Horizontal monitoring and tax control framework
The working method of the Dutch tax authorities is changing from vertical monitoring towards horizontal monitoring. Although vertical monitoring will not disappear, horizontal monitoring becomes more important. Where vertical monitoring is based on checking retrospectively, horizontal monitoring is a form of working in the present based on mutual trust, understanding and transparency between the enterprise and the tax authorities. Horizontal monitoring consists of two elements. On one hand, a good relationship between the tax payer and the tax authorities which is recorded in a compliance agreement (‘handhavingsconvenant’) concluded with an enterprise or a trade organisation. On the other hand good risk detection, which is based on what is known as the tax control framework.
In the “vertical” level the taxpayers file their tax return and consequently they are subject to an audit of the tax authorities in order to verify they are correctly completed. This results in a situation of uncertainty for the taxpayer about his tax situation and this can go on for a reasonable long time. Horizontal monitoring is the method the Dutch tax authorities are promoting in order to avoid the disadvantages peculiar to the vertical method. For entrepreneurs this new method can provide substantial advantages. By applying horizontal monitoring, the Dutch tax authorities try to arrive at a method of compliance. This means that entrepreneurs voluntary will comply with the application of the law and regulations.
“The approach of horizontal monitoring is based on mutual trust, understanding and transparency between tax authorities and taxpayer. In other words: both parties will work together.”
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Horizontal monitoring means that the tax authorities need to rely on the willingness of the entrepreneurs to comply on a correct way with their fiscal obligations. The entrepreneur needs to prove that from a tax viewpoint he is “in control”. This means that the entrepreneur needs to inform the tax inspector at an early stage about the fiscal risks by providing all relevant facts and circumstances. As a service in return, the tax inspector will give security to the taxpayer about his fiscal position and this within a short notice.
Advantages
- Certainty in advance
By applying horizontal monitoring, “working in the past” is replaced by “working at present”. The entrepreneur will act with a transparent attitude towards the tax authorities and the latter will provide a fast judgment about the tax situation of the taxpayer. Both parties will not any longer find themselves in a situation of insecurity. In addition, the taxpayer will have a fixed point of contact with the tax authorities. - Less rigorous audits afterwards
Working at present means that future tax audits and relating points of discussion with the tax authorities will be avoided. Under the system of horizontal monitoring tax audits will only be performed at random. The tax authorities have expressed their intention that entrepreneurs not taking part of the horizontal monitoring will be subject to tax audits in the future. - Agree to disagree
Horizontal monitoring does not mean that the tax authorities and the taxpayer always need to agree so this leaves room for discussion and eventually the possibility to proceed before the court: “ Agree to disagree”. Under the horizontal monitoring the entrepreneur can still opt to follow the most tax efficient way. In this respect, the role of the tax advisor will not change. In other words, the tax advisor will not become a so-called “extension” of the tax authorities. - Fast settlement of previous years
The horizontal monitoring is focussed on working at presence. If an entrepreneur likes to participate to it, than the fiscal disputes which might exist with respect to the past first need to be solved. The tax authorities have informed the outside world that they actively will participate to it in a positive atmosphere.
Tax control framework
Risk management has become one of the top priorities of enterprises, and so has tax risk management for the enterprises of their tax departments. These departments have the increased responsibility to manage and anticipate (potential) tax risks and have become (co-) responsible for the requirements these enterprises have to meet in this respect on the basis of among others Financial Accounting Standards (FAS) 109, International Accounting Standard (IAS) 12 and FASB Interpretation No. (FIN 48). In addition, enterprises that have concluded or would like to conclude a compliance agreement (“handhavingsconvenant”) with the Dutch tax authorities need to have a tax control framework. Such tax control framework includes among others a determination and description of an enterprise’s tax strategy, tax department and tax related processes, determination of who is responsible for what tax matters, a tax risk analysis, the implementation of relevant controls and policy as to the use of the information obtained with these controls and last but not least a periodical up-date of the tax control framework.
