The Norwegian tax office frequently conducts tax audits. You should therefore not be surprised if this hits you or your company. Our advice is to not panic and lean on professional expertise. Below is an overview of your rights and obligations if you become subject to a tax audit.
You will commonly not know what the tax inspector is looking for, which may create uncertainty on how to act and what to expect. Even though you have nothing to hide you may be left with the impression that you or your company is under hostile suspicion.
The risk at stake may be increased taxation, severe penalty taxes and interest charges. In any case, a tax audit is time consuming and you should be prepared to spend time and resources in defending yourself.
On the right track from the start
It is important that the tax audit is guided into the right track from the start.
If you are unsure on how to deal with the queries from the tax authorities, we advise you to seek professional expertise as early as possible. For a tax advisor, it can be more resource-intensive to enter the process at a late stage. In particular if this involves repairing damages caused by the taxpayer.
To prevent misunderstandings, it is important to avoid giving impulsive and incomplete answers to the tax authorities. A professional party can help you answer the tax questions in an orderly manner.
Also read: New tax scheme in Norway – PAYE
Tax audits in general
If you or your company has received a tax audit notice, you should read on.
Two kinds of control
The tax authorities may carry out control in two ways. They may either collect information via a written request or they may conduct a physical control (so called “local control”) at the premises of the taxpayer.
The most common audit is a written request, which often is a limited control of a specific item. Such requests may be limited to asking for documentation and explanations that is to be submitted to the tax authorities.
The other form is a local control, where the tax authorities carry out the control at the company's premises, or at your bank or business partner’s premises. The tax inspector is entitled to review physical or electronical archives.
The tax authority may copy the information to a data storage medium in order to be able to go through the archive at a later date.
Note that the tax office may request to copy information stored at your mobile phone or PC. If you decline to cooperate, they may obtain a court order.
Notification in advance
The tax office is obliged to give notice before a local control is conducted, provided this does not jeopardize the purpose of the control.
The statutory limitations is 10 years.
Value oriented tax audit
The policy of the tax authorities is to conduct audits where they expect to find irregularities.
Lately they have focused on certain transactions, in particular transactions between related companies or between the company and its owner(s) in order to control the transfer pricing. Further, certain industries have been controlled such as the construction or building sector, transportation sector, restaurants, etc.
Tax, VAT and payroll tax
The tax authorities may audit any information relevant for the various taxes and duties levied by the state. This includes corporate income tax, value added tax (VAT) and payroll taxes. The control can be limited to one of these areas or apply to them all.
Note that the tax authorities should always strive to find the right tax assessment and if relevant also adjust to the benefit of the taxpayer. For example; if they refuse a deduction for input VAT - and this should result in a deduction of the income tax base, they should also adjust the income tax.
What information can the tax authorities require?
The taxpayer who is subject to a tax audit has a general duty to give the tax authorities access to:
Accounting material with documentation, contracts, correspondence, minutes from board of directors’ meetings, electronic programs and program systems which may be of significance for his or her bookkeeping or tax liability and the control thereof.
Therein lies a criterion of relevance, which means that you are under no obligation to provide information that is not relevant to the audit.
The information should concern matters that may help to clarify and fulfil your tax liability. However, the taxpayer has a duty to provide information and thus the responsibility for ensuring that sufficient information is provided.
Furthermore, only factual information may be required by the tax authorities. You are not obliged to provide legal reviews made by yourself, your company or others.
Lawyers have a strict duty of confidentiality.
This means that the tax authorities cannot demand that you disclose correspondence or other documents provided by your lawyer. This may also apply to e-mail correspondence where you have copied in your lawyer.
Further your lawyer is not allowed to disclose information related to the client without the consent of the client.
Note that your communication with other tax advisors such as your auditor or your accountant is not protected by the same non-disclosure regulations.
Who can the Norwegian Tax Administration claim tax information from?
The Tax Administration Act stipulates that taxpayers, as a general rule, are obliged to provide information according to requirements from the tax authorities. Note that the taxpayer can be anyone subject to tax, including both corporations and individuals.
The tax authorities can also control whether a business meets the conditions as a tax-free institution.
The duty to provide information also applies to certain payors, e.g. the employer and client who in certain cases is responsible for reporting or withholding taxes.
This applies e.g. when the employer pays salary to the employee, or when a company pays dividends to non-Norwegian shareholder.
The Tax Administration Act also allows the tax office to request that third parties participate in the control. There must however be a connection between the person being controlled and the third party whom the tax authorities require to assist in the control.
This can typically be the taxpayer's auditor, accountant, bank or employer. It may also be a person or company with which the taxpayer has an existing or previous contractual relationship. For example, the tax authorities can instruct your customers to disclose supporting documents that show whether you have invoiced with or without VAT.
The tax authorities often inform third parties that the control is confidential, which implies that the third parties cannot inform the audited taxpayer of the control. This is usually the case when the tax authorities obtain statements directly from the bank.
The provision giving the tax authorities the right to require third parties to participate, does not apply if the third party is limited by the statutory duty of confidentiality. However, the statutory duty of confidentiality does not apply when the tax authorities require information on money transfers, deposits and debts, as well as who is party to the transaction. This also applies to lawyers.
Obligation to provide information for third parties
In assessing what information, a third party must provide to the tax authority, a distinction must be made between whether a third party is a self-employed person, a legal body of person, or is a private individual.
Businesses are obliged to provide relevant information in cases where the tax authorities specify which taxpayer is the subject of the tax control. It is however a precondition that there is a connection between the business and the taxpayer who is controlled.
The obligation for third party individuals to provide information is very limited and applies only to some tax issues.
It is important that the tax audit is on the right track from the very beginning of the process.
Thus, please do not hesitate to contact the undersigned or any of my colleagues at Magnus Legal as soon as you understand that you will be subject to a tax audit.
Find out more about Magnus Legal’s tax services on our webpage: Corporate tax in Norway