Tax Disputes and Controversy Update – Voluntary Disclosures in Canada, US, Italy and the Netherlands

Voluntary Disclosures

As tax audit activity and controversy continue to rise worldwide, many large global businesses and high net worth individuals are getting their tax affairs on track through voluntary disclosures. Taxpayer amnesty and relief programs are an increasingly popular means for tax authorities to encourage taxpayers to come forward and correct errant tax filings in exchange for potential immunity from prosecution, reduced penalties and other relief.While voluntary disclosure programs in various countries have similarities, there are important differences in application procedures, tax filings covered, and types of relief provided. Companies and individuals who are thinking about using this route to remedy their tax filing lapses can avoid missteps and get the most benefit by carefully examining the specifics of the voluntary disclosure program in the jurisdiction in question.

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As tax audit activity and controversy continue to rise worldwide, many large global businesses and high net worth individuals are getting their tax affairs on track through voluntary disclosures. Taxpayer amnesty and relief programs are an increasingly popular means for tax authorities to encourage taxpayers to come forward and correct errant tax filings in exchange for potential immunity from prosecution, reduced penalties and other relief.

While voluntary disclosure programs in various countries have similarities, there are important differences in application procedures, tax filings covered, and types of relief provided. Companies and individuals who are thinking about using this route to remedy their tax filing lapses can avoid missteps and get the most benefit by carefully examining the specifics of the voluntary disclosure program in the jurisdiction in question.

To examine some of the unique features of various programs and the implications for taxpayers taking part in them, Sharon Katz-Pearlman hosted a recent webcast with Tax Dispute Resolution and Controversy Services leaders from KPMG International’s network of firms in Canada, the United States, Italy and the Netherlands. The information and insights shared during the webcast are summarized below.

Voluntary disclosure in Canada – Paul Lynch, Partner, Tax and National Leader, Tax Litigation & Dispute Resolution, KPMG in Canada

Canada’s voluntary disclosure program is a longstanding, permanent program that is open to individuals, corporations and other taxpayers alike. The program allows taxpayers to correct inaccuracies or incomplete information, or disclose materials not reported during previous dealings with the Canada Revenue Agency (CRA).

A disclosure under the program is considered as a form of late voluntary compliance, rather than a step toward a negotiated settlement. The CRA has a statutory basis for waiving penalties and interest for successful applicants, but the outstanding taxes must still be paid. 

What’s the process for making voluntary disclosures?

You can make your disclosure on a ‘named’ and ‘no-named’ basis. If you are not certain whether it’s in your interests to proceed with a disclosure, you can make your initial application anonymously and have preliminary, non-binding discussions with program officers so you can understand the process and the risks involved. You would be protected from prosecution from the date of your first, no-named application, and you would then have another 90 days to provide the CRA with the outstanding details. 

The CRA’s authority to accept or reject the application is discretionary, so you should carefully consider the CRA’s criteria before applying. The four criteria are as follows:

  1. Voluntary – You can only apply if you have no knowledge that the CRA has initiated any compliance action related to the information subject to the disclosure. This is a broad-based criterion that could include, for example, compliance action initiated by a tax authority in another jurisdiction.
  2. Completeness – You can only make one voluntary disclosure request per entity over its lifetime, except in limited circumstances. With generally only one chance to apply, you do not want to have your application rejected. You will want to ensure you provide full and accurate facts and documentation, and that your initial application covers all potential issues. Applications must be made in writing, and use of the CRA’s Form RC199, Taxpayer Agreement, is optional. Completing the form can help you ensure you provide all the information needed for acceptance.
  3. Penalty – A valid disclosure must involve the potential application of a penalty, which is often a late filing penalty but could be another penalty, such as the penalties related to failure to remit, unpaid installments, or gross negligence. You cannot seek relief through the program if no penalty applies.
  4. More than one year past due – To prevent taxpayers from using the program to avoid late filing penalties for current-year returns, the CRA imposes a one-year waiting period from the related information’s due date before it accepts applications. The CRA may accept a current-year application where that year is part of a disclosure covering multiple years.

What relief is available?

The CRA can provide penalty and interest relief for any taxation year or fiscal period that ended within the previous 10 years before the calendar year in which the submission is filed. The 10-year limitation period rolls forward at the start of each calendar year. The CRA may cancel/waive interest that accrued within the last 10 years, even where the debt arose in a year prior to the last 10 years.

Penalties are almost always cancelled once you are accepted into the program, and interest relief is usually granted for years or reporting periods that precede the three most recent years. These three years are technically open, and the CRA could issue a reassessment if it detected the problem.

On acceptance, the CRA will issue an assessment, which specifies the penalty and interest relief. If the application results in a reassessment that you disagree with, you have the right to file an objection regarding the taxes, but not regarding the penalties and/or interest.

If your disclosure is rejected, the disclosed information may be referred to another CRA department, which may result in an assessment or reassessment, penalties and interest, and, in some cases, investigation and prosecution.

Finally, if you disagree with the outcome of your application, you can apply to the court for a judicial review. Because the program is discretionary, the courts cannot overturn the CRA’s findings. However, the court can compel the CRA to reconsider the application if it can be shown that the CRA did not exercise its discretion fairly and reasonably. A second review may be allowed, for example, if some information was misinterpreted, considered out of context or not considered at all, or if new facts or documents have come to light.

Nevertheless, the CRA’s Voluntary Disclosure Program officers accept the majority of voluntary disclosures, and many taxpayers have been granted relief from penalties and interest as a result – not to mention the peace of mind they gain from bringing their tax compliance back onside.

Voluntary disclosure in the United States – Lauren Roberts, Director, Practice, Procedure & Administration, Washington National Tax, KPMG LLP (US)

The US government has stepped up its efforts in recent years to stop offshore tax evasion through measures that include enhanced enforcement, criminal prosecutions and implementation of third-party reporting via the Foreign Account Tax Compliance Act (FATCA). The US has also entered into new agreements for the mutual exchange of taxpayer information with Switzerland, the United Kingdom and Australia.

As part of these efforts, the Internal Revenue Service’s (IRS) Offshore Voluntary Disclosure Program (OVDP) aims to encourage qualifying taxpayers with unreported income from undisclosed foreign financial accounts and assets to come forward. The IRS has offered versions of this program several times in the past, most recently in 2010. Previous versions have prompted over 50,000 voluntary disclosures and netted an additional US$7 billion in back taxes, interest and penalties. 

What relief is available?

The program’s terms and conditions (e.g., eligibility criteria) have toughened and the relief provided has lessened with each iteration. The current version took effect in July 2014, and will continue indefinitely until the IRS announces its closure. If you are thinking about taking advantage of the program, you are advised to make your application quickly. The program’s terms and conditions can change at any time, and, as in the prior programs, the window of opportunity may close at any time without warning. Whether the IRS would introduce a subsequent OVDP is unknown; based on past experience, any subsequent program would probably contain less favorable terms and conditions than the current program.

The core OVDP offers individuals, corporations, partnerships and trusts protection from potential criminal prosecution if they truthfully and completely comply with all terms and conditions of the 2014 OVDP and pay the applicable tax and penalties, including an offshore penalty, described below, from previously unidentified offshore accounts and assets. The core OVDP applies to the most recent period of 8 tax years for which the due date has passed. Any tax period for which the taxpayer is compliant is excluded from the 8-year period.

What’s the process for making voluntary disclosures?

The OVDP progresses through 5 steps:

1. Request ‘pre-clearance’ from the IRS Criminal Lead Development Center, providing identifying information about the taxpayer, foreign assets and accounts, and related financial institutions.

2. File a ‘Voluntary Disclosure Letter’ with required attachments with the Voluntary Disclosure Coordinator.

3. Complete a Voluntary Disclosure Application and cooperate with the IRS examiner to finalize your submission. A complete application includes:

  • full payment of Title 26 tax liabilities for periods included in the 8-year disclosure period, plus interest and applicable penalties
  • copies of previously filed returns, if any, and all required original or amended returns for the disclosure period
  • an agreement to extend the applicable period of limitation to assess tax and penalties.

4. Once the IRS examines the submission, the IRS will ‘certify’ whether returns are complete and accurate.  Once the submission is certified, immunity from prosecution attaches.

5. Upon mutual agreement, the IRS and the taxpayer enter into a closing agreement with the taxpayer.

While the taxpayer can obtain immunity from prosecution, the penalties they must pay under the 2014 OVDP are substantial. Applicable penalties are:

  • Failure to file penalty of 5 percent per month or up to 25 percent of balance due
  • Failure to pay penalty of 0.5 percent per month or up to 25 percent of unpaid tax shown on return) (IRC Section 6651(a) (2)).
  • Accuracy-related penalty of 20 percent of underpaid tax, which rises to 40 percent for certain understatements (e.g., related to foreign financial assets, substantial understatements of income tax, gross undervaluations, and reportable transactions) 
  • Offshore penalty in lieu of otherwise applicable penalties under the Internal Revenue Code, equal to 27.5 percent of highest year’s aggregate value of certain foreign assets during the voluntary disclosure period. This penalty can be increased to 50 percent where a financial institution or facilitator has been publicly identified as being investigated or as cooperating with the US government. 

In addition to the core OVDP, other disclosure procedures are available to US taxpayers with undisclosed foreign financial assets. You may be eligible to use these options to correct non-willful reporting failures without penalty (or without substantial penalties), for delinquent TD F 90-22.1, Report of Foreign Bank and Financial Accounts and international-related information return submissions (e.g., Form 5471, Information Return of U.S. Persons with Respect to Certain Foreign Corporations).

Given the IRS’s heightened enforcement activities and new enforcement tools, such as exchange of information agreements, it’s more important than ever for qualifying taxpayers with unreported income from undisclosed foreign financial accounts and assets to bring themselves into compliance with US tax laws. Taxpayers who don’t take advantage of the 2014 OVDP or other voluntary disclosure routes risk much greater criminal and civil sanctions if the IRS catches up with them.

Voluntary disclosure in Italy – Linda Favi, Manager, Studio Associato – Consulenza Legale e Tributaria

Italy’s new voluntary disclosure program, introduced in December 2014, is designed as special procedure for amending tax returns so taxpayers can regularize their income and asset reporting for 2013 and earlier years. The program encourages taxpayers to get their tax affairs in order before the entry into force of automatic exchange of information in Italy in 2018, under the Common Reporting Standard, and of exchange of information upon request under Italy’s new bilateral agreements with, for example, Switzerland, Liechtenstein and Monaco. Initially designed to address international non-compliance (“International Voluntary Disclosure”), the program was extended to domestic situations (“Domestic Voluntary Disclosure”), based on a constitutional requirement to treat all taxpayers equally.

What relief is available?

Unlike Italy’s previous tax amnesty programs, taxpayers making use of the current program must fully pay all outstanding taxes and interest. They can still get relief from administrative penalties – which can be substantial – and they are protected from criminal prosecution for tax crimes. This includes immunity from the new crime of self laundering, which involves the use of funds realized through tax evasion for reinvestment in income-producing assets or entrepreneurial activities. 

The International Voluntary Disclosure program is only open to Italian tax resident individuals, partnerships, trusts and other non-business entities subject to tax monitoring obligations. Virtually any kind of Italian taxpayer can use the Domestic Voluntary Disclosure. You can only use the program where no formal investigation has started, and you can only use it once. All disclosures must be complete – no ‘cherry picking’ of assets or incidents of non-compliance is allowed. 

Disclosures are made for tax periods up to 2013 (and starting from 2009 or before, depending on the location of the foreign undeclared income, the violations to be regularized and the commission of tax crimes). Disclosures are due by September 15, 2015, the date when 2014 year becomes statute-barred. This deadline might be postponed.

What’s the process for making voluntary disclosures?

Voluntary Disclosure in Italy is made as follows:

  1. Taxpayers file electronically a Voluntary Disclosure request form disclosing unreported income and assets, together with all supporting documentation and a memorandum detailing the case.
  2. The Italian Tax Authorities issue payment requests based on their analysis of the case, including taxes, interest and reduced administrative penalties.

If the payment requests are integrally paid, maximum administrative penalties relief is enjoyed. Otherwise, the case can be agreed upon with the Italian Tax Authorities, but with less relief from penalties. 

What relief is available?

Under the Voluntary Disclosure program, administrative penalties are reduced by 25 percent (for income tax and VAT) and by 50 percent (for non-compliance with tax monitoring obligations). If the Voluntary Disclosure procedure is executed, these penalties are further reduced by as much as 1/6 or 1/3, which is substantial. For example, Italy’s current penalty for an incomplete tax return is up to 133 percent of unpaid tax on undeclared foreign income sourced in white listed countries and up to 200 percent of unpaid tax on undeclared foreign income sourced in black listed countries.

A bigger benefit is safety from the harsh consequences of not making a voluntary disclosure (or not having a disclosure agreement executed). In this case, taxpayers receive no reduction in administrative penalties and no protection from criminal prosecution, and the tax authorities will have an extra year beyond the statute-barred date to investigate and assess the taxpayer’s filings. 

Given these benefits and consequences, any individual, trust or other eligible Italian resident taxpayer who may have undeclared income or assets for 2013 and earlier years should consider taking advantage of the voluntary disclosure procedure before the September 15, 2015 deadline.

Voluntary disclosure in the Netherlands – Jantine Kastelein, Director, Tax Dispute Resolution & Controversy, KPMG Meijburg & Co

The ability to make voluntary tax disclosures is a longstanding feature of the Netherlands’ tax administration. Taxpayers who make a voluntary disclosure still have to pay the unpaid tax on previously undisclosed earnings and assets, they can gain a reduction in the severe penalty for non-reported income. The penalty can reach as high as 100 percent of the evaded tax, and for certain components of income even 300%, but only in cases where the tax authorities can show willful misconduct on the taxpayer’s part, which can be difficult prove in practice. 

You can correct incorrect or incomplete returns with no penalty as long as you file a correct return within 2 years of the deficient filing. Or in case no return was filed within 2 years after the moment the return should have been filed. After these 2 years, you can file corrected returns under the voluntary disclosure mechanism, thereby providing complete and correct information. Please note that a voluntary disclosure can only apply if the taxpayer can reasonably assume that the Dutch Tax Authority (DTA) have no knowledge nor will get the knowledge of the object of the voluntary disclosure.  

Filings under voluntary disclosure attract reduced penalties of:

  • 30 percent of unpaid taxes for voluntary disclosures made before 1 July 2015, and
  • 60 percent of unpaid taxes for disclosures after that date.

While the reduced penalty will be more onerous after 1 July 2015, it will still be much lower than the regular 100 or 300 percent penalty that would otherwise apply. 

While the facility is available for all taxes, it is most often used for income, wage and value added taxes. It can be used to correct deficient filings within the statute-barred period, which goes back 5 years for undisclosed domestic income and equity (which rarely arises in the Netherlands’ context), and back 12 years for undisclosed foreign income and equity. 

The statute-barred period is indefinite for inheritance taxes, but the legal basis for this is questionable and the issue has not been tested in the Supreme Court.

What’s the process for making voluntary disclosures?

To make a voluntary disclosure in the Netherlands, you would follow these steps:

  1. Notify the (DTA) in writing of your intention to voluntarily disclose income and assets with a brief letter detailing the taxpayer’s name, the undisclosed accounts and the estimated income or equity.
  2. Provide follow-up communication with full financial data on all worldwide unreported income, assets and any withholding taxes paid.

Following this disclosure, the DTA normally accepts the information as submitted and issues corrected assessments for all years in question, including interest and penalties.

A replay of the webcast held on 27 May 2015 is available at: www.kpmg.com/taxwebcasts  

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

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