Joint Audits: The Route to Tax Certainty and Effective Dispute Avoidance

A focus on Italy and Sweden

The Organisation for Economic Co-operation and Development (OECD) published a report in 2019 titled  “Joint Audit 2019 - Enhancing Tax Co-operation and Improving Tax Certainty” (the “Report”). The Report highlights the important role Joint Audits can play in ensuring tax certainty and effective dispute avoidance.

In an increasingly globalised world, a unilateral approach to cross-border matters is less effective and requires more advanced cooperation instruments. The Report identifies various forms of mutual assistance, ranging from a simple request for information to Joint Audits.

Source: OECD (2019), Joint Audit 2019 – Enhancing Tax Co-operation and Improving Tax Certainty: Forum on Tax Administration, OECD Publishing, Paris, https://doi.org/10.1787/17bfa30d-en.

What is a Joint Audit?

A Joint Audit involves tax auditors from different jurisdictions working together to review the tax compliance of a taxpayer, typically a multinational entity.

What is the purpose of a Joint Audit?

The objective of a Joint Audit is to ensure that taxable income is allocated appropriately among the involved countries, thereby minimising disputes and reducing the risk of double taxation. This collaborative approach enables a comprehensive examination of the relevant facts and circumstances surrounding cross-border transactions, which can often be complex and contentious.

What are the benefits of a Joint Audit?

The benefits of conducting a Joint Audit include:

Efficiency: Collaboration enables tax authorities to streamline processes, reducing the time and resources needed to resolve disputes.

Clarity for taxpayers: Taxpayers are only required to provide documentation once and are not caught between the conflicting demands of different tax administrations.

Reduced risk of double taxation: They help to clarify how income should be taxed across jurisdictions, thereby reducing instances of double taxation.

What is the legal framework for a Joint Audit?

The legal basis for Joint Audits varies between jurisdictions.  The following elements are governed by domestic law:

• the procedural framework for the Joint Audit case selection process;
• preparation specific to the Joint Audit; and
• the conduct and completion of the Joint Audit.

Joint Audits also often include provisions from international agreements such as bilateral tax treaties or regional regulations. For example,  the European Commission’s  Directive 2021/514/EU on Administrative Cooperation known as  “DAC 7” which facilitates administrative cooperation between Member States.

What are the stages of a Joint Audit?

Generally, a Joint Audit has the following stages:

Proposal submission: A proposal for a Joint Audit is submitted by one tax authority to its counterpart in another country. The proposal includes details about the taxpayer, the transactions under review, and the audit period.

Discretionary decision: The receiving tax authority evaluates the proposal and decides whether to participate in the Joint Audit. If approved, both authorities agree on the scope and methodology of the Joint Audit.

Conducting the Joint Audit: Tax auditors from both jurisdictions conduct the audit simultaneously, sharing information and findings throughout the process. This direct collaboration helps to avoid inconsistencies that could arise from separate audits.

Final agreement: At the end of the audit, the tax authorities aim to agree on the tax position of the taxpayer based on jointly determined facts. If an agreement is reached, it typically negates the need for further dispute resolution procedures, such as mutual agreement procedures under international treaties.

Focus on Italy: What are the recent rule changes in relation to Joint Audits?

The Italian legislator has recently introduced specific forms of tax cooperation between domestic and foreign administrations (Article 3 of Legislative Decree No. 13 of 12 February 2024), in line with the DAC 7 and the provisions of Directive 2011/16/EU.

Advanced administrative cooperation (“AAC”)

The new provisions regulate the instruments of “advanced administrative cooperation” in a more organic and uniform manner and involves closer cooperation between the tax authorities in EU Member States. They have also introduced the use of AAC with non-EU Member States, in accordance with the provisions applicable to EU Member States and the specific agreements in force at bilateral or multilateral level.

Cooperation between Member States

Under the new provisions, the tax administration "shall endeavour" to reach an agreement with the competent authorities of the other Member States on the taxpayer in question. It also provides that a final report will be drawn up at the end of the Joint Audit process setting out a) the results of the Joint Audit and b) the points on which the competent authorities agree. The final report must be communicated to the taxpayer concerned within 60 days.

The tax administration will carry out Joint Audits in an agreed and coordinated manner with the other Member State officials involved. Language arrangements will be based on the laws and procedures of the host country. Participating Member State officials may not exercise powers of control wider than those conferred on them by their country’s legislation.

Process for Joint Audits taking place in Italy

The tax administration appoints a representative to direct and coordinate the activities and will adopt the necessary measures to ensure that:

• participating Member State officials may request data and information from the persons concerned and examine documents together with Italian officials, in accordance with the Italian procedural rules;
• evidence collected during the Joint Audit may be evaluated, including for admissibility, under the same legal conditions that would normally apply to evidence collected during an ordinary audit; and
• the taxpayer subject to or concerned by the Joint Audit are granted rights and obligations similar to those granted to persons subject to an ordinary audit.

Focus on Sweden: What is the scope and legal framework of Joint Audits?

In Sweden, Joint Audits fall under the regulatory framework of the Swedish Tax Procedures Act (the “TPA”) and the Law on the Administrative Cooperation within the EU in the Field of Taxation ( the “LASEU”). The administrative measures involved include the following:

• Audits (Chapter 41, TPA): Formal inspections of books, records and other documents connected to the business, even if they do not have book-keeping obligations in Sweden.
• Requests for information (Chapter 37, TPA): Demands for specific data or documentation.
• Enforcement measures (Chapters 44 and 45, TPA): In cases of non-cooperation, the Swedish Tax Agency can escalate actions to include penalty orders or evidence preservation measures.

Importantly, if another Member State has equivalent legislative measures, additional activities such as site visits or equipment inspections may also be undertaken. For instance, Chapter 42 of the TPA enables inspections to ensure compliance with requirements like maintaining personnel ledgers.

Joint Audits undertaken in Sweden are governed by Swedish law to ensure fairness and compliance. The audited party is guaranteed the same rights as with any Swedish domestic investigation. These rights include the requirement to notify the individual or entity of the audit decision and its purpose.

Audit decisions must specify:

• The purpose of the audit;
• The officials authorised to conduct it; and
• The specific provisions under which the audit is being conducted.

If EU officials participate in the audit, the subject must be informed of their involvement. While EU officials can pose questions and examine records, they must adhere to Swedish procedural rules.

Joint Audits present unique challenges, particularly regarding the interplay of different legal systems. To address these, the framework includes safeguards to ensure that:

• Compliance with domestic law: All measures taken in Sweden are governed by Swedish law, even when part of an EU collaborative effort.
• Legal consistency across borders: Participating officials (both domestic and foreign) must act within the bounds of the Swedish legal framework.
• Fair treatment: The audited parties are guaranteed the same rights and protections as they would under Swedish domestic investigations.

Audit material is protected under Swedish law. Only authorised individuals (including the auditors, supervisory personnel, and designated officials from the Swedish Tax Agency) may access these materials. This restriction also applies to EU officials, ensuring a consistent standard of confidentiality.

The success of Joint Audits depends on clear coordination between the participating authorities. A representative from the Swedish Tax Agency oversees and manages Joint Audits conducted in Sweden. The representative is responsible for ensuring compliance with Swedish legal standards and facilitating collaboration with other Member States.

Joint Audits may involve various activities, including:

• Reviewing records on-site;
• Issuing directives for compliance; and
• Applying enforcement measures, such as penalties, if cooperation is lacking.

The activities undertaken need not be identical across participating states. Each country determines the most appropriate and proportionate control measures based on its legal framework.

Swedish Tax Agency officials can participate in activities conducted in other EU Member States. Their actions are limited to what would be permissible under both Swedish law and the host state's legislation. If conflicts arise between the legal frameworks, the Swedish Tax Agency may either refrain from participating or limit its involvement to compliant activities. For example, Swedish auditors cannot review documents if Swedish law or the host state's law prohibits such access under specific circumstances.

What does the future of Joint Audits look like?

As both Joint Audits and EU directives on the exchange of information between authorities become more prevalent, they stand to play a central role in the EU's strategy to combat tax evasion and improve tax compliance. For businesses and individuals, this development underscores the importance of maintaining robust compliance practices, particularly for cross-border operations.