TLDR;
This video features a discussion with Leat Noviber, Head of VAT and Property Tax at Goldfarb Seligman, about VAT (Value Added Tax) audits and investigations in Israel. She provides insights into how tax authorities select cases for audit, the audit process itself, the rights and obligations of businesses during an audit, and when it's advisable to seek professional representation.
- Only a small percentage of VAT returns are audited.
- Audits can stem from intelligence, reporting anomalies, or random sampling.
- Businesses have rights during searches and seizures, including the right to legal representation.
- It's crucial to cooperate with auditors while also protecting sensitive information.
- Seeking professional advice is recommended, especially when facing complex or potentially criminal investigations.
Introduction to VAT Audits and Investigations [0:11]
The discussion begins by introducing the topic of VAT audits and investigations, acknowledging the stress they can cause. Leat Noviber is introduced as an expert in indirect taxes, particularly VAT, who will provide insights into navigating this complex area.
How Tax Authorities Select Cases for VAT Audit [0:57]
Leat explains that only a small fraction (0.67%) of VAT returns are selected for audit, possibly even less now due to resources being diverted to property tax compensation claims. Selection is based on intelligence (both overt and covert), anomalies in detailed reporting, and negative added value. She advises businesses to rectify any reporting discrepancies to avoid triggering an audit. The "Asna report," which can be extracted from the tax authority's system, is described as a "blood test" for a company, showing transactions, inputs, and added value over several years, which can help predict audit risk. Audits can also arise from random sampling or collaboration between different tax authority departments, such as income tax and VAT, or property tax.
The VAT Audit Process [5:30]
The standard audit process typically starts with a letter requesting documents, including a standardised file, reconciliation reports, ledger cards, and explanations for anomalies. Tax authorities may also request an interview with the CFO, VP Finance, or Tax Director. Leat stresses the importance of preparing thoroughly for such interviews and deciding who is best suited to attend. She warns that an interview can quickly escalate into a formal investigation, at which point legal representation is essential. In more serious cases, audits may begin with a surprise visit or search warrant, in which case businesses should immediately request to see identification and a court order, and contact a lawyer. Computers and phones cannot be seized without a court order.
Tax Authority Powers and Criminal Aspects of VAT Law [10:05]
Leat emphasises that tax inspectors have broad powers, similar to those of police officers, especially in investigations. VAT law is fundamentally criminal, with Section 117 outlining various offences that can lead to penalties, including imprisonment. These offences range from failing to register correctly to issuing incorrect invoices or failing to submit VAT returns on time. She highlights the need for increased diligence in VAT matters compared to income tax due to the criminal nature of the law.
Handling Broad or Unreasonable Requests from VAT Inspectors [12:38]
Leat advises that while businesses must cooperate with tax authorities, they should also be aware of their rights and the limits of the inspector's authority. Requests for access to legal materials, board meeting minutes, or employee emails should be treated with caution. She notes the existence of legal privilege and the need to protect sensitive business information. Businesses should explain any difficulties in providing certain documents and negotiate with the tax authority to narrow the scope of the request. If an agreement is reached to provide sensitive documents, a cover letter should be included, citing Section 42 of the VAT law, which mandates confidentiality. In extreme cases, businesses can request that sensitive documents be stored in a safe with limited access. Leat also mentions that requests for employee emails and diaries are generally not enforceable due to privacy concerns. She highlights the importance of the battle against submitting reportable tax opinions to the tax authority.
Responding to Standard Document Requests and Seeking Extensions [20:23]
It's crucial to respond to all document requests respectfully and comprehensively, even if some requests seem unreasonable. Instead of ignoring a request, provide a clear explanation of why the information cannot be provided or propose an alternative solution. If facing heavy workloads or tight deadlines, request an extension in writing, explaining the reasons for the delay. Tax authorities are generally cooperative in granting extensions if approached respectfully.
Subsequent Stages of a VAT Assessment [23:52]
After reviewing the documents, the tax inspector may request additional information or clarification. This could include questions about employee events, vehicle expenses, VAT-exempt transactions, or intercompany financing arrangements. Inspectors may also conduct site visits to inspect facilities and understand the company's operations. If disagreements arise, the inspector will issue an assessment, which the business can then appeal within 30 days.
Filing an Appeal (Objection) Against a VAT Assessment [28:37]
The appeal stage is critical, as any legal arguments or evidence not presented at this stage may not be admissible in later court proceedings. The appeal should be a comprehensive document, including all relevant legal arguments, case law, and supporting evidence. After filing the appeal, a hearing will be scheduled, and it's important to ensure that the minutes of the hearing accurately reflect the arguments presented. If the minutes are inaccurate, corrections should be requested, or a separate statement should be added to the record.
Appeal Outcomes and Further Legal Proceedings [32:13]
The tax authority must issue a decision on the appeal within one year; otherwise, the appeal is deemed accepted. If the appeal is rejected, the business can file an appeal to the District Court. Even after filing an appeal, negotiations with the tax authority can continue, and many cases are resolved through settlement. Leat stresses the importance of meeting deadlines and protecting procedural rights throughout the process. VAT appeals differ from income tax appeals in that the appellant must file a full appeal with all legal arguments within 60 days.
When to Seek Professional Representation [36:16]
Leat concludes by discussing when businesses should seek professional representation in VAT audits and investigations. While some companies prefer to handle routine matters themselves, others prefer to delegate all communication with the tax authority to a professional. She notes that tax authorities may sometimes take advantage of those who are less familiar with their rights. Engaging a professional can provide protection, expedite the process, and lead to better outcomes. Even if a company chooses to manage the audit internally, consulting with a professional can be beneficial, especially if any issues arise that seem unusual or potentially problematic. Leat also mentions that sometimes professionals advise from behind the scenes.
