Two excellent articles are linked to review Best Practices for tax risk management from a Board perspective. The first article is by the Canadian Chartered Professional Accountants and poses various questions and concepts for Directors to ask. The second article, approached from a practitioners point of view, was written by a KPMG partner. A related article is also attached as reference at the end of this posting.
The first article reviews various tax risks, including risks of tax planning and subsequent implementation, financial disclosures, tax compliance and audits. Examples of interesting insights and questions include the following:
Are outside consultants an integral part of tax planning?
Are direct, and indirect, tax risks addressed?
What are the capabilities of internal resources?
Are post implementation monitoring processes in place?
What are the trends of tax authorities in major jurisdictions?
How does the company keep up with change?
Is reputational risk considered in tax appeals or court filings?
What is the mindset of internal management in foreign jurisdictions re: alignment of overall strategies?
What are the source of tax planning ideas?
Have tax saving opportunities been missed?
The second article entitled “Tax Risk Management and Board Responsibility” defines a tax philosophy and establishment of a Tax Risk Framework. A tax philosophy pyramid is presented that correlates to tax risk. In addition, the following components of a Tax Risk Management Strategy are discussed:
Tax profile, relationships and communication
Processes and technology
Internal qualifications of tax staff
Both articles are excellent reading, and should form a basis for Best Practices to ensure alignment with Board responsibilities and expectations.
Tax jurisdictions and authorities are increasing their global focus in all aspects of tax risk, most recently promoting Beneficial Ownership transparency rules and other initiatives at the G8 Conference. Conversely, multinational tax teams should also be increasing their resources, and time spent, on addressing global tax risks, enhancing internal governance including a Tax Risk Framework / Policy, scenario planning, and informing the business.
We can view this correlation as the increased significance of tax risks, including reputational risk, compared to tax resource allocation for risk governance. It may also be beneficial to distinguish internal and external tax resources used in the risk methodology. The comparison may provide interesting results, from which the proper emphasis could be used to form additional Best Practices. This comparison could also be viewed in contrast to tax compliance and other tax projects for additional perspective.
I invite your comments on this thought, and Best Practices that you can share.
The Global Forum has 120 members and is the premier international body re: implementation of internationally agreed transparency standards and exchange of information. This Forum is very active in today’s tax environment, as demonstrated by its recent activities including:
2nd meeting of the Competent Authorities on 30-31 May 2013, attended by 174 delegates from 77 jurisdictions. Delegates shared procedures for Exchange of Information networks to tackle tax evasion, tools to enhance effective communication between Competent Authorities, as well as providing opportunities to share experiences and practices.
Regional Training Seminar in Brazil 7-10 May 2013, attended by 70 tax administrators from Argentina, Brazil, Columbia, Costa Rica, Dominican Republic, El Salvador, Paraguay and Uruguay. Panama and the United Kingdom provided expert trainers, focusing on an OECD overview of Exchange of Information, the 2012 update to Article 26 of the OECD Model Tax Convention and its Commentary, and the Multilateral Convention on Mutual Administrative Assistance.
Regional Training Seminar in Dakar, Senegal 24-26 April 2013, attended by 20 tax authorities in 8 francophone African countries (Burkina Faso, Cameroon, Democratic Republic of Congo, Gabon, Morocco, Niger, Senegal and Tunisia). The African countries are recent members of the Global Forum and will have Phase 1 peer reviews in 2014. Belgium and Qatar provided expert trainers, focusing on the peer review process and preparation for evaluation of legal and regulatory frameworks for the exchange of information.
The activities of this Forum are visibly expanding transparency initiatives and the exchange of information around the world. The recent G8 conference encouraged all countries to join in order to share mutual benefits.
Regional and global tax teams should review internal processes to ensure global consistency and adherence with internal governance protocols. Additionally, a dialogue should be established between tax and the business leaders to heighten global awareness and ensure strategic alignment.
This OECD report entitled “A Step Change in Tax Transparency” was prepared for the G8 meeting and summarizes recent developments, action plans for global automatic exchange of information and a feasibility assessment.
In today’s tax environment the exchange of tax information is quickly evolving and gaining momentum. This report provides valuable context for discussion.
The EU VAT forum is a collaboration between tax authorities and business representatives to work on common interests. The first link provides additional information, including a list of the member organizations that were appointed for a three year mandate starting on 1 October 2012.
Thirteen EU Member States have also agreed to participate in a test case for cross-border VAT rulings. This program commenced on 1 June 2013 and is scheduled to last until 31 December 2013. The link provides procedural rules for submission of a private ruling request. The following Member States participate in this project:
It would be beneficial to follow developments of the EU VAT forum, including the test case for cross-border rulings, to build upon Best Practices developed globally and integrated into the tax risk framework. Additionally, it would be an ideal time to form peer relationships, if not already developed, with business members of the EU VAT forum.
This insightful report focuses on practical experiences of 24 countries, with a chart summarizing each country’s status for this initiative. Additional features are identified leading to successful “co-operative compliance” strategies.
A framework is developed, based on a business case approach, for revenue authorities to measure results, and success. The report adopts a systematic approach to tax risk and discusses the five pillars established in 2008 based on understandings for:
Openness through disclosure and transparency
Evolving concepts include:
Future direction of initiatives
Multilateral co-operative compliance
Approaches by tax authorities to measure results and success.
The report provides useful links in Appendix A for country specific information and is an excellent reference to develop further understanding into this rapidly growing initiative, while providing a foundation for Best Practices including:
Documentation of the current enhanced relationship / co-operative compliance methods in use.
Reviewing available co-operative compliance programs for the 24 countries in the report.
Developing a process determining if, when and how the voluntary programs are to be adopted.
Developing a measurement for success based on current initiatives, as well as benchmarking results and experiences with your peers.
Reviewing this evolving initiative annually.
Developing Memorandum of Understanding learnings, as programs are both formal and informal in approach.
Advising regional teams of country developments for continual awareness and future opportunities.
Comparing resource limitations with potential benefits for future co-operative compliance initiatives.
This informative publication reviews tax policies in 60 countries, against a backdrop of today’s tax environment with continuing controversy and disputes as countries pursue general anti-avoidance rules (GAAR) and suggest public disclosure initiatives for tax payments by multinational corporations.
As OECD and UN tax initiatives are increasing in scope, coupled with developing countries continually evolving their tax proficiencies, this publication provides valuable context for the present and expectations in the near future.
The OECD’s Task Force on Tax and Development will use this concept to assist developing countries by providing international auditing expertise and advice to better address tax base erosion, including tax evasion and avoidance. This initiative is led by the Commissioner General of the South Africa Revenue Service, South Africa’s Deputy Finance Minister and Director of the OECD’s Centre for Tax Policy and Administration.
The Tax Inspectors Without Borders program will match demand from countries requesting international tax audit assistance with a supply of international experts, primarily consisting of tax inspectors in other tax administrations. Accordingly, the experts will now be made available to developing countries.
The initiative is being launched this year, thus communication with the auditors in developing countries should include a discussion on the use of this concept, a listing of the respective experts and the communications that could be shared with the corporation.
It will be interesting to see the development of this initiative, the sharing of information, memorandums of understanding with the corporation or, absent an explicit statement that the country is using this initiative, any impact on the appeal process resulting from assessments of this sharing program. Additionally, it would be interesting to compare the developing countries that use this program versus, or along with, tax training from the United Nations, posted in the blog dated 2 June 2013.
This publication provides a very interesting treatise on the development of GAAR in India, including an international perspective in Appendix B for the United States, S. Africa, Germany, China, Canada, United Kingdom and Australia.
Importantly, the publication sets forth the OECD definitions for tax evasion, tax avoidance and tax planning for clarity.
This concept is increasing in importance, and should be followed closely with ideas of forming Best Practices re: tax planning, tax documentation, etc.
Ideas for Best Practice consideration:
Address the concepts of GAAR, formal or informal, as part of every tax planning exercise.
Ensure the global tax team is informed about the latest GAAR developments to increase awareness and responsibility.
Brainstorm ideas about GAAR, forming Best Practices for the organization.
Proactively ask for input from external advisors to gain different perspectives on this evolving topic.
Share your ideas with your peers from other organizations for a win-win result.
We are all confronted with receiving several daily emails from many sources focused on the latest developments in all areas of tax: International, Federal, State, Direct / Indirect Taxes including VAT, etc. Individuals in a tax organization, located in various parts of the world, generally try to browse the latest news for their area of responsibility, creating duplication of effort and the collective loss of valuable time. Additionally, as tax responsibilities increase with limited talent resources and budget constraints, it becomes exponentially more difficult. Opportunities may be lost, while risks of “not knowing” are also increasing. The obligation to use new knowledge effectively could be viewed as a process to potentially gain efficiencies.
The following ideas are provided for consideration:
Share great resources and bookmarks with peers within your organization and global network, resulting in a Best Practice resource listing.
For tax teams organized by function, assign one team member of each function the daily task of reviewing the relevant sources of new developments, summarizing those articles that may be relevant and distribute to other team members to further investigate the impact upon the company and action steps. This responsibility should be an objective, and measured, part of their job description to further enhance responsibility and accountability. This change should create more time for other members within that function also browsing the latest, and often identical, developments.
Review the budget for cost/benefit effectiveness; coupled with a link to past success based on utilizing that particular resource.
Review fees incurred to obtain information, such as tax treaties, from external parties; could this resource be in-sourced more effectively?
Meet with your advisors providing tax developments; discuss the possibility of having them briefly summarize benefits (company specific) from key developments when you receive them, versus a straight transcript of all developments that contain many items that are not relevant.
Review key developments monthly within the functions and /or overall team to ensure relevant items are receiving priority and action plans. This review could be internal, as well as coordinated with external advisors, to ensure there are no gaps. Proactive advisors should recommend this action for a win-win result to encourage interaction and alignment, while also providing a good opportunity for brainstorming other ideas.
Review the legal structure efficiency, at least annually, to determine if business strategies have changed and/or new developments have occurred that provide opportunities.
Highlight developments aligned with your strategic tax objectives.
Align tax developments with the Tax Risk Framework.
This link directs you to the final version of the U.N’s Practical Manual on Transfer Pricing for Developing Countries. This version corrects minor technical errors in the 2012 version. The separate country guidance is already attracting controversy since these countries are provided an official platform to express their views on location-specific advantages, etc. that compete with OECD guidelines.
In addition to this document, Alexander Trepelkov, Director of Financing for Development Office (FFDO), U.N. Department of Economic and Social Affairs has stated three primary initiatives of the FFDO. The three initiatives will create tax training tools to:
Strengthen developing nations’ capacity to conduct transfer pricing analyses,
Negotiate, administer, and interpret tax treaties, and
Develop tax administration systems.
Transfer pricing analyses initiative:
A meeting is being held this week to determine the scope and content of the project, focused on supporting tax administrators apply the arms-length principle to transactions between associated enterprises.
Tax treaty initiative: Training tools in development for tax administrators
Fundamentals of tax treaties course, including similarities/differences between the U.N. models, is planned for early 2014
Advanced tax treaty course to be developed jointly with the OECD, ensuring materials covering the U.N. model are included
A joint project to create training tools on tax treaty administration with the German Federal Ministry for Economic Development and Cooperation.
Develop tax administration systems initiative:
A joint project with the Inter-American Center of Tax Administrations to develop an empirical method to measure and assess tax administration cost. Pilot programs are taking place in Costa Rica and Uruguay.
These developments should be closely followed, especially in developing countries that are developing transfer pricing expertise and non-OECD countries that have publicly stated their views in the U.N.’s Practical Manual on Transfer Pricing for Developing Countries. This insight is also valuable information to review in a pre-audit strategy for such countries, having advance knowledge of their stated positions and differences with OECD methodology.