Rethinking the inspection procedure in the age of digitalization

The rules governing the so-called “inspection procedures and proceedings”, which are set out in the Spanish General Taxation Law (GTL), continue to reflect the legal and administrative traditions of the Tax Inspectorate, with few changes having been made to the provisions by which such processes have long been governed. Tax management procedures have undergone a profound evolution, and tax collection procedures, despite retaining the same basic structure, have been transformed in terms of their administrative organization and the powers of the bodies involved. The regulation of  tax inspections, however, continues to be based on the existence of a single procedure centered on ex-post verification using what are essentially accounting and documentary audit techniques.

There have, of course, been some changes. These include the creation of two bodies which have become essential: the Large Taxpayers’ Central Office and the National Office of International Taxation. Along these same lines, we have seen a general shift towards the internationalization of proceedings, with the mutual assistance regime now being regulated by the GTL. Inspection proceedings more often have an investigative bias, as seen from the number of cases in which the commencement of the proceedings is marked by the entity’s registered office being entered and searched. These changes, however, are often inadequately regulated, whereas in other cases, they have to co-exist alongside a basic structure consisting of single verification and investigation procedure which is different from the management verification procedure; this takes place on an ex-post basis, the objective being to carry out a complete audit, or one of general scope, covering various taxes and periods.

Perhaps the time has now come to rethink the legal bases supporting the inspection procedure, or at least to begin considering the possibility of doing so. A reform of this type will be complex and sensitive, although it has to an extent been made unavoidable by the way in which our social, economic and international reality has evolved. In any event, our aim here is merely to put out a few basic ideas, focusing more closely on certain areas in which, in our view, the possibility of such a reform could at least be considered.

Firstly, we need to look at the very essence of the current system, based on the distinction between an inspection procedure and a variety of management procedures, all of which are in any event classed as verification procedures. The existence of a variety of management procedures may give rise to artifice and prove overly contentious in relation to the suitability of the procedure chosen in each case by the acting administrative body. The separation between management procedures and inspection procedures – with the verification of accounting records being reserved for the latter – is an organizational tradition of the State Administration which is worthy of respect. The fact is, however, that the exact demarcation is unclear, giving rise to no end of problems regarding the legitimacy of actions taken by management bodies, in addition to which more relevant criteria,  based on the type and size of the taxpayer and the needs of the different tax Administrations, are overlooked. One possibility to be considered would therefore be the existence of a single verification procedure of which there would be different models in terms of scope of the proceedings, depending on the way in which each Administration is organized, the type of taxpayer and the tax being verified.

Secondly, any regulations governing inspection proceedings would need to address two aspects which currently lack an adequate and precise legal basis: proceedings carried out by the tax Administration which are purely investigative, and the link between inspection proceedings and so-called cooperative compliance or other formulas deriving from comparative and international experience. In addition, there is a need to regulate the classic inspection procedure in a manner which reflects what it is in reality, i.e. a computer audit procedure carried out on accounting data which is stored in data processing equipment.

As regards the purely investigative powers of the Tax Inspectorate, it already carries out proceedings of this kind and it is logical that it should do so. What is lacking, however, is proper regulation of such powers, which takes into account the rights of taxpayers. Such regulations would need to address a variety of issues, such as the power to obtain information, or to probe or monitor a particular taxpayer prior to the actual commencement of the inspection procedure. Similarly, the entering and searching of a domicile cannot continue to be based on nothing more than the existence of a legal rule which envisages judicial authorization of such actions where necessary in order to execute an administrative decision which, in reality, does not exist in this case. There need to be regulations which establish when such investigative proceedings are legitimate, how they are to be carried out, and what subsequent monitoring is to take place, based on the doctrine of the ECHR. Tax law should also reflect the consequences of the data protection regime, since in today’s world, the processing of data affects not only the bases of international taxation but also the bases which establish the limits applicable to actions by public authorities which are intrusive or affect a person’s private life. Finally, the particular characteristics of the Customs administration and how it links up with the Tax Agency as a whole need to be addressed.

What is more urgent, however, is the groundwork required to enable the Tax administration to function in a manner which reflects adequately the concept of cooperative compliance. The inspection procedure is based on a full ex-post verification procedure carried out according to a tax control plan and a system for the selection of taxpayers, whereas we need to move towards another type of model based on on-going relations and frequent communication between the Administration and major corporations, in which the inspection proceedings carried out are sporadic, partial, and based on an assessment of the tax risks. For this transition to work, companies must be transparent, the Administration must accept that it needs to respond to companies’ consultations in a manner which is clear and objective and respects the principle of legitimate expectation; and above all, we need to cease to assess how well the Administration functions based only on the purported cases of fraud discovered and the debts settled as a result of inspection assessments. This model will also require full inspection proceedings to be carried out in some cases, and the classing of taxpayers may well prove problematic in aspects such as objectivity, transparency, equality and even competition in the market.

It must be assumed, in relation to the changes referred to above, that the foreseeable evolution of any organization over the coming years will be characterized above all by internationalization and digitalization. Regarding internationalization, we have already seen the increasing importance of procedures relating to the verification of transnational groups or transfer pricing procedures, and a spectacular increase in the amount of data being passed on through international exchanges of information. Concepts which were all but unknown not so long ago have become commonplace, as we see with mutual agreement procedures, the importance of which – if the OECD’s predictions are anything to go by – is sure to increase. Inspections taking place simultaneous to proceedings carried out by another Administration and the exchange of information with other Administrations shall become more frequent, but we shall also see a normalization of informal relations between civil servants from different Administrations, all of which shall require the establishing of clear criteria, a change in training and mentality, and that the companies themselves be involved in the process of change.

Finally, the digitalization of the economy and of organizations will be reflected in an inspection procedure in which access to systems for the digital storage of information – primarily accounting data – is essential. More precise rules are therefore required on how these systems are accessed, the data obtained, how and for how long such data is to be kept, and the conditions in which it can be examined, with the involvement of the taxpayer or its representatives and advisors. A good starting point for anyone wishing to find out more about the legal requirements to which these changes will give rise is the Judgment of the ECHR of March 14, 2013 in the case Bernh Larsen Holding and others v.

Norway, which sets out the bases required to support an inspection procedure which relies on access to data stored in digital form.

Speech by Félix Plaza, Director of Centro de Estudios Garrigues, at the Inauguration of the 2018/2019 Academic Year

Rector of the Antonio de Nebrija University, Juan Cayón,

Director-General of the State Tax Agency, Jesús Gascón Catalán,

Senior Partner of Garrigues, Ricardo Gómez-Barreda,

Dear teaching staff of Centro de Estudios Garrigues,

Dear students of the 2018/2019 academic year,

Dear friends:

Today we officially inaugurate the 2018/2019 academic year.

During the first few days of class I had the opportunity to speak to most of you, with a view to welcoming you to Centro de Estudios Garrigues and introducing you to a number of essential principles and values on which our institution is based, such as teamwork, solidarity, effort …, but above all our three “E’s”:

  • Ética (we strive to be ethical)
  • Excelencia (we seek excellence)
  • Exigencia (we are exacting)

Being exacting is probably no more than a manifestation of excellence, since it is impossible to attain excellence without demanding the most from oneself, but excellence is also supported by other pillars, such as rigor (understood as appropriateness and precision) and knowledge.

And it is here, in knowledge, that the thoughts I wish to share with you now, at the commencement of a new academic year, truly begin.

Back when I was at university, there was no Internet.  The research of any subject took time:  time to go to the library, time to locate the books or papers that might have a bearing on the subject, time to analyze or review databases and indices before requesting what one wished to consult.  Today, what used to take hours, takes only minutes (little more than the click of a mouse and a few minutes of processing the information to be analyzed).  But when all that is done, the only way to continue is, and always has been, careful study.

I have heard that, in Internet terms, “years” refers to “dog years”, because one year on the Internet is like seven years in the “real world”.

I have always thought that this technical evolution is good.  I still think it is.  But, as with everything, it can have side effects …

The other day, via WhatsApp, I was sent an article by Javier Paredes, Professor of Contemporary History at the University of Alcalá, published in the digital newspaper Hispanidad, in which, while analyzing another matter, he wrote the following:

When the information society supplants the knowledge-based society, ignorance sprouts even in the keenest of minds. The problem is that some think that the two societies are one and the same.  No, one has nothing to do with the other. The information society merely watches television and, at best, occasionally reads something short. The knowledge-based society reads, studies and seldom or never watches television.  Accordingly, we would be wise to consult those who have studied the essence of Spain”.

This article drew my attention to something that is, in my opinion, essential, and that is whether today, when we are living in a time in which we have access to more information than ever before, society is becoming capable on all fronts of transforming this information into greater knowledge, or whether, on the contrary, rapid access to information is having the effect that we no longer look deeply into things, and that, in fact, we know a little about a lot of things, and a lot about very little.

José María Sanz-Magallón, Subdirector-General of Internal Communication and Knowledge Management at Telefónica S.A., in an article published in Nueva Revista affirmed that “A daily issue of the New York Times contains more information than an average citizen of the 17th century would have had in his entire life. More information has been generated in the last five years than in the last 5,000 years, and this information doubles every five years”.

But are we capable of converting all that information into knowledge? Or can excess information have an adverse effect on society in general when it comes to deepening knowledge? And all of this, without asking ourselves something that is just as important as the above, such as, who is monitoring the truth and rigor of all this information?

As Sanz-Magallón notes in the article I just mentioned “It is clear that, thanks to the development of modern information storage, processing and transfer technologies, human beings can cope with and work with the enormous amounts of data produced.  Nonetheless, as Julio Linares indicates, ‘the more the information generated by society, the greater the need to turn it into knowledge’”.

Faculty members Zoia Bozul and José Castro Herrera, in their paper “University Faculty in the Knowledge-Based Society: Professional Teaching Skills” take the view that:

The knowledge-based society is not something that exists now, rather it is a final stage of an evolutionary phase toward which society is moving, a stage subsequent to the current information era, which will be reached through the opportunities represented by the information and communication technology (ICT) of current societies.

 

Based on this, a need is perceived to train people who can be capable of selecting, updating and using knowledge in a specific context, who are capable of learning in different contexts and modes throughout their life and who are able to understand the potential of what they are learning so as to adapt their knowledge to new situations”.

Nonetheless, the concepts of “information society” and “knowledge-based society” are frequently confused or even treated as the same thing.  I believe, however, that today, more than ever, it is necessary to distinguish clearly between information and knowledge, even if information is an integral part of knowledge.

In the previously-mentioned article, José María Sanz-Magallón defines the knowledge-based society as “that in which citizens have practically unlimited and immediate access to information, and in which information, its processing and transfer, serve as key factors in all the activities of individuals, from their economic relationships to leisure and public life.”

 

University of Barcelona professor Kasten Krüger, in his paper THE CONCEPT OF “KNOWLEDGE-BASED SOCIETY”, notes that “the current concept of “knowledge-based society” does not focus on technological progress, but rather regards it as a factor of social change among others, such as, for example, the expansion of education.  According to this focus, knowledge will increasingly serve as the basis for social processes in various functional areas of societies.  The importance of knowledge as an economic resource will grow, thus entailing the need to learn throughout one’s lifetime.  But awareness of “not knowing” and awareness of the risks of modern society will also grow”.

 

Along these lines, José Luis Mateo, former Vice President of the CSIC, in his paper KNOWLEDGE-BASED SOCIETY, states that: “knowledge has therefore always played an important role, although it is the rate of its generation that undoubtedly creates major differences from one era to another.

 

Every so often, our current society is referred to as a “learning society” and, doubtless, this name reflects the reality, although it would be advisable to qualify or add that this is mainly a result of the rapid production and generation of knowledge, which requires ongoing learning to avoid one’s knowledge of the matter in question becoming obsolete. The learning society is therefore a consequence of the knowledge-based society. In other words, the most recent generations of professionals and those to come will never cease to be students.

In the light of all of the foregoing, I believe it is necessary to understand that the information society should not be confused with the knowledge-based society, although it will lead us (it is leading us) inexorably towards it.

But in the same way, it becomes necessary, now more than ever, not to be superficial, frivolous, and not to be “informedly uninformed”.  Our future, the future of society, as has always been the case, depends on knowledge and on our capacity to turn information into knowledge.

The evolution of technology has given us the tools (unlimited access to information); it is now up to us to put these tools to use.  It is our job to transform information into knowledge.

In the words of Kofi Annan: “Knowledge is power. Information is liberating. Education is the premise of progress, in every society, in every family”.

At Centro de Estudios Garrigues, we want you to absolutely stand out, to understand that you are called to take the reins in the transformation of society and that, in this transformation, the most important tool, what will set you apart from the rest, is knowledge.

Let us to help you in this process, to help you build a better society, a better future, let us to give you the tool that will enable you to change the world: knowledge.

Today you have been duly informed of your responsibility.

Thank you.