The Austrian Federal Ministry of Finance published a draft regulation on 25 September 2018 that addresses the basic elements of the “tax control framework,” as well as the documentation and expert opinion requirements under the tax authorities’ new horizontal monitoring procedure.
Horizontal monitoring involves ongoing communications with the tax authorities to discuss and resolve issues in lieu of a standard tax audit, thus giving taxpayers more certainty.
The Annual Tax Amendment Act 2018, published on 13 June 2018, implements the horizontal monitoring regime in Austria as from 1 January 2019. Qualifying large companies (i.e. companies with turnover exceeding EUR 40 million) that are tax resident in Austria can voluntarily apply for the regime, under which participants no longer will be subject to tax audits but instead will discuss their tax risks with the tax authorities on an ongoing and regular basis.
To participate in the horizontal monitoring regime, a company must i.a. obtain an expert opinion from a certified auditor or tax advisor that the design and implementation of its tax control framework meets certain requirements.
Basic elements of tax control framework.
The draft regulation would require a company’s tax control framework to contain the following basic elements:
- A tax control environment under which the company’s management is committed to tax compliance in terms of honesty in tax matters and operational measures;
- The company’s ability to prepare a correct and thorough calculation of relevant taxes, meet payment deadlines and timely identify and mitigate risks of a material breach of the tax rules;
- The assessment of tax risks, including their probability and monetary impact;
- Preventive or detective measures designed to limit tax risks and assist the company in achieving its control objectives;
- Appropriate training and communication of detailed information to employees about the tax control framework elements, responsibilities and tasks;
- Penalties and prevention measures for identified rule violations, which are required to be determined in advance. According to the draft regulation, this would include the investigation of incidents and analysis of their effects on the company’s control objectives and the effectiveness of the control framework;
- Measures for monitoring the effectiveness of the tax control framework on a regular basis and the elimination of any deficiencies.
Companies would be required to describe and document the basic elements of their tax control framework, including their organizational structure and significant tax processes. Documentation of identified tax risks and associated control measures (e.g. in the form of a detailed risk control matrix) also is required.
The draft regulation would require two types of expert opinions:
- An opinion that the design and implementation of the tax control framework is adequate. As mentioned previously, this opinion must be obtained by the taxpayer before applying to participate in the horizontal monitoring regime; and
- An opinion that the tax control framework is effective. This opinion must be obtained every third year or where the framework has materially changed.
The Austrian tax authorities’ horizontal monitoring procedure is an attractive alternative to regular ex-post tax audits, which usually are performed with respect to a prior three-year period. Although the procedure would require comprehensive efforts from the taxpayer to implement a proper tax control framework, the taxpayer would discuss potential tax risks with the tax authorities in a timely manner, and the tax authorities would be obliged to provide advice in the horizontal monitoring regime. Additionally, an effective tax control framework potentially could help a taxpayer avoid underpayments of tax and, therefore, potential associated monetary penalties or fiscal criminal consequences.
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