Increasing digitalisation of tax control

How is tax control transformed by digitalisation?

1. For some years now, the tax administration has been pursuing a policy that revolutionizes tax control, and thus the tax management of companies and the profession of tax specialist. This is an intelligent policy that has been done quietly, and everyone knows that the best reforms are those that are not seen.

In the past, tax control was mainly based on paper and face-to-face meetings that enabled oral and contradictory debate to be implemented. The administration began by eliminating paper by generalizing the requirement of a remittance of accounting in a single and dematerialized format: the accounting entries file (FEC), which is the cornerstone of its digital transformation. The playing field is no longer the same: while in a conventional control, an auditor used between 1,000 and 5,000 paper data at most, we suddenly went to a range between 200 million and 1 billion dematerialized data! In practice, this means that the auditor has tools with which he can surf, sort, filter, classify, calculate, query in the accounting to the most detailed cell of each accounting entry and thus have access to the intimate areas of the information system.

The administration then added other digital bricks:

• the Accounting Review (EC) which enables the implementation of a remote tax audit (from the administration offices) via the operation of the FEC;
• the reliable VAT audit trail;
• but also access to cost accounting and consolidated accounts which can have a strong orientation on dematerialized aspects (access to "cost centers" for example);
• certification of cash register systems and software.

It is a nebula that takes shape, which is resolutely digital and whose heart is centered around data analysis. The mix of IT and tax controls is certainly not new: the tax control of computerized accounting (CFCI) has existed for 30 years. But it was a matter of specialists, even hyper-specialists, with a strong dominance of computer skills, and the subjects were debated and settled between «computer scientists». Henceforth, any verifier is able to systematically implement means of computer investigation for all controls whether in VAT, transfer pricing, IS...

In the face of this digitalisation of tax audits, do you see any change in the skills of auditors?

2. The auditor was walking on three legs, now he has four legs.

• a lawyer: taxation is above all a right;
• an accounting expert: we approach taxation through accounting documents;
• an economist to manage transfer pricing.

Now he has a fourth string to his bow: he is a data analyst. This result is the result of a deliberate desire of the administration to develop the autonomy of its auditors so that they are all daily users of computer tools and that computer specialists focus on complex issues volumetry.

The administration is clearly ahead: the technological breakthroughs it has implemented for less than 5 years are completely changing the situation for companies!

 

Do you see correlative changes in the activity and skills of corporate tax teams?

3. Yes, many businesses quickly realized that they needed to return to a level playing field with auditors. Because control is a negotiation and we do not enter into negotiation in a situation of weakness.

Faced with this paradigm shift, they have retained their skills, while adapting their reflexes, their automatisms, their reasoning and their ways of thinking. They perceived the need to be able to analyze the available data with adapted reading tools. This is the reason why, for example, we have developed a scalable tax platform that aims to identify accounting and tax irregularities and to dive into the data at the mesh of accounting writing, in order to assist our clients in the preparation, then in the management of their tax audits.

The FEC: pivot of the current tax audit

 

What is the current attitude of the administration towards FEC compliance requirements?

4. As a first step, the administration was pragmatic, which allowed companies and auditors to adapt to this new format.

If until now the auditors had focused on the compliance of the technical format, we now see in practice a particular attention on their part to the accounting compliance of the FEC and the quality of the accounting data. According to our information, this change results from instructions given by the central administration. Thus, a certain number of accounting anomalies or non-conformities are more systematically identified and sanctioned by the auditing services.

The administration has an extremely precise matrix with the FEC that allows it to identify a significant number of non-conformities almost automatically. Indeed, to each of the fields or combinations of fields of the FEC correspond a mandatory accounting rule, and the computer tool makes it possible to identify them easily.

What are the penalties for non-compliance with the FEC?

5. According to the administration, it is necessary to distinguish cases of technical non-conformities from accounting non-conformities:

• in the first case, the company incurs a fine of € 5,000 or, in the case of rectification and if the amount is higher, an increase of 10% of the duties charged to the taxpayer;
• In the second case, however, the fine is in principle not incurred by the undertaking but the risk is the outright rejection of its accounts. These cases of rejection are on the rise since the beginning of 2018, regardless of the size of the company, and not only in SMEs and VSEs.

In practice, the boundary between these two types of non-compliance remains unclear and it is appropriate to refer to the provisions of the decree of 29 July 2013 which defines the technical format but also includes elements related to accounting compliance. The distinction made by the administration may make it possible to challenge the application of penalties in some cases when 3 accounting non-conformities identified would not be covered by the aforementioned order which serves as the basis for the application of the fine.

Can companies rely on the online FEC test offered by the administration?

6. The administration does offer on its website a tool for verifying the conformity of the FEC, "accounting test" which is available to taxpayers. So in principle it’s a good thing. However, this tool does not give a full guarantee to the company on the quality of the data and even on compliance with the technical format of the FEC. So if a FEC comes out of the tester without an indication of error, it does not protect the company from the application of the fine or an accounting rejection.

It therefore seems imperative to us to test the FEC technically and with regard to the key elements of accounting compliance before any handover to an audit department, but also to master all the data given to the auditors andidentify as much as possible the potential tax issues (proven risks and areas of questioning of the audit department).

 

Feedback on the practice of the accounting exam and CFICs

What do you think of the first experiences of implementing the accounting examination by the administration?

7. As a quick reminder, the accounting review is a new type of control that has been in place for two years now and allows the auditor to request a company’s FEC in order to perform a remote control of the company, without having to travel to its premises. The administration has confirmed to us that the target audience for the accounting review is primarily VSEs and SMEs, although it can be applied to all companies.

Our main concern concerns the exact nature of the computer processing that the auditor can carry out in this context, even if this type of examination is most often likened to a spot check.

The maintenance of an effective oral and contradictory debate between the company and the auditor is a subject that must be taken over by the taxpayer himself. We know that 4 the administration has made recommendations in this regard to the auditors, in particular to contact the audited companies by telephone to explain the conclusions of their investigations. But the efficient existence of oral and contradictory debate requires companies to adopt a proactive attitude. It is up to the taxpayer to take the initiative to bring the oral and contradictory debate to life. Of course, there is nothing to prevent the taxpayer from travelling to the administration’s premises to discuss sensitive points.

What are the difficulties raised by the deadline for submitting files in CFICs?

8. As a reminder, when an auditor wishes to perform computer processing as part of a tax audit of computerized accounts, the taxpayer has three options:

• provide access to the company’s information system, so that the auditor performs the desired computer processing himself (option a);
• perform the treatments themselves and provide the results to the administration (option b);
• give to the administration the documents, data and processing subject to control and necessary for computer processing that are carried out by the administration (option c).

The amending Finance Act for 2016 imposed a 15-day deadline for companies to submit documents to the administration under options b) and c). If they do not comply, they face the same penalties as the non-compliance of the FEC (a fine of € 5,000 or an increase in the enhancements of 10% if this amount is higher). But this delay is very often unrealistic. This is why we sometimes recommend option a) to our customers, which we did not do in the past, to avoid the risk of the penalty.

In addition, we found that some auditors use this delay as a leverage when discussing/negotiating the request for computer processing. From the point of view of the administration, the main purpose of this delay was to avoid forms of latent opposition or delaying practices by certain taxpayers. According to the administration, this 15-day period corresponds to the average period of submission of files before it was imposed as a legal constraint. In practice, compliance with the fifteen-day period is usually impossible outside of preparation well in advance of the extremely thorough control.

A last recommendation to companies?

9. Anticipation! This is the only solution to meet the deadlines and avoid the fines and penalties incurred, including some cumulative, both in the preparation of the FEC, used for accounting audits and examinations, for CFICs or for the reliable audit trail. This necessary anticipation also concerns the preparation of teams for the operational consequences of the increasing digitalization of tax control. The corporate tax expert and his advisors must now combine the skills of the lawyer and a strong ability to analyze mass data using computer tools. Only then will companies be ready for future tax audits.