This post is a complement to my 5 April Pre-Audit Strategies blog. Pre-audit strategies are addressed, the audit is conducted, ultimate settlement is achieved and workpapers are returned to the files. Post-audit tax strategies can be utilized to address learnings for future audits, critique the pre-audit strategy approach, and form Best Practices to minimize global risks.
The following ideas should be beneficial in a post-audit tax strategy review:
- List all items in the pre-audit strategy checklist, using my prior blog as a reference along with your ideas. Based on hindsight, provide a rating of 1 to 5 for each strategy with comments.
- Revise the global checklist, if applicable, for future audits.
- Cross-reference the pre-audit checklist against the top risks encountered / not initially settled in the audit for correlation. Are there items that should have been performed before commencement of the audit that were not foreseen at the time?
- Review utilization of tax counsel in the audit to address significant risks; were they involved, should they have been involved earlier, was counsel appropriate for the risks being contested, what learnings can be gained?
- Were audit meetings negotiated efficiently using the appropriate individuals? Should there have been additional training to address significant tax risks, educate the auditor in the company’s transfer pricing methodology, etc.?
- Should a company overview have been provided, if applicable, to provide context for the auditor prior to requests for data?
- Conduct a 360 feedback with everyone involved in the audit to gain efficiencies in the ways of working.
- Were there basic misunderstandings between the auditor and the company that could have been addressed differently?
- Assess the consistency of audit responses with other audits being conducted globally; are they globally consistent to form a uniform basis for discussions between tax authorities sharing information?
- Are there new risks identified that should be included in the global Tax Risk Framework?
- Were audit defense mechanisms reviewed timely to plan effectively?
- For US multinational companies, were memorandums prepared for foreign audits to obtain additional assurance for receiving the benefit of a Foreign Tax Credit? Foreign counsel should be proactive in this effort from the beginning of the audit, outlining cost/benefit relationships, practical appeal opportunities, probability of success for alternative appeals, etc. This memorandum should be discussed early in the audit to align expectations.
- Review precedents established for future years, and applicability for post-audit years.
- Review tax reserves established for the audit years, and all open years.
- Provide a brief memoranda to the audit participants and senior management, summarizing the audit and successful interaction of internal and external resources.
- Were Double Tax Treaty, bilateral and/ or multilateral defenses used? Review their effectiveness, or choice not to use.
- Review the interaction of internal and external resources; who was in control of the strategy?
- In today’s environment of increased collaboration between the tax authorities and multinational companies, should an enhanced collaborative tax return / audit strategy be considered to provide timely certainty?
- Develop a post-audit tax checklist as a learning tool for individuals engaged in tax audits.
The above points should form a foundation to engage in this beneficial exercise, highlighting learnings and opportunities, while adopting a Best Practices approach.
I look forward to your valuable comments.
The Tax Foundation is a nonpartisan research organization that monitors U.S. fiscal policy. “The Tax Foundation’s Center for Federal Tax Policy produces and promotes timely and high-quality data, research, and analysis on federal tax issues that influences the debate toward economically principled policies.” There are interesting articles and publications available at their website.
In a report dated 21 May, 2013 entitled “Are Multinational Companies Dodging Their Taxes?” the Foundation found that U.S. multinational corporations paid more than $100 billion – an average effective rate of 25 percent – in foreign income taxes in 2009. This information is especially relevant as the issue of international tax payments was addressed on Capitol Hill when Apple executives testified before a Senate subcommittee.
A paragraph at the bottom of the article focuses on the complexity of international taxation for U.S. multinational corporations that is often overlooked in today’s tax environment, stating that “People who criticize U.S. companies for ‘avoiding’ taxes on their foreign earnings need to be more careful with their language and acknowledge that our worldwide tax system requires U.S. firms to pay taxes twice on their foreign profits, before they can reinvest those profits back home.”
Another Tax Foundation publication entitled “U.S. Multinationals Paid More Than $100 Billion in Foreign Income Taxes” is also interesting, as it includes a table that lists 2009 country data in order of Taxable income, Foreign taxes paid/accrued/deemed paid, and Average Effective Tax Rate. For example, the average effective tax rate is 62.7% for Nigeria, approx. 45% for Indonesia and Italy, while the effective tax rates for Norway and South Korea exceed 60%.
This resource is useful for U.S. multinational corporations, and other multinationals, as an information resource in today’s complex tax environment.
The statement that people need to be more careful with their language can also be correlated to the observation that terms used interchangeably by tax authorities and governments include: tax planning, aggressive tax planning, tax avoidance, evasion and fraud. The absence of publicly stating important differences of such terms may lead to misleading statements and inappropriate conclusions.
I would encourage everyone to be familiar with this valuable resource.
The OECD approved this revision on 16 May 2013 and discusses the benefits and concerns for safe harbour provisions. It encourages appropriate bilateral or multilateral safe harbors for which the previous guidance was generally silent. In an effort to facilitate negotiations between tax administrations, sample memoranda of understanding (MOUs)” are included for competent authorities to establish bilateral safe harbors for certain classes of transfer pricing cases. Sample MOUs are provided for low risk activities of Manufacturing, Distribution, and Research and Development Services.
Benefits to be gained:
- Compliance relief
- Administrative simplicity
Safe harbour concerns:
- Divergence from the arm’s length principle
- Risk of double taxation, double non-taxation, and mutual agreement concerns
- Possibility of opening avenues for tax planning opportunities
- Equity and uniformity issues
Sections 4.128 and 4.129 emphasize the fact that safe harbours can be negotiated on a bilateral or multilateral basis, providing significant relief from compliance burdens and administrative complexity. Additionally, a safe harbour is not binding, or precedential, for countries which have not themselves adopted the safe harbour.
In an environment of increasing request for assistance from competent authorities, I am hopeful this tool is used proactively and efficiently by competent authorities to provide certainty for past, current, and future low risk activities. Multinationals should be familiar with these new guidelines and the respective MOUs to aid negotiation efforts in bilateral or multilateral transactions. Discussion of this principle in meetings with competent authorities will hopefully lead to enhanced mutuality, cooperation and resolution.
The Forum on Tax Administration (FTA) was created in July 2002 by the OECD with the aim of promoting dialogue between tax administrations and of identifying good tax administration practices. The OECD link provides reference to the opening FTA remarks by Deputy Secretary-General Mr. Yves Leterme, and the Final Communique from the 16-17 May 2013 meeting in Moscow, Russian Federation.
The press release sets the stage with the following remarks:
- Tax base of governments is being threatened by international tax avoidance and evasion.
- Part of the answer to international avoidance by businesses is a question of tax policy, rather than administration.
- The development of a new set of international standards is going to require ever closer cooperation at the international level.
- International cooperation between tax administrations is enhanced by improved transparency, which helps tax administrations apply the rules effectively.
- Transparency is also key to the fight against international evasion.
- The OECD, working with the G20, is developing a new multilateral standard on automatic exchange of information.
The Final Communique’s first paragraph states the need to effectively address tax evasion, aggressive tax avoidance, trans-national tax fraud and aggressive tax planning. The Communique addresses the need for increased transparency and comprehensive exchange of information, and strongly endorses exchanging information automatically.
Most importantly, the Communique further states: “We have developed a framework of co-operative compliance for the large business segment that provides a sustainable basis for a relationship based on transparency, justified trust and confidence between tax administrations and business. We will continue to refine this framework, also working with the business community, and recommend all countries to adopt it.”
In today’s tax environment, against the backdrop of terminology including tax evasion, aggressive tax avoidance, tax fraud and aggressive tax planning, the recent and upcoming meetings of the OECD and related organizations are increasingly important. The trend of a formal cooperative compliance framework is becoming more evident, and multinationals should already be planning for ways to develop such relationships with tax authorities around the world in present and future audits.
In continuing verbal encounters by Google UK before the Parliament’s Public Accounts Committee (PAC), it is interesting to note the following in the above article, supplemented by similar language in the related articles cited below:
- The company evidently stated that “We are selling, but not closing.”
- The article cites the fact that a review of LinkedIn profiles revealed sales activities were conducted by employees.
- The article does not provide the reader a concise description of PE, or its safe harbors in Double Tax Treaties: re: “preparatory and auxiliary activities.”
This arduous lesson in reputational risk reinforces the need to ensure Best Practices are in place for PE, as posted in a prior blog.
It is a very interesting point that LinkedIn profiles were reviewed to further examine potential sales activities carried out in the UK. A company cannot control the social network profiles of its employees, although it should be very clear in everyone’s job description what is, and is not, allowable for marketing or sales activities. The Do’s and Don’ts List should be signed annually as a reminder to employees of their responsibilities and limitations in scope.
A company with significant Branch activities should be reviewing how written statements, including emails, are communicated in discussions of sales, market support or promotional activities.
The statement “We are selling, but not closing” brings a substance vs. form argument into the subjective definition of PE, an argument that is not helpful in forming objective arguments by the company or tax authorities. Therefore, a company should examine its Best Practices to increase its objective PE evidence, in substance and form, in preparation for controversy.
Does your Tax Risk Policy include any statements re: whistleblower activity, and how such activity should be addressed?
Finally, a company should conduct an annual audit of its significant Branch activities, in possible coordination with internal audit, to further minimize its PE (and reputational) risk on an annual basis.
A proliferation of complex and significant tax risks are at the forefront of global news. Aggressive tax planning, tax avoidance, tax evasion and fraud are terms used interchangeably to describe actions by multinationals. Tax authorities, governments, G8, G20, among others, are discussing new ways to combat these perceived risks in the form of additional tax transparency, audit resources, new legislation, etc. Similarly, tax organization structures should also be reviewed based on a tax risk management approach. Ideas for developing Best Practices in tax risk management include the following:
- List the top 5 tax risks; then align these risks with the tax personnel whose primary function it is to focus on such risks.
- Are the top 5 risks being managed efficiently internally and / or externally?
- Is each risk the top priority of one or more members of the tax team?
- Is the strength of each tax member aligned with the respective risk?
- Are you currently able to shift resources away from geographical / functional responsibilities to address current risks?
- Are the tax members adding focus on these risks in addition to their other responsibilities?
- Have specific strategies been developed to address the top tax risks, and champions assignable for each risk?
- Are specific training courses being developed to better inform the tax team and the business of developing risks?
- Are proactive discussions being held with senior management and the Board to ensure efficient tax risk management?
- Is there a quarterly tax risk review to assess status and future actions?
- Have internal procedures been reviewed, as well as mitigating controls, to address potential risk gaps?
- Is the business aware of such risks on an ongoing basis?
- Is this an opportunity to review tax resources to achieve the proper focus on the top tax risks?
- Compare the current tax organizational structure with the tax risks; is it fit for purpose?
- Review Best Practices for obtaining APA’s, entering mutual audit procedures such as CAP, horizontal monitoring, enhanced cooperation in today’s increased emphasis on mutuality and and tax transparency with tax authorities.
- Who conducts audit meetings with tax authorities around the world? Is this an opportunity to minimize risks at an early stage? Are these individuals knowledgeable of the top tax risks? Do you conduct training for audit meetings, including negotiation skills?
- Is internal audit aligned to identify tax risk gaps in their routine audit reviews?
- Is Global Mobility trained to identify potential PE risks? Consider a review of their internal processes for assignments.
- Who reviews Branch activities to ensure such activities do not inadvertently lead to a PE?
- Review the Transfer Pricing documentation framework to address transfer pricing issues early.
- Ensure Treasury is aligned with the tax risks and processes are in place for intercompany loan arrangements.
- Align cross-functionally to ensure new strategies, or a change in current strategies, are reviewed for tax risk exposure.
In summary, I would encourage a review of the tax organization structure based upon a creative tax risk approach, as compared to the present organization to highlight opportunities and Best Practices.
The Commission adopted on 27th June 2012 a Communication on the fight against tax fraud and tax evasion. An Action Plan which details concrete proposals to strengthen the fight against tax fraud and tax evasion was adopted on 6th December 2012.
One of the 34 measures contained in the Action Plan is the development of a European Taxpayer’s Code which is described as follows (action 17):
“In order to improve tax compliance, the Commission will compile good administrative practices in Member States to develop a taxpayer’s code setting out best practices for enhancing cooperation, trust and confidence between tax administrations and taxpayers, for ensuring greater transparency on the rights and obligations of taxpayers and encouraging a service-oriented approach.
The Commission will launch a public consultation on this at the beginning of 2013. By improving relations between taxpayers and tax administrations, enhancing transparency of tax rules, reducing the risk of mistakes with potentially severe consequences for taxpayers and encouraging tax compliance, encouraging Member States’ administrations to apply a taxpayer’s code will help to contribute to more effective tax collection.”
In anticipation of this initiative, some points worthy of consideration are:
- Does your company have a Taxpayers’ Code or Best Practices within a Tax Policy or Tax Risk Policy?
- Should the concept of a Taxpayers’ Code be discussed at the beginning of an audit to enhance trust and confidence?
- Will this initiative be helpful in a simultaneous or joint audit?
- Should a discussion be initiated with the auditor to establish a mutual Taxpayers’ Code?
I look forward to your thoughts on this interesting topic.