Strategizing International Tax Best Practices – by Keith Brockman

The European Parliament adopted a resolution to tackle tax avoidance and tax evasion via transparency measures to ameliorate limited resources of tax administrations.  A summary and full content of the proposal are referenced herein:

http://www.europarl.europa.eu/oeil/popups/summary.do?id=1396472&t=d&l=en

http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P8-TA-2015-0265

Key observations:

  • Publish country-by-country reporting (CBCR) template as part of annual reporting; The European Commission is to provide a legislative proposal to amend the Accounting Directive accordingly.
  • Establish a consistent definition of “tax havens” by the end of 2015.
  • Provide a blacklist of countries that do not combat tax evasion or that accept it.
  • New treaties with developing countries should tax profits where value is created.
  • EU Member States should agree on a Common Consolidated Corporate Tax Base (CCCTB).
  • The EU should be taking a leading role to combat tax havens, tax fraud and evasion, leading by example.
  • Beneficial information should be public; the Financial Action Task Force’s (FAFT) anti-money laundering recommendation is a minimum.
  • Public scrutiny of tax governance and the monitoring of tax fraud cases; protect whistleblowers and journalistic sources.
  • Transition period for developing countries to adopt the Automatic Exchange of Information mechanism.

These initiatives are accelerating the focus and intent for public tax disclosures in the very near future.

Most importantly, inclusion of the CBCR template as required documentation of annual reporting will automatically accelerate the due date for completion of such information.  Thus, the year-end 2017 timeline proposed by the OECD will give way to this proposal and similar unilateral actions.

As tax authorities, most recently Australia and UK, place added focus on a tax risk framework and providing evidence of diligence re: such procedures, it is critical that new financial leaders receive tax risk training upon entering an organization as well as a review on a recurring basis.  The training should also be reviewed and updated annually for new developments.

Examples of topics for discussion:

  • Beneficial ownership & disclosures (coordinated with Treasury Know Your Customer perspective)
  • Permanent Establishment (PE)
  • General Anti-Avoidance rules (GAAR)
  • Transfer pricing methodologies, internal governance procedures
  • Transfer pricing documentation process
  • BEPS governance strategies
  • Financial statement tax reserve criteria and timing
  • Interrelationship of domestic law and double tax treaties
  • Tax policy
  • Elements of tax risk framework
  • Tax audit protocol
  • Tax audit methodologies
  • Customs / Transfer pricing coordination
  • BEPS Country-by-Country report, future trends

The training generally provides additional awareness, thereby mitigating tax risk exposures and providing a win-win opportunity that cascades across the organization.

The Brazilian government has announced two new programs:

  • Use of tax losses to offset currently disputed Federal tax liabilities
  • Disclosure of tax planning structures that avoid, reduce or postpone taxes; such measures are meant to improve relationships between tax authorities and taxpayers.  This requirement is also meant to align with the OECD BEPS guidelines.  For planning structures implemented in 2014, disclosure is due by 30 Sept. 2015.  

http://www.ey.com/Publication/vwLUAssets/Brazil_uses_tax_losses_to_encourage_companies_to_settle_disputed_tax_liabilities_while_also_introducing_new_disclosure_requirement/$FILE/2015G_CM5636_Brazil%20uses%20tax%20losses%20to%20encourage%20cos%20to%20settle%20disputed%20tax%20liabilities.pdf

Additional disclosures and initiatives, aligned with BEPS guidelines, will be introduced in legislation by other countries, resulting in additional diligence requirements to avoid penalties.  Tax governance is becoming increasingly difficult and complex, underpinned by dissimilar compliance demands of each country.

HMRC has issued consultation documents proposing requirements to publish a “tax strategy,”, voluntary Code of Practice corporate tax processes and creation of a “special measures” regime.  Comments are due by 14 October 2015 for each Consultation document.

These proposals follow closely upon the heels of the ATO issuance of Best Practice methodologies addressing a taxpayer’s tax risk.

Three documents are provided for reference: (1) A Clifford Chance Briefing note, (ii) HMRC’s Consultation document for Improving Large Business Tax Compliance and (iii) HMRC’s Consultation document on Strengthening Sanctions  for Tax Avoidance.

http://www.cliffordchance.com/briefings/2015/07/mandatory_tax_strategiesacodeofpracticean.html

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447313/Improving_Large_Business_Tax_Compliance.pdf

https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/447320/Strengthening_Sanctions_for_Tax_Avoidance_-_A_Consultation_on_Detailed_Proposals.pdf

Executive brief:

  • Public availability of a company’s tax strategy (financial penalty for non-disclosure) including:
    • Tax internal governance arrangements
    • Risk management approach
    • Tax planning attitude and tax risk appetite, including affirmation that it aims to satisfy the spirit, as well as the letter of the law
    • Attitude to relationship with HMRC
    • Target UK effective tax rate (if applicable), and what measures are being taken to achieve it
  • Voluntary Code of Practice, including affirmations that:
    • Tax planning is consistent with the economic consequences
    • Transactions provide a tax result that is in accordance with the intentions of Parliament: “HMRC will consider a purposive construction of the legislation, and will also consider whether Parliament can realistically have intended to give the proposed result in circumstances that are very different from those that prevailed at the time”
    • Transparent relationship is maintained with HMRC
    • Tax obligations are met
    • Early dialogues for engagement with HMRC to discuss tax planning, strategy, risk, significant transactions and full disclosure of areas providing significant uncertainty
    • Objective evidence is provided to HMRC that decisions with tax implications have been approved by a senior decision maker
  • Special Measures for companies entering into aggressive tax planning / failing to transparently engage withHMRC, including:
    • Providing all documentation (including third party tax advice) related to tax
    • Refusal to provide non-statutory clearances
    • Public naming
    • Automatic 100% tax penalties

Observations in the Documents:

  • Attitudes to tax avoidance and aggressive tax planning have altered significantly, including political interest
  • Intention is to create Best Practices
  • The Government is awaiting the EU Tax Transparency Package consultation, and will consider its findings carefully
  • Proposal is separate from the current SAO regime, as well as the OECD’s country-by-country reporting guidelines
  • A company could be required to state in their tax strategy whether they are a signatory to the Voluntary Code of Practice
  • Non-publication of a tax strategy will be a consideration of HMRC’s tax risk reviews
  • Evidence of “governance in action” to be provided
  • Voluntary Code of Practice is aimed at tax planning that crosses over into tax avoidance
  • The company should reasonably believe that transactions give a tax result which is not contrary to Parliament’s intentions
  • Special measures will remain for a minimum of 2 years

A higher standard of tax excellence is being demanded by public pressures and tax administrations in the form of an objective tax risk framework overseen at the Board level and subject to internal control testing.  HMRC’s proposals are being followed by other countries worldwide, and similar measures would not be unexpected in other jurisdictions.  Accordingly, all interested parties should review the documents, and provide comments thereto.

 

The Australian Tax Office (ATO) has issued comprehensive and detailed rules addressing requirements for a formal tax risk framework, from which a taxpayer’s risk will be measured.  The guidance includes a tax risk management and governance review guide, in addition to appendices for control testing and directorship responsibilities. The risk guide is focused upon Board and Managerial level responsibilities. EY’s Global Alert and ATO’s tax risk guide and appendices are provided for reference:

http://www.ey.com/Publication/vwLUAssets/Australian_Tax_Office_issues_new_guidelines_on_tax_corporate_governance/$FILE/2015G_CM5625_AU%20TO%20issues%20new%20guidelines%20on%20tax%20corporate%20governance.pdf

https://www.ato.gov.au/business/large-business/in-detail/key-products-and-resources/tax-risk-management-and-governance-review-guide/#Boardlevelresponsibilities

https://www.ato.gov.au/business/large-business/in-detail/key-products-and-resources/tax-risk-management-and-governance-review-guide/?anchor=Directorshipresponsibilities#Directorshipresponsibilities

Key actions:

  • Express requirements for Directors
  • Mandatory self-assurance processes for tax governance for which the ATO may rely in assessing risk
  • A lack of requisite tax controls will affect the risk rating
  • Board controls:
    • Formalized tax control framework (Tax strategy document and policies endorsed by Board of Directors)
    • Formalises company director roles / responsibilities for tax risk management
    • Formal evidence of tax risk review and familiarity with tax risk matters
    • Periodic internal control testing, including senior management’s attestation / formal board review of the testing results
  • Managerial level responsibilities:
    • Clearly defined and documented tax compliance and risk management roles / responsibilities
    • Senior management’s active role and governance with objective criteria  to demonstrate Best Practices
    • Identification of significant transactions via a policy, process, risk rating
    • Ensuring data controls are in place
    • Record-keeping policies, including a formal tax record-retention policy
    • Documented internal control framework
    • Documented procedures explaining significant differences between accounting disclosures, financial statements and the tax return
    • Complete and accurate tax disclosures, including compliance risk review and tax return review
    • Tax governance policies addressing legal and administrative changes
  • Appendices
    • A: Testing of controls to test control design effectiveness, with a (comprehensive) example of a walk-through scenario
    • B: Directorship responsibilities, including a penalty regime, and an appointed public officer

The ATO has set forth new expectations and Best Practices for multinational organisations. The Board of Directors for all MNE’s, not only those operating in Australia, should review the new guidelines, as they set the standard for the future to regulate tax risk management.  

Astute Boards will be acting proactively to ensure all controls are in place to effectively manage global tax risk in this brave new world of post-BEPS introspection.

Other countries will surely follow, limited only by current resources.  

Accordingly, the concept of a Tax Risk Officer and additional focus on tax risk management / governance policies (supported by objective testing) are becoming the new norm for which all MNE’s should embrace.  

The revenue authorities from South Africa, Botswana, Lesotho, Mozambique, Namibia, Swaziland and Zambia shared their thoughts and insights at a Best Practice tax meeting in Pretoria, South Africa on 16 July, 2015.

The Joint Statement of the Commissioners is attached for reference:

http://www.sars.gov.za/AllDocs/Documents/MediaReleases/Joint%20statement%20of%20the%20Comissioners%20General%20and%20heads%20of%20delegation%20-%20%20Illicit%20Financial%20Flows%20meeting%20-%2016%20July%202015.pdf

Key considerations:

  • Closer cooperation is needed re: illicit financial flows for tax and customs purposes.
  • The country-by-country (CbC) reporting threshold set by the OECD may need to be less for the African sub-region.
  • Information re: aggressive tax and duty schemes will be shared with existing treaty provisions.
  • Collaborative efforts will ensure to counter direct and indirect tax fraud.
  • Measures should be adopted to mitigate negative effects of profit shifting.
  • Legal frameworks and collaboration efforts will improve.
  • A regional database is to be established to support a risk-based approach.
  • Treaty networking will be emphasized, including the African Tax Administration Forum (ATAF) Agreement on Mutual Assistance in Tax Matters (AMATM).
  • South Africa will host a technical transfer pricing meeting, as well as convene the next meeting by October 2015.

Regional tax authorities in the African region, and others around the world, are working closer together to formulate Best Practices and join efforts to mitigate base erosion and profit shifting activities.

This collaboration also provides multinational organizations an opportunity to review their proactive efforts with tax authorities around the world to form trusting relationships and win-win opportunities to achieve mutual benefits.

The Australian government has released Terms of Reference in preparation for anti-hybrid legislation, expected to be announced 12 May, 2016 in the federal budget.  Effective dates may be set as of 1 July, 2016 or 1 January, 2017 for calendar year taxpayers.

Specific rules are under consideration, including:

  • Objectives for eliminating double non-taxation
  • Economic costs for Australia
  • Taxpayer compliance costs
  • Interactions of domestic legislation, tax treaties and new anti-hybrid rules, expected to be announced by the OECD in October 2015.

A PwC Tax Insight summary is included for reference:

http://www.pwc.com/en_US/us/tax-services/publications/insights/assets/pwc-australia-announces-plans-beps-anti-hybrid-legislation.pdf

Australia, recently following the lead of the UK for diverted profits tax initiatives, has shown its proactive stance for adoption of the new OECD guidelines.

It is important to note that Australia will wait for the final OECD guidelines to pass matching legislation.  This legislative trend, and steps to initiate BEPS proposals quickly, will be a trend to watch for the rest of world countries.  

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