In this newsletter we will highlight one of the methods for zero measurement of tax risks: 'statistical sampling' to exactly determine the amount of risk or saving.
Why is the exact amount important?
We will illustrate this using a due diligence investigation as an example. Such investigation not only serves the purpose of identifying the material risks, but also the quantification of these risks is essential. A traditional due diligence investigation normally involves completion of standard questionnaires and retrieval of standard information, which is provided by the vendor via a specially designed data room.
When for example possible incorrect VAT determination is detected, a rough estimate of the magnitude of the VAT risks (or savings!) is made on the basis of turnover and sales figures. This is not ideal for both vendor and purchaser, as it involves a lot of guesswork and thus usually provides an insufficient framework in price negotiations.
The question is whether there is a more accurate method for determining the potential additional tax assessment (or saving!) in an efficient and effective way.
In order to quickly gain insight into the level of tax risks (i.e. calculation of the potential assessment), statistical sampling can be used. By selecting a few elements (euros), the reliability of the composition of tax items can be determined with a high degree of certainty, and on the basis of identified errors in the sample, the exact amount of additional tax assessment can be calculated.
Supportive to the strength of this method is the fact that statistical sampling is the preferred tax audit method used by the Dutch tax authorities in their tax audits. This method is explicitly approved by the highest Dutch court.
Defining the scope, designing, drawing the sample and evaluating the results requires a multidisciplinary approach. In addition to indirect tax knowledge, expertise in statistical sampling is required.
In case of a due diligence such a sample is not solely relevant for the purchaser. Also the selling party can benefit from sampling with regard to preparatory work for a prospective takeover. When a statistical sample is drawn and the results are acceptable, the conclusions can be proactively taken into the data room. This can serve as additional evidence of implementation and maintenance of an effective (tax) control framework.
Moreover, in the Netherlands the possibility exists to align and discuss the results of the observed findings with the tax authorities, which provides more certainty regarding the adopted tax position.
All this can positively contribute to the sales negotiations, including the amount of guarantees and/or discounts that are to be provided.
Via the 'single audit' method, it is possible to extend the scope from VAT and/or GST to other tax areas such as 'corporate income tax' and 'wage tax'. Click on 'Go to Flyer' below if you want to learn more about 'zero measurement of risks and savings' or select 'single audit' method for debrief.