Global – Guide to Voluntary Disclosure Agreements

Introduction 

Voluntary disclosure agreements or programs allow taxable persons to resolve their past-due tax compliance obligations in a less demanding manner than if they are investigated under statutory audits. This type of “relief” program permits eligible businesses and individuals to disclose their tax liabilities in a more “amicable” way to the respective tax authorities. 

The agreement is mutually beneficial. The revenue authority will be aware of the disclosed taxpayer’s tax liability and, in that manner, will obtain at least(depending on the tax provisions) the owed tax payable and interest for late payment. 

The disclosed taxpayer will limit the “amicable” auditing period to a so-called look-back period, and penalties will often be waived. 

Tax compliance VDA arrangement is a precious tool for filling the tax gap caused by the non-compliant behavior of taxable persons. This compliance scheme will reduce the tax authority’s administrative burden and related costs for taking all the necessary steps to pursue non-compliant taxpayers. 

The responsible economic operator will leverage this program by reducing the statutory prescription period to the look-back period and reducing or waiving the guaranteed penalties in the case of the state audit. 

Voluntary Disclosure Agreements 

It should be noted that there aren’t unified rules regarding voluntary disclosure agreements. When we make a practical comparison between the regions, we could draw some similarities between the countries or states that belong to the specific region; however, there aren’t uniformly followed standards. 

This differentiation is critical to consider for cross-border businesses that have tax exposure in different regions. Important to notice is that not every country where you conduct your sales offers the possibility of adhering to the VDA program. 

This note doesn’t mean that you can or can’t be eligible for the relief program; it implies that the country or US state hasn’t even introduced the VDA program as an option. 

The tax compliance VDA program generally doesn’t cover just one type of tax liability of the taxable person. Depending on the country, this program can be used by the interested party for different kinds of taxes, such as income tax, value-added tax, corporate tax, franchise tax, and others. 

The possibility of the taxable person adhering to the VDA program in the country of interest should be analyzed individually. Numerous voluntary tax disclosure benefits are available for eligible businesses or individuals who agree with revenue authority concerning specific tax liability.

However, the interested taxable person shouldn’t adhere to the VDA program without conducting a proper due diligence and cost-benefit analysis of their case. There are also many situations where the taxable person will bear higher costs for stipulating VDA than remaining on the primary chosen path. This could be when the vendor has low-value sales in the destination country. The costs of the VDA professional services of the tax advisor are way above the tax audit and the tax payable and penalties that will surely come as the result of the audit. 

Are there differences in the rules established for adhering to the VDA program depending on the type of business activity that an economic operator conducts? Also, what about VDA for e-commerce sellers or digital providers? Are there specifically designed tax requirements for VDA applications?  

The short answer to these questions depends on the country in which the interested taxable person is looking to apply for the VDA. Regarding e-commerce vendors and digital service providers, the rules for accessing the VDA are the same as the VDA requirements for other types of retailers. Yes, the threshold, registrations, and reporting rules could differ, but adherence to the VDA, such as using template forms, is the same in many countries. 

What does the procedure for adhering to the VDA look like? Also, what is the timeline of the procedure’s life cycle? 

Unfortunately, there isn’t a general response to these questions. This entirely depends on the VDA rules in the country where the taxable person is applying for VDA. However, the following flow could be derived from our experience and practical knowledge in the regions where we have represented our clients. 

Tax Compliance VDA process 

• Consultation with respective Tax Advisor 
• Submission of Application 
• Review of the submitted documentation by the Tax Authority 
• Correspondence and potential negotiation with the Tax Authority
• Tax Registration/Registration of the VDA/Tax payable 
• Payment of interests 
• Definition of compliance and guidance to maintenance(by respective revenue authority and chosen tax advisor)

Answering the question concerning the amount of time and precise timeline on which the tax compliance VDA process will be based is very difficult without knowing at least two basic questions: in what country the interested party is looking to apply for the VDA and for what type of tax or taxes the interested party is looking to negotiate the VDA terms. 

In some countries, the agreement could be concluded in two months if everything is prepared as it should be from the moment the mandatory documentation for the VDA program is submitted. However, there are also numerous cases, especially in the US, where the process could take up to nine months.

Voluntary Disclosure Agreements

Regions 

EU 

There isn’t a standardized EU approach concerning voluntary disclosure agreements at the EU level. Various tax provisions from the VAT regulatory framework or direct tax framework are in circulation that could or should be followed as guidelines for establishing a national regulatory framework for the voluntary disclosure relief programs that national tax authorities should establish for domestic or foreign taxable persons. 

Based on our experience, the structure of the voluntary disclosure agreement tax differs between Member States. The differences arise from various parts of the voluntary disclosure schemes. These distinctions are most often visible in the following: 

• Eligibility criteria
• Look-back period
• Application of penalties
• Disclosure of the taxpayer(during the initial submission phase or later)
• Value of interest rates
• Types of taxes covered by VDA

United States

The US regulatory tax landscape is, by default, very complex. There aren’t uniform rules like those at the national level within the EU or other regions. Each state has independent state and local tax(SALT) requirements in the United States. 

The same regulatory principles are applied when we narrow the search to sales and use taxes. The sales tax provisions are designed specifically for the state in question. Practically speaking, the sales and use tax rules are defined at the level of the specific state.

However, sales and use tax rates differ even on the local and state levels, making the US tax system the most complicated regarding finding the appropriate tax rate for out-of-state supplies. 

The statutory rules for state and local tax voluntary disclosure follow the same logic but differ between states. The situation was quite different even when the obligation for sales tax registration was mainly based on the supplier’s physical presence in the state, defined as the place of supply. 

With the Wayfair Supreme Court Decision(South Dakota v. Wayfair Inc., 585 U.S., 138 S. Ct. 2080 (2018)), the sales tax provisions and rules have been significantly updated. The Supreme Court decision introduced the concept of economic nexus. 

The economic nexus thresholds introduced mandatory registration obligation for remote sellers(remote vendors and digital marketplaces) to register for sales tax when their economic presence(turnover) generated from their remote sales in the State of supply reaches the state-based threshold. 

Considering all these complexities, how is the Voluntary Disclosure Agreement regulated? 

Each US state has its own rules for VDAs. Based on our experience and cases that we had with our clients in the US(mainly remote vendors and digital marketplaces), the main parameters that distinguish the state and local tax voluntary disclosure systems can be based on the following requirements: 

Eligibility criteria – Can a taxable person submit the VDA application anonymously, or should they disclose the business identity at the initial stage of the proceedings? Are registered taxpayers eligible to adhere to the voluntary disclosure agreement salt program in the first place? 

The broadness of benefits permitted by VDA – First, we will accommodate the so-called look-back period in the category of benefits. The look-back period represents a tax period that the tax authority can cover to determine the taxable person’s final tax and interest debt after signing a VDA. The look-back period is often one of the main reasons non-compliant vendors reach for a VDA. 

The second reason taxable persons seek VDA benefits is derived from the first one: the possibility of reducing statutory penalties for tax non-compliance or waiving penalties in general. 

The introduction of the economic nexus and related sales and use tax liabilities for remote sellers have significantly expanded the number of taxable persons who will be obliged to register for sales tax in one or more US states. 

The connection between economic nexus and tax compliance should be approached state-by-state from the perspective of e-commerce vendors and suppliers of digital services. US-established economic operators and those with a place of business outside the United States are experiencing many more challenges when determining what should be done to comply in specific US states. 

From the perspective of the revenue authorities, introducing the concept of economic nexus has also significantly increased the workload of tax authority officials in determining what economic operators should register for sales tax in their state. 

Different associations or commissions have been established to reduce the complexity of this challenge to some extent. These associations or commissions help tax authority officials determine which remote sellers need to conduct their business operations compliantly. 

The number of remote sellers established in the US or abroad accessing the VDA program after introducing the economic nexus statute into state laws has continuously grown. Why is that so? Because many suppliers have been operating without sales tax registrations for years, even after introducing the thresholds for remote sales specifically designed for out-of-state vendors. 

To make things easier for remote vendors and digital service providers, US states have established a Multi-State Commission that permits the possibility of adhering to multi-state tax compliance solutions. One of these solutions is the possibility for remote sellers to adhere to the VDA with different US states in one place. 

Practically speaking, submitting a VDA application to different US states where a taxable person has defined their sales tax exposure through one online portal is possible. The taxable person can submit an online application after thoroughly preparing all mandatory documents(determined on a state basis).

E-commerce vendors and digital service providers operating cross-border are steadily experiencing high levels of competition from competitors established in one or more different regions. This pressure and drive to act fast and establish themselves on the market could sometimes lead to unawareness of the VAT, GST, or Sales Tax duties. 

To ease their tax liabilities and reduce fines and penalties, the tax authorities worldwide have introduced different VDA programs. The VDA relief programs guarantee a higher level of compliance and revenue for tax authorities from their side, and for businesses that haven’t been compliant, the possibility to reduce their tax liabilities. 

Before the taxable person chooses the VDA application in one or more countries, he should be aware of all the pros and cons that this type of program will bring. There are cases when the VDA isn’t the best solution for the business. In case of doubt, the best solution will be to address the scenario on a case-by-case basis with the respective tax advisor.