Information resources of the tax administration, international cooperation between authorities and companies, cross-border exchange of information or the future of digital tax administration. These covered just some of the long list of topics addressed in our February seminar with tax litigation specialists. In one of the panels, we focused on what resources the tax administrator can draw information from during a tax audit and how audited entities can prepare for it.

Social media posts as a source of information for tax administrator

After an audit has been initiated, the tax administrator’s first steps typically lead towards public sources of information. The most common ones include, for example, commercial and trade registers, the register of beneficial owners, the register of VAT payers and many others. A similar information function is also performed by compulsorily published documents, for example, in collections of documents (particularly annual reports) or databases of economic information (Amadeus, TP Catalyst, etc.).

All of the above-mentioned resources are available to the general public which is a fact that, in particular, companies and organisations that are facing tax audits should take advantage of. Knowing one’s own information footprint can effectively help in preventing potential misunderstandings and problems.

Even the tax administrator may commit misconduct within the tax audit and related proceedings, particularly in periods with more frequent audits by authorities. Read our article with a description of what can be assessed as improper proceedings by authorities and how audited companies can defend themselves in such a situation.

The amount and form of information in registers or records is unified and based on legal regulations. However, what audited entities can influence directly is their own presentation on the internet. What is put on the website or what information the company shares on social media lies entirely in its hands. However, even in this case, the accuracy and correctness of the information is very important, as it can be used as a relevant source within an audit. Companies also cannot rely on a possible deletion of content prior to a visit from the tax authority – such a step raises suspicion and changes to the website can (for example, with the help of archiving services) be traceable to a considerable extent.

Companies must answer all related queries as part of the tax audit

As part of the tax audit, the tax administrator examines a number of documents in their own possession or in the possession of other public authorities, such as VAT returns, control and summary reports, monthly summaries of the General Health Insurance Company/ District Social Security Administration, financial statements and many others.

A specific type of information source includes the tax administrator’s queries. In practice, queries are raised by almost any means available – by e-mail, telephone, communication application etc. They may therefore have a seemingly informal character, but the traceability of the query and the answer are essential for their possible use in the analysis or as evidence. The audited entity is naturally obliged to respond to the queries and provide the requested information, or to provide the necessary documents if they are required for tax administration.

Examples of queries that may be raised by the tax administrator within a dividend withholding tax audit:

• Who has the rights of disposal to the parent company’s accounts?
• What revenues did the company’s net annual sales comprise?
• Why is CZK the foreign parent company’s functional currency?
• Who are the persons responsible for authorising and entering payments?
• How was the general meeting of the parent company held? Who was present? Who was represented through the power of attorney?

The pace of international cooperation and digitisation

The acquisition and verification of information may also take place across borders within tax audits, if the company operates abroad, cooperates with business partners from foreign countries etc. Whereas in the past this was a lengthy process requiring a lot of time, willingness and activity of all parties involved, today the information exchange regime is partly automated and even the standard exchange of information on request is swifter. The time for answering queries, the process of proving and so on has been reduced to months.

The use of modern (not only communication) technologies across disciplines, including taxation, has helped this situation. The digitisation of public administration, the automation of reporting, the development of online financial administration – these are just a few of the many trends that will significantly transform tax audits in the future.