International joint audits: is two better than one?

• Author: Chambers, Valrie

In December 2011, the IRS announced its plans to implement a program, advanced by the Organisation for Economic Cooperation and Development's (OECD's) Forum on Tax Administration (FTA), to "jointly" audit multinational taxpayers with tax administrations from around the world, but always on the basis of a tax treaty between them. (All of the materials the OECD published on this subject are available at oecd.org, as a means of increasing its own transparency.)

The FTA is a body within the OECD and its Committee on Fiscal Affairs and is composed of the heads of tax administration bodies in 45 OECD member and observer nations. The FTA is a forum for tax administrators to discuss common problems and concerns, work together to improve tax administration, share information on challenges and solutions, and work more cooperatively to improve the effectiveness of overall tax administration. Joint audits present unique challenges and opportunities that are only briefly addressed in this item.

The program the IRS announced arises from a report released during the sixth meeting of the OECD Forum on Tax Administration in September 2010 in Istanbul, Turkey. The Joint Audit Report (available at tinyurl.com/lbgwnys) introduced the program by saying;

As a consequence of today's increasingly borderless world and the growth in international transactions by entities (corporations, trusts and other enterprises) and individuals, revenue bodies need to plan for the challenges of a vastly increasing number of taxpayers with international issues. This increasing internationalisation will also mean revenue bodies will need to cooperate and collaborate more closely in order to optimise compliance with international and national tax rules. The concept of a "joint audit" is relatively simple, but applying it in practice is a significant challenge for revenue bodies and taxpayers alike.

Example: Tax treaty partners in countries A and B have an interest in the proper income tax reporting of multinational entity Z, which operates in their national borders. The idea is that A and B, operating under the Exchange of Information (EOI) article in their bilateral tax treaty, could work as one team (rather than conducting two separate examinations) to examine Z's accounts. In theory, all requests for information from Z would be issued simultaneously by A and B, following their own domestic rules and procedures, and then analyzed and discussed by the revenue bodies under the...