Tax authority as a service provider and the system of taxpayer rating
As part of the tax authority's changing approach, from 1 January 2016, NAV announced that it wished to support taxpayers as a service provider in understanding the tax regime and the fulfillment of their tax obligations. The change of approach was intended to improve taxpayer morale and promote voluntary compliance. The tax authority took a strong step in the direction of digitalization and intended to gradually share the benefits deriving from this with taxpayers also (e.g. personal income tax return proposals, electronic certificates, drafts of expected VAT returns) and it also set the goal of cutting and simplifying administration.
The tax authority broke with the concept of an audit-focused "tax authority presence" with mentoring, supporting procedures and warnings before audits taking the leading role. Today, the authority not only publishes its annual audit plan but notifies taxpayers in advance of upcoming audits. As an approachable modern authority treating taxpayers as its partners, the tax authority now collects more revenue with "less work" as voluntary compliance strengthens.
In addition, as an "incentive program" NAV launched the system of taxpayer rating. These ratings (classifying taxpayers as non-rated, reliable or risky taxpayers) are gradually filled with ever broader content: advantages or a stricter approach. In 5 years, companies also gained an understanding of the benefit/disadvantages of specific ratings and found that it is also an advantage to be included in the group of reliable taxpayers in a case of emergency.
Data warehouse of Big Brother NAV – does the tax authority see everything?
In 2018, the tax authority and the taxpayers reached yet another milestone. With the NAV 2.0 program, preparation for digital taxation and a digital tax authority started. After the online connection of cash registers in 2013, the introduction of the EKÁER (Electronic Trade and Transport Control) system in 2015 and the launch of personal income tax return proposals in 2017, digital data gathering entered a whole new level with the introduction of NAV Online Invoice data reporting in 2018. With the launch of Online Invoice 3.0, NAV will now practically see all invoices with the exception of foreign acquisitions. The tax authority also has means for fighting international tax evasion: various international exchanges of data, international exchange of banking information, transfer pricing documentation or binding rulings.
The Hungarian tax authority has a data asset that allows it to see and test the fulfillment of specific tax obligations almost real-time. This also the basis for the preparation of VAT return proposals, which are expected to be sent to taxpayers first in July 2021.
NAV does not yet see everything BUT IT WILL!
The mass of information that NAV can obtain digitally will grow further with the launch of Online Invoice 3.0. The gathering of information and exchange of data applied so far will become insignificant in the coming years relative to the expected level of data reporting! NAV is already developing the XML file structures for the Hungarian introduction of the Standard Audit File for Tax (SAF-T) elaborated by OECD. In these, companies will have to provide the tax authority in a standard form with accounting and other business data (another 10-15 types of data lines). For now, taxpayers will only have to provide these upon NAV's request but the process is not likely to stop there. The efficiency of tax audits may improve exceptionally with the introduction of SAF-T files.
With these reports, NAV could see all details of a transaction between business entities in real time from the issuing of the invoice through the movements of stock, the acceptance and accounting of the invoice and the VAT analytical records to the payment of the price. With this information, NAV will be able to perform real-time, automated, software-based audits without any human intervention.
Changing tax audit trends – support at times but often a ruthless approach
The change of the tax authority's approach is also apparent in auditing. However, the concept of the tax authority as a service provider is forgotten (many times without reason) in subsequent tax audits.
The digitalization processes of the past few years helped the selection of taxpayers for auditing significantly with increasing focus on software comparison of data and the introduction of data reporting obligations that make auditing possible. Today, the tax authority typically initiates a traditional tax audit in cases where there is suspicion of violation of law at a taxpayer.
If the tax authority finds that the violation was not intentional, taxpayers will be able to participate voluntarily in a support process and remedy the errors detected as a result of the risk assessment together with NAV. The situation is very different if NAV suspects a violation of law, more specifically, tax evasion at a taxpayer. It is also an apparent part of the new approach that in these cases, NAV does not only want to achieve results but also to set a deterrent example for others.
In many cases already, NAV not just starts a "simple tax audit", but the tax, criminal law and execution functions of the authority take coordinated action together against the taxpayers concerned. This way, taxpayers not only have to face inspectors but also executors and potentially, a criminal procedure also. Strict, coordinated action in itself is not a problem. To the contrary, it is an efficient means of deterring taxpayers from repeating the violation. The concern comes if fundamental taxpayer rights are infringed during the procedure or if companies are affected that did not take part in the violation and were involved unsuspectingly but are affected by the consequences equally (if not more severely).
Regarding the tax authority's change of approach, we can say that overall NAV chose fundamentally very good directions by actively supporting taxpayers, introducing tax authority services such as the proposals for personal income tax and VAT returns, sharing the benefits of digitalization with companies, targeted audits and taking firm action all of which are promoting voluntary compliance. However, in the meantime, NAV and legislators should remember to comply with the international rules that apply to them also and to provide proper legal guarantees to ensure the enforceability of taxpayer and general civil rights.
In our series of blog posts, RSM Hungary's team specializing in tax audits and tax litigation will present to you the tax authority's current way of thinking after the change of approach that took place in the last 5 years, new procedures, audit tools and practices applied, potentially problematic findings and its experience on the tax authority's positions.
