From documentation and audits by the Federal Tax Administration (FTA) to the appeals procedure, it pays to think ahead and get all three phases of the value-added tax (VAT) process right. Here you’ll find why this is important, and how to go about it.

VAT is based on a self-assessment system, with every organisation responsible for filing its own declaration. Whether or not it has done so correctly will emerge, at the very latest, when the FTA conducts a VAT audit. So the first dimension in successfully handling VAT is accurate documentation. Master the second dimension by preparing properly for a VAT audit, and you’ll avoid surprises. And if you don’t agree with the findings of the audit, you can take remedial action in the third dimension, the appeals procedure.

Dimension 1: documenting VAT processes

It’s up to the taxable person to document VAT processes, but often a lack of time, awareness or resources means that errors creep in. Errors and shortcomings can remain hidden for years and only emerge when the FTA conducts a VAT audit. This can result in substantial additional charges. For this reason it makes sense to draw up a VAT handbook describing and documenting VAT processes – if necessary with the help of an expert.

When documenting VAT processes, the taxable person should keep the following special cases in mind:

• Is there evidence to prove the tax-exempt status of exports with export documents?
• Are supplies correctly assessed as VAT-exempt without credit?
• Can you prove that input tax has been paid?
• Is an input tax correction plausible on the basis of supplies exempt from the tax without credit?
• Are supplies to employees declared correctly (for example company vehicles)?
• Has the FTA issued instructions in previous audits, and are these instructions being followed?
• Are VAT processes reviewed on a regular basis and brought into line with the latest legislation and FTA practice?

If an organisation has particularly complex flows of goods and services and transactions, or if FTA practice is not clear, the organisation should have the legal situation clarified with a ruling. This gives maximum legal certainty, and means the organisation can fall back on the FTA’s definitive ruling if there are questions later on. Let’s look at an example: following discussions on the method of input tax correction a company was able to present a nine-year-old ruling to the FTA and convince the administration that the method it was using was correct. But this doesn’t always work; if the legal basis or the circumstances have changed, the ruling might no longer be binding. For this reason rulings should be regularly reviewed and updated.

Dimension 2: preparing for a VAT audit

Every year the FTA conducts around 9,000 VAT audits. According to a recent study, three out of four audited entities report their VAT incorrectly. For this reason VAT audits often result in an additional tax charge. In most cases the announcement of a VAT audit unleashes a flurry of hectic activity. It doesn’t have to be this way. You can prepare properly by addressing the audit actively and preparing your VAT documentation wisely.

You should work on the basis of the turnover and input tax reconciliation as defined in Art. 128 of the VAT Ordinance (MWSTV). If you don’t have a reconciliation, you might not have much time before the audit starts. A taxable entity that does a reconciliation every year can concentrate on reviewing special cases.

If documentation is missing or no plausible explanations of the practice applied can be produced, the VAT auditor can make corrections or a fair assessment of the tax claim. Experience has shown that it is often difficult to make the FTA change its stance. When it comes to the audit itself, the following considerations are crucial:

• Is it possible to access your accounting systems directly, and can access be restricted (for example to prevent access to personnel data)?
• Does the FTA auditor have a contact on site to whom they can address their concerns?
• Are external experts available in the event that there are differences of opinion?
• Have kick-off and debriefing meetings been organised?

Preparing thoroughly for a VAT audit pays off. Whatever happens, the entity should carefully check the assessment notice issued by the FTA following the audit, which will contain any corrections. It may have to explain the divergent item to the FTA in writing and submit additional documentation.

Dimension 3: appeal proceedings

If an assessment notice has been issued and the FTA cannot be convinced after further discussions, there is still the option of an appeal. The procedure consists of three stages: from filing a written objection with the FTA, followed by filing an appeal with the Federal Administrative Court, all the way up to the Federal Supreme Court.

A successful appeal requires an experienced tax lawyer; with a combination of in-depth knowledge of VAT and experience in legal proceedings, appeal proceedings do have a fair chance of success. Figure 1 shows that in the last five years, 278 VAT appeals have been rejected by Federal Administrative Court, and 108 have been approved. In other words, around one third of appeals are successful.