The Audit Process: Examination Of Tax Returns And Appeal Rights

  1. Introduction

    Switzerland's direct tax system functions at three jurisdictional levels. In addition to Federal income taxes, the 26 Cantons (States) and the more than 2,500 communes (municipalities) levy their own income taxes. However, generally, the Cantonal Tax Authorities assess and collect not only the Cantonal, but also the Federal and Communal Taxes.1 Because of considerations of space, this paper will address only the Federal income tax legislation (i.e., the Federal Direct Tax Act or FDTA)2, which is basically identical to the income tax legislation of the various Cantons. Further, as the Forum Facts involve only companies, the taxation process as it affects individuals will not be discussed.

  2. Audit process

    1. Assessment process

      The assessment process comprises three stages: the filing of the tax return; the audit of the tax return, during which further information is collected from the taxpayer if necessary; and the actual assessment, including the assessment decision.3

      It should be noted that any person acting on behalf of the authorities involved in the assessment or audit proceedings described below and who is either personally affected by the case or is biased in relation to the case for any other reason, is obliged to withdraw from the proceedings. Additionally, the taxpayer may request that such a person be removed from the proceedings for any of the reasons mentioned.4

      Hence, HCo cannot challenge of any of the persons acting on behalf of the tax authorities in the audit process in the absence of any of the reasons set out in the FDTA. Nor does the Swiss tax legislation make any provision for requesting an advisory opinion or other technical assistance from a specialised technical division.

      1. Filing of tax returns

        Switzerland's tax system is organised as a self reporting system. Individual and corporate taxpayers are required to file annual tax returns declaring their annual income and wealth or profit and equity, respectively. A taxpayer is obliged to fill out the tax return form truthfully and completely, sign the tax return personally and file the return together with the relevant enclosures (in particular, the financial statements for the business year) with the competent Cantonal Tax Authorities in due time.5 A taxpayer that does not fill out a tax return or that files a tax return that is incomplete will be summoned to correct the default within a reasonable time.6

        A taxpayer must do everything he can to make a complete and correct assessment possible. He has a comprehensive duty to co-operate in the assessment process, is obliged to grant access to his records at the request of the tax authorities and must keep the relevant documents in his files for 10 years.7

      2. Audit

        The tax authorities review the tax returns filed and may launch additional inquiries.8 The law does not provide for an official accelerated review procedure. However, it is possible to discuss the reasons why an accelerated review is required with the competent tax authorities. Therefore, should HCo have any substantial grounds for asking for an accelerated review of its tax returns, it can certainly try to obtain one simply by talking to the competent tax authorities.

        The tax authorities are obliged and entitled to clarify the relevant facts in order to be able to make a complete and true assessment of the taxpayer.9 To enable them do so, the tax authorities are legally entitled to use various examination methods. In particular, they can bring in an expert, make an inspection and view business records and other files on-site.10 However, the tax authorities are bound by the assumption that the taxpayer's description of the facts is true and complete, especially that the books of a company are kept correctly and in line with the accounting standards.11

        If, despite a written reminder from the tax authorities, the taxpayer still fails to file a tax return or if it is not possible to determine the necessary facts for the correct assessment because of a lack of reliable records, the tax authorities will assess the tax using their reasonable discretion.12

      3. Assessment decision

        In the assessment decision, the tax authorities determine the taxable profit, the tax rate and the amount of tax and the effective equity of a company. The taxpayer is informed of any discrepancies with the items declared in its tax return, at the latest when the assessment decision is communicated to it. The assessment decision may be communicated to the Federal Tax Authorities (FTA) if required.13 An objection against an assessment decision is possible.14

        Consequently, if HCo wishes to have the proposed deficiencies or penalties reduced, it will need to file an objection.15

      4. Due date for payment of tax

        Companies are assessed annually and are provided with tax return forms in the year following the tax period. Companies must file their tax returns within a few months following receipt of the tax return forms, the precise date depending on the applicable Cantonal Law.16

        However, the date on which the taxes for the relevant tax period are due is March 1 of the year following the tax period.17 In other words, the taxes are usually due before the assessment is made or becomes final. In these circumstances, the Canton concerned provides the taxpayer in advance with a provisional invoice, which usually is based on the tax position of the previous tax period. The taxpayer is obliged to pay provisional taxes within 30 days of receiving the provisional invoice and the...

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