How to prepare for tax raids and other aggressive audit techniques

Transcription

1 How to prepare for tax raids and other aggressive audit techniques With a focus on attorney-client privilege/work-product doctrine in Europe and the US Tax Dispute Resolution Group Milan 6 February 2014 Baker & McKenzie SCP est membre de Baker & McKenzie International. Les membres de Baker & McKenzie International sont des cabinets d'avocats présents dans différents pays à travers le monde. Conformément à la terminologie usuelle utilisée par les sociétés de services professionnels, la référence à un "associé" désigne un associé de l'un de ces cabinets d'avocats et la référence à un "bureau" désigne un bureau de l'un de ces cabinets d'avocats.

2 Panelists Ariane Calloud (Paris) and Paul Halprin (Amsterdam), Moderators Alexander Chmelev (Moscow) Nicola Crispino (Milan) Jessica Eden (London) Eric Meier (Paris) Duane Webber (Washington) 2

3 Tax raids and other aggressive audit techniques

4 Current trends of the tax administrations across Europe Fight against tax evasion / tax optimization Main challenges refer to: Permanent Establishment, and Transfer Pricing Targets: multinational entities Criminal actions / tax fraud 4

5 The criminal approach - Italy Search & Seizure Order Preliminary investigation Interviews with witnesses Questioning of the individuals under investigation Appointment of experts International cooperation The provisional seizure of assets Statute of limitations The connection between criminal and tax proceedings 5

6 The regular approach - Italy Access all the premises, land and means of transport Examine the books and other records, irrespective of the medium on which they are stored Take or obtain copies of or extracts from documents even though protected by copyright and intellectual property Seal all the documents collected in a room (to be maintained at disposal of the tax auditors) Ask any representative or member of staff for explanations 6

7 Electronic searches - Italy Officials have extensive powers to search electronic files Will bring an IT expert with them will run automated searches (varying levels of sophistication) Will ask for certain steps to be taken (e.g. access to certain accounts, locking accounts to prevent deletion) Will ask how the IT systems are organized (e.g. what is archived and for how long, what document management systems are in place etc.) 7

8 Aggressive audit techniques used by the Russian tax authories Numerous requests for large amounts of documents and information Requests for all primary documents for the audited period (2-3 years) Requests for documents in electronic form (e.g. sales and purchases journals) or for access to taxpayer s databases 8

9 Aggressive audit techniques used by the Russian tax authories Practical Tips Check whether all requested documents refer to period and subject of the audit Request for prolongation of the term for presentation of documents Ask to specify the request Taxpayers are not obligated to present documents in electronic form or provide access to databases 9

10 Aggressive audit techniques used by the Russian tax authories Requests to taxpayers and requests to the audited taxpayer s counter parties (cross-audits) for documents and information that do not refer to a specific transaction without commencing a tax audit 10

11 Aggressive audit techniques used by the Russian tax authories Practical Tips Such requests are not provided for by the Russian Tax Code and may be challenged 11

12 Aggressive audit techniques used by the Russian tax authories Invitations to taxpayer (chief accountant, general director) to the tax inspectorate without specifying the purpose of such meeting 12

13 Aggressive audit techniques used by the Russian tax authories Practical Tips Always take an attorney for such meetings Decline to answer specific questions about tax calculation and payment if a tax audit was not initiated Make sure that the questions refer to the period and subject of an audit If a witness interrogation is performed, a formal invitation should be sent 13

14 Aggressive audit techniques used by the Russian tax authories Practical Tips Always check the protocol of witness interrogation and make corrections if a tax inspector misinterpreted the testimony 14

15 Recent proposals in procedural legislation A draft law was proposed that would permit criminal investigators to conduct examinations of taxpayer activities and initiate criminal proceedings for tax evasion without a prior tax audit. 15

16 Recent proposals in procedural legislation Potential consequences: risk of parallel examinations; re-examination of periods already covered by tax audits by criminal investigators; tax assessments for periods outside the 3-year limitation period for tax auits (limitation period for initiation of criminal proceedings is 10 years). 16

17 Tax raids in France Requirement: presumptions that a taxpayer did not comply with the filing or the payment of CIT or VAT (court warrant required) 17

18 Tax raids in France Collection of information through various sources including aggressive audit techniques Exploitation of public sources (LinkedIn profiles of employees, job offers, reports ) Right of communication towards third parties The French tax authorities are authorized to exercise their right of communication to obtain privileged information from third parties. Third parties must provide them with any books, registers or other accounting documents relating to the targeted company that they are required to keep by law 18

19 Tax raids in France Collection of information through various sources including aggressive audit techniques Exchange of information with foreign tax authorities (extension) Information collected through a VAT enquiry (check that billing is compliant with VAT obligations) 19

20 Tax raids in the UK Tax raids by UK tax authorities (HM Revenue & Customs) are rare, generally a last resort Tax raid more likely in a criminal investigation (warrant required) Tax raid unlikely for a civil inspection: informationgathering through co-operation and advance notice is more usual Tax raid will involve HMRC officers Police may also be involved, but only for criminal cases 20

21 Developments in the Netherlands Increase in tax audits Prompted by requests for information from abroad Resulting from sharing information under Horizontal Monitoring Arrangement More information obligations and stricter enforcement New information obligations for conduit companies More often use of so-called Information Notification (informatiebeschikking) 21

22 Developments in the Netherlands (Automatic) exchange information new tax treaties concluded or existing treaties updated FATCA, G5 initiative Reduction of legal protection under domestic rules 22

23 Recommendations / Best practices

24 Be prepared for an audit/investigation Ascertain proper implementation of business model and consistency of documentation with business model Ascertain compliance and periodical review It all starts with a proper administration that meets all legal requirements. Well-organized document gathering and maintenance process is critical to success Keep privileged information separated from the rest 24

25 Be prepared for an audit/investigation Be carefull with electronic files and s Clear instructions and guidelines Appoint a team leader to be the contact person with auditors and centralize audit information 25

26 Recommendations in case of a tax raid Adopt a step-by-step internal procedure to follow and coach representatives Identify the director/employee who has the power to represent the company and be the principal contact point to deal with authorities Don t panic and be polite and courteous Ask (but do not insist) that the authorities wait until the legal counsel has arrived before performing any search - or interviewing any employees (interviews could be avoided depending on jurisdictions) 26

27 Recommendations in case of a tax raid Check the warrant / notice Don t try to be helpful by volunteering providing documents or discussing operations If any information is requested (interviews, documents, copies, etc.), ask for such requests be in writing and keep a log of all statements made or documents and files seized. Receipt? Set-up copying and documentation procedures 27

28 Recommendations in case of a tax raid Ability to protect privileged communication Establish data barriers UK: If HMRC have issued an Information Notice, the company must provide the documents/information specified within a reasonable time (could be immediately in the context of a raid) 28

29 Focus on Attorney-client privilege

30 Attorney-Client privilege - US Confidential communication (no strangers to the privilege) between a lawyer (member of the bar including in-house counsels) and its client for the purpose of securing legal advice. Litigation-Related Privilege: materials prepared by or for a party in anticipation/contemplation of litigation Attorney Work Product Doctrine Case of waivers Protection of non-lawyer communications Cross-Border applications 30

31 Dawn raids: protected documents - UK HMRC cannot seize or inspect documents protected by legal professional privilege (LPP) LPP applies to documents which are confidential communications between lawyer and client and which came into existence for the purpose of seeking or giving legal advice (includes documents drafted by inhouse lawyers) 31

32 Dawn raids: protected documents - UK LPP extends to non-lawyers where litigation is reasonably in prospect but this will not include a tax audit No privilege for tax advice provided by anyone other than a qualified lawyer (e.g. a tax accountant) If HMRC challenge claim to privilege, dispute resolved by application to First-tier Tax Tribunal 32

33 Attorney-client privilege - The Netherlands Advocates Legal obligation to secrecy and corresponding privilege of nondisclosure. Tax advisors In general, communications between client and tax advisor are not protected. Scope is restricted to information which has been entrusted to the advocate, including correspondence between client and advocate. Informal privilege: Based on case law, the Dutch Tax Authorities do not have access to the analysis and advice from a tax adviser that pertains to the taxpayer s position (principle of fair play). Not just information at the office of the advocate but information at the premises of the client is also protected. No informal privilege in criminal cases. 33

34 Attorney-client privilege - France Consultation and correspondence between the lawyer (admitted to the bar correspondence with in-house lawyers are not covered) and its client are protected by the professional secrecy even held by the client, except in case of participation of the lawyer in the fraud Infringement to this professional secrecy is forbidden Tax raids : when infriged by the FTA, the consequence is the cancellation of the seizure only regarding the documents covered by the professional secrecy 34

35 Attorney-client privilege - France Protection of any format or type of communication, tangible or intangible A privileged and confidential notice is not necessary but could be useful especially in the context of tax raids 35

36 Attorney-client privilege/work product doctrine in Russia Russia recognizes limited advocate-client privilege: only for registered advocates admitted to the bar not all attorneys does not allow state authorities to request or seize documents from advocate s files or compel an advocate to disclose client-related information in all other cases tax authorities may request information/documents from law firms within a crossaudit (rarely happens in practice) 36

37 Attorney-client privilege/work product doctrine in Russia Russia recognizes limited advocate-client privilege: taxpayers may challenge requests for documents received from their advisors (lawyers, auditors) as documents that are not required for tax calculation and payment if legal opinions, memorandums, etc. are found by the tax authorities within a tax audit, attorney-client privilege cannot be claimed for such documents 37

38 Legal privilege - Italy The scope of the legal privilege Correspondence with in-house counsel Tax related documents Electronic correspondence Confidentiality of documentation/information collected by tax authorities/public prosecutor 38