquiries within the Reference Library
Complete materials from IOTA technical and administrative activities
IOTA publications and administrative activities

TAX TRIBUNE

Discussion fora
Registered users directory
E-registration module for IOTA events
Polls/surveys/questionnaires online
Digital photo and video gallery
Private messaging module

179

On 1 January 2010, the Organisation consisted of 42 full Members

from the following states or entities:
Albania Austria Azerbaijan Belarus Belgium Bosnia & Herzegovina
Bulgaria Croatia Cyprus Czech Republic Denmark Estonia
Finland France Georgia Germany Greece Hungary Iceland
Ireland Italy Latvia Lithuania Luxembourg Malta Moldova
Montenegro Netherlands Norway Poland Portugal Republic of
Srpska (B&H) Romania Serbia Slovakia Slovenia Spain Sweden
Switzerland The former Yugoslav Republic of Macedonia Ukraine
United Kingdom

On 1 January 2010, the Organisation had two associate Members from

Jordan and Kazakhstan.

Published by IOTA, 2010 Address: H-1075 Rumbach Sebestyn u.14., Budapest, Hungary
Editor-in-Chief: Mr. Marek Welenczyk Editorial Team Members: Ms. Kristine Sergejeva;
Ms. gnes Lukcs; Mr. Xavier Bosc; Mr. Jerry Taylor; Mr. Eugenijus Soldatkovas Phone:
(36) 1 478 3030 E-mail: iota@iota.hu Issuer: Kompkonzult Kft. H-1111 Budafoki t 41,
Budapest, Hungary ISSN: 1418-4818 Number of copies: 2500