Tax audits … using the grey matter

This article appears in the September issue of our International Corporate Structures Newsletter.

I have always found that a number of factors contribute to a successful tax audit outcome, not least of which is the ability to adapt to changing circumstances and to think creatively. I recall one particular audit in a Southern European country which illustrates the point. It always makes me smile when I think of how it was positively concluded.

This tax audit was on local matters only, so my team would not normally have had direct involvement. In such situations, the audits would be handled by the local finance team, with help from external advisers if needed. As the local Controller and team were highly proficient and as the issues were more factual than technical, I concluded that the local finance team would deal with the day to day audit with updates to my team, with no immediate need to engage our advisers. This proved to be the right decision and the audit was closed within the agreed timeframe, with only minor adjustments to filed returns.

However, I ended up having a far greater role than was ever envisaged – not from a technical perspective, but more to do with my appearance.

During the first week of the audit the tax authority team consisted of competent young tax officials, and our young team consisted of the Controller and two members of her staff.

The audit was going smoothly until the tax inspector in charge arrived to get an update. He was a very experienced taxman who happened to be approaching retirement age, had a head of grey hair and suffered from old fashioned ways. The trouble was that no matter how competent or thorough his team were, he treated them like his children and expected them to listen to him and follow his instructions. Unfortunately he also treated our Controller and her team the same way. Our Controller acknowledged he was courteous to them all, but he appeared to be unable to accept that young people actually knew what they were talking about.

Our Controller thought long and hard about the impasse that threatened to prevent closure of a straightforward audit. She came up with a solution to resolve the matter without necessitating lodging formal complaints against him.

She called me and explained the situation. She asked if I would go over there during the following week and sit in on the closing meetings with the tax inspector. I was surprised to say the least, as the issues were domestic so my input would be limited – and I only spoke English and the tax inspector didn’t.

Then she confessed that I would be invaluable due to my seniority (in the company she said, but I think she was also referring to my age) but more so that I was similarly blessed with a head of grey hair. In other words, a direct match for the tax inspector. Never having been flattered like this before I agreed to her request, but only after she agreed that my travel and hotel costs would be picked up by the local market.

The meetings went well. The tax inspector sat on one side flanked by his team, and the Controller insisted I sat directly opposite him flanked by her and her team. I had already been briefed on the issues by the Controller and we agreed on how to accept or reject the tax authority’s position on each item.

Throughout the meetings, the tax inspector would only look at me for my reaction – it was funny as we couldn’t talk to each other. Nevertheless, he went away happy to have closed the audit. It seems that although I was younger than him, he liked the idea that another senior person was present.

Although the Controller’s brainwave won the day, she subsequently confessed to being slightly apprehensive about asking me to help in this way but it was so quirky and clever, there was no way I could refuse. One of my most enjoyable audits.