Have you ever wondered why different auditors are conducting inspections on work conditions, tax returns and proper payments of social security contributions? 

Supply of labour to other companies nationally or across borders involves careful observation of several areas of law. Companies must comply with rules of each area and depending on the state involved, enforcement is often carried out by distinct authorities. Each of them following their own procedures and conducting their own form of controls. 

Satisfying the demands of all administrations individually can be time-consuming, costly and cumbersome. In cross-border situations the matter becomes even more complex: More people are involved, and each country follows its own approach, when enquiring frequently overlapping information. Known ways to reduce administrative burdens and costs already exist and are currently explored. New developments at European Union (EU) level could be on the brink to provide further tools to improve the current situation. One way of improvement may be joint audits. But, what are joint audits? This contribution shortly elaborates on the concept and the current developments of joint audits that could facilitate a cross-country concept of joint audits.

What are joint audits, and why should we use them?

Joint audits offer a possible remedy for time and quality inefficiencies of traditional audits as they operate at a deeper level of cooperation among administrations. Instead of two or more teams of auditors, in a joint audit only one team composed of auditors of both administrations works on a case and produces one final report. Thus, the one-sided information gathering of traditional cooperation is replaced by a joint-information gathering and evaluation team.

In cross-border tax conflicts and EU Social Security Coordination situations, there are various tools administrations can use to obtain information for the assessment. The most prominent tool is Exchange of Information (EoI), which is laid down in international conventions, EU directives, regulations and decisions. EoI represents a one-sided approach of administrative cooperation where one administration asks the other for information pertaining to the same area. The audits however, are conducted separately in each state, even though both countries are eager to determine whether tax or social security has properly been paid to the right administration. As a consequence, the company will have to report to each administration and can become the intermediary between administrations. A lack of direct communication between the administrations can lead to conflicts of interpretation which in turn leads to slow progress and uncertain outcomes.

In practice
Especially in the field of international tax law, joint audits have gained more and more attention ever since the OECD Joint Audit Report was published in 2010. Various countries launched pilot projects to conduct joint audits, one of which was carried out between Germany and the Netherlands. The project started in 2013 and ended in 2014. During that time five joint audits were conducted following the OECD principles for joint audits. Another pilot project was conducted between Germany and Italy, with similar results. Even though not all went according to the book, auditors concluded that cooperation was definitely enhanced, but that these projects represent only the first steps. Thus, cross-border joint audits have a great potential for all tax areas as well as non-tax areas.  For international tax law purposes joint audits are also a way to avoid lengthy Mutual Agreement Procedures, which are the last resort to solve an unclear tax situation.

Advantages and challenges
Joint audits are pro-active, can increase the quality of the assessment, reduce the contact necessary between party under scrutiny and authorities, and prevent conflicts arising between administrations. Additionally, the existing ‘Chinese walls’ between social security, tax law and labour law crack open when auditors start looking over the fence and directly communicate with each other. The current legal framework in many countries however does not foresee such an interaction at this point.

Despite the many advantages cross-border joint audits might have, they do not come without difficulty. Different information or interaction standards of the countries involved might conflict. Language can become a challenge for a proper assessment and other potential obstacles include timing mismatches in procedures or logistics and resource constraints.

However, I am convinced once established, joint audits may have many more advantages apart from the ones mentioned above. Joint audits could lead to common practices, jurisdictions having the possibility to learn from each other and identify best practices. Direct interaction between inspectors can greatly enhance communication among the authorities, also in light of future joint assessments. Pilot projects as mentioned above are proof of that.

Current EU Developments with great potential
For social security and labour law great potential lies in the recent proposal for a European Labour Authority (ELA), which shall come into being in 2019. The ELA may become a promising tool to encourage administrative cooperation through cross-border joint audits in social security and labour law. Whether or not tax falls within the competences of the ELA remains to be seen but is unlikely. Currently, the objectives of the ELA encompass the support of cooperation between national authorities to protect compliance with EU law and prevent fraud. Therefore, one way ahead could be the introduction of joint audits between Member States. As the concrete tasks of the Agency are still unclear, the future will show how influential the new entity is going to be. 

Ultimately, what would be desirable is not only having cross-border joint audits in one area of law but having one joint audit for all the three areas to solve a situation of conflict as efficient, timely and accurately as possible. The concept of a joint audit may however not only be interesting for cross-border situations, also cross-administrative joint audits may yield great results. This however is still a utopian idea and the momentum for such a move forward is yet to come. Nonetheless, joint audits are a promising new approach, which should be explored not only between authorities in cross-border tax audits, but also amongst authorities responsible for the other areas of law.

Author: Kilian Heller

Kilian Heller is connected to Expertise Centre ITEM (Institute for Transnational and Euregional Cross Border Cooperation and Mobility / ITEM) as a PhD-Candidate for his research under guidance of prof. dr. Marjon Weerepas and prof. Rainer Prokisch.

Read more about his research at Expertise Centre ITEM:

• Cross-Border Liability in Subcontracting Chains