Strategizing International Tax Best Practices – by Keith Brockman

Archive for July, 2013

OECD: White Paper on Transfer Pricing Documentation

http://www.oecd.org/tax/transfer-pricing-documentation.htm

The Organization for Economic Cooperation and Development (“OECD”) is quickly following up Step 13 in its Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”) for enhanced transparency, information on global income allocation, economic activity and taxes paid among countries, according to a common template.  Refer to my 19 July 2013 post for information on the OECD BEPS and Action Plan.

The White Paper takes a “big picture” approach, with interested parties invited to comment by 01 October 2013.  An insightful summary outlines significant differences in transfer pricing documentation requirements from country to country, concluding with a recommended two-tiered approach (“Coordinated Documentation Approach”) consisting of a Masterfile and a Local file.

The recommended Masterfile is broad in scope, requesting global legal ownership/structure, geographical location of principal operating entities, in addition to management structure and geographical location of key management personnel.  Major business lines would be described in extensive detail, as well as intangible strategies, intercompany financing activities, listing of APAs, MAP procedures and the consolidating income statement.

The Local File describes local management structure and geographical location of senior executives, recent business restructurings including transfers of intangibles, controlled transactions and financial information.

Annex 1 and 2 provide multi-country surveys on transfer pricing documentation and tax return disclosure requirements, with related sources of information for reference.

The OECD believes the Coordinated Documentation Approach offers a balanced trade-off between greater transparency and streamlined transfer pricing documentation requirements.

All international tax executives should follow public comments that are posted by  OECD for this new Coordinated Documentation approach, discuss advantages and disadvantages with their peers, in addition to determining if they will provide comments directly.  The current methodology of preparing transfer pricing documentation reports should be compared to this suggested approach to initiate insightful planning and efficiencies that will form Best Practices for future years.

PwC transfer pricing survey: Intercompany loans, pooling, guarantees

http://www.pwc.com/gx/en/tax/transfer-pricing/navigating-the-complexity/download.jhtml

PwC has conducted a survey, as referenced in the attached link, of transfer pricing aspects for financial transactions in over 40 countries in the Americas, Asia Pacific and Europe.  The insightful information, current as of 1/1/2013, initially provides a comprehensive overview of intercompany loans, cash pooling and guarantees followed by transfer pricing details for each country.

Each country included in the survey provided responses to the following topics:

  • Transfer pricing rules and regulations, domestic / OECD guidelines
  • Thin capitalisation
  • Intercompany loans (arms-length nature, transfer pricing methodologies, etc.)
  • Cash pooling; transfer pricing methodologies
  • Intercompany guarantees
  • Documentation requirements
  • Advance certainty via APA, etc.

Transfer pricing questions and issues re: intercompany loans and various aspects of financial transactions are becoming more common and complex as businesses are continuing global expansion.  Accordingly, multinational tax and treasury departments need to be mutually aware of transfer pricing rules for arms-length principles, contemporaneous documentation requirements, and inherent risks / opportunities for intercompany financial transactions.

Evolving rules in this area dictate continual training, awareness and strategizing risks from a global tax and treasury perspective.  Transfer pricing training should be provided at regional / global treasury conferences;  conversely treasury should ensure tax is aware of new financing tools that arise in different markets to ensure alignment.

OECD Country MAP Profiles & Statistics – Valuable tools

http://www.oecd.org/ctp/dispute/countrymapprofiles.htm

http://www.oecd.org/ctp/dispute/mapstatistics20062011.htm

The links provide reference to the OECD Country MAP Profiles and MAP Statistics 2006-2011.  The OECD MAP content provides valuable information that should be included as an integral component of audit risk strategies.

The Country MAP Profiles provide the following content for OECD member countries, in addition to Argentina, People’s Republic of China, Russia, and South Africa:

  • Competent Authority contact information
  • Organisation of the Competent Authority
  • Scope of MAP & MAP Advance Pricing Arrangements (APAs)
  • References to domestic guidelines and administrative arrangements
  • MAP request content, timelines, fees and documentation requirements
  • Provisions on tax collection, penalties and interest pending outcome of the MAP process
  • Other dispute resolution mechanisms, and
  • Links to websites for the relevant jurisdiction.

The MAP Statistics include information on MAP inventories, cases initiated, completed, withdrawn, and average cycle time.  These statistics are provided for the OECD member countries and some non-OECD economies.  This information is very helpful in reviewing the trend of MAP filings in relevant jurisdictions.  There were 3,838 open MAP cases by OECD member countries at the end of 2011, with an average completion time of 25 months.

The OECD Forum on Tax Administration (FTA) convenes later this year to discuss Best Practices for improving MAP: refer to prior post 27 June 2013.

With the increase of transfer pricing controversies that are inherently complex and subjective in nature, MAP is a tool that is being used more frequently worldwide.  Examples of Best Practices to strategize MAP are provided for insight:

  • Document domestic and bilateral/multilateral avenues of appeal upon commencement of an audit to facilitate advance planning.
  • Review Double Tax Treaties for relevant Arbitration provisions that are providing an impetus for some jurisdictions to finalize negotiations.
  • Determine the interplay of domestic appeals (informal settlement, formal Appeals, Court filings, etc.) with MAP early in the audit process.
  • Outline deadlines for domestic appeals, MAP and other bilateral/multilateral tools (i.e. EU Arbitration Convention)
  • Develop a pro-forma multilateral calculation to strategize solutions minimizing double taxation.
  • Ensure MAP and other appeal strategies are integrated in the Tax Risk Framework.

    OECD Map with accession (green) and discussion...

    OECD Map with accession (green) and discussion (pink) countries added (Photo credit: Wikipedia the relevant jurisdictions)

OECD exchange of information: Multilateral Convention review

http://www.oecd.org/ctp/exchange-of-tax-information/conventiononmutualadministrativeassistanceintaxmatters.htm

This link provides access to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters prescribing procedures for the exchange of information between tax authorities, in addition to press releases and related documents.

The Convention, and its provisions, are becoming more important with increased tax transparency and sharing of Best Practices among tax jurisdictions.  The Multilateral Convention, as well as factors leading to its current and future importance provide valuable context in understanding the current state of affairs, and intentions to increase the exchange of information worldwide.

UK Finance Act 2013: GAAR has arrived

Click to access ukpga_20130029_en.pdf

http://www.hmrc.gov.uk/avoidance/gaar.htm

The links provide reference to the UK Finance Act 2013 and information about the development and intent of the new general anti-avoidance rule (GAAR).

The GAAR legislation, effective at date of enactment, includes various taxes with its stated purpose as counteracting tax advantages arising from tax arrangements that are abusive.  A “tax arrangement” must also be “abusive” for GAAR to apply. Part 5, in part, is provided herein for reference.

207 Meaning of “tax arrangements” and “abusive”

(1) Arrangements are “tax arrangements” if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.

(2) Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances including

(a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions,

 (b) whether the means of achieving those results involves one or more  contrived or abnormal steps, and

(c) whether the arrangements are intended to exploit any shortcomings in those provisions.

The UK GAAR legislation, as in other countries, is principle based and subjective.  Accordingly,  a comprehensive understanding of the GAAR legislation, and inherent intent, is required.  An interesting aspect of the UK GAAR legislation is the formal procedure to be used by HMRC for application of GAAR.

Best Practices include preparation of a memorandum for planning transactions that objectively states the business / economic reasons to provide rationale for the proposal, thereby deriving business intent for application of the GAAR rules.  Additionally, benefits of early discussions with tax authorities in countries for which co-operative compliance programs are in place (refer to 13 June 2013 post: OECD – A Framework for Co-operative Compliance) should be considered.  

OECD Base Erosion and Profit Shifting (BEPS) report & Action Plan

http://www.oecd.org/tax/beps.htm

Click to access OECD.pdf

The BEPS report, previously released, and the new Action Plan are available for public review, with many commentators already providing insight on the Action Plan.

The 24 month Action Plan is comprehensive and aggressive, with tax transparency and disclosure rules likely to be implemented early in that timeline.  The report also discusses an improvement of global rules in developing countries, further referenced by work of the Tax Inspectors without Borders study, as discussed in my 9 June 2013 post.

One very interesting proposal in the report is the development of a multilateral convention to address BEPS issues.  This will allow countries to rapidly implement some actions without formally renegotiating bilateral treaties.  Additionally, Appendix C provides examples of tax planning structures by multinational organizations.

The OECD BEPS report and Action Plan will provide additional momentum and debate for the proposed actions, for which multinationals should prepare an internal action plan to address such initiatives.

Tax transparency; Seizing the initiative

Click to access EY_Tax_Transparency.pdf

I highly recommend reviewing this comprehensive publication by Ernst & Young, focusing on strategies and questions Boards should ask to prepare for tax transparency reporting.  One insightful section describes key stakeholders for tax transparency reporting, including consumers, NGOs, Parliamentarians, OECD, and the media.

The publication encompasses the following concepts:

  • Current context for transparency
  • Current tax transparency reporting requirements
  • What others are reporting
  • Information that could be disclosed
  • Challenges to be faced
  • Deriving value from tax transparency
  • Next steps

There is an excellent summary, at the end of the publication, depicting a structured approach for managing your tax profile, outlining ideas leading to a Best Practices strategy.

A Best Practices initiative for tax transparency reporting should be initiated, forming a framework to address challenges and identify opportunities.

Australia: Tax return disclosures enacted into law

http://www.comlaw.gov.au/Details/C2013A00124

Australia has enacted tax return disclosures into law via amendments referenced in Schedule 5, Tax secrecy and transparency.  The Commissioner must, as soon as practicable after the end of the income year, make publicly available the following information for corporate tax entities with reported total income of $100 million or more, according to information reported in the entity’s tax return:

  • ABN
  • Total income for the income year
  • Taxable income or net income (if any) for the income year
  • Income tax payable (if any)

All multinationals should develop an action plan, if not already in place, outlining the method by which tax return disclosures are to be reported in Australia and other countries around the world.  The methodology should be aligned with the CFO, Board of Directors and senior leaders of the business.

The tax return information chosen for disclosure will not provide reasons why there may be significant differences between total income, taxable income and the resulting income tax payable (if any), and will likely provide a forum for public scrutiny and questions surrounding noted variances.

Accordingly, critical decisions re: additional voluntary disclosures, responses to questions generated by the disclosures, and other relevant factors should be considered within the context of the global Tax Risk Framework.  Valuable information can be obtained from tax disclosures of the extractive industries, including the impact of indirect taxes and non-tax contributions.

Tax transparency is a rapidly growing trend for which global strategies and Best Practices should be adopted to timely address current and future developments.

PwC PE survey: Trends & Challenges

http://www.pwc.com/gx/en/tax/publications/permanent-establishments.jhtml

PwC has published results from a survey of more than 200 multinationals in Europe and the U.S., focused on Permanent Establishment (PE) challenges and trends.

Survey results include the following:

  • 86% cite increased mobility as a significant trend in triggering PE risk.
  • Difficulty in monitoring business activities, after PE guidance is provided.
  • Do’s and Don’ts provisions are hard to manage.
  • Audit readiness checks should be conducted to reduce PE risk.
  • Tax authorities are exhibiting more aggressiveness in assertions of PE, primarily focused in Europe.
  • Site visits and employee interviews are techniques used more often by tax authorities to identify risks.

My prior posts encompassing PE trends and Best Practices should be reviewed, including 14 April PE Risks and Best Practices, 24 April Global Mobility Alignment, 11 May and 20 May Branch activity risks.

Examples of Best Practices:

  • Confirmation of PE awareness and controls annually by CFO’s / Business Leaders, including Branches and emerging markets
  • PE template to facilitate audit readiness checks
  • PE internal reference guide
  • PE workshops with Internal Audit, Global Mobility and Business Leaders discussing examples of PE and addressing adequacy of controls
  • Discussion of PE cases in the media with regional and global tax teams to accurately and timely inform business leaders

PE risk is still increasing, thus additional focus should be directed to minimize this risk and integrate controls into the Tax Risk Framework.

Best Practices for new Transfer Pricing disclosures & Peru’s new rules

http://www.kpmg.com/global/en/issuesandinsights/articlespublications/taxnewsflash/pages/peru-changes-to-transfer-pricing-obligations.aspx

The Peruvian tax authority (SUNAT) has implemented new rules for submission of a transfer pricing study annually by corporate taxpayers with transactions or revenue exceeding prescribed amounts.  This change will be effective for the 2012 year, to be submitted in October 2013.  Previously, as in many other countries, this report was required to be available upon request.

The transfer pricing report is in addition to an information return disclosing intercompany transactions.

This new rule highlights several important governance questions for new guidance on transfer pricing documentation, including the following:

  • How are members of the transfer pricing team (local/regional/global) informed of new disclosures timely for planning and process changes?
  • Are there gaps that could occur, resulting in last minute actions or untimely disclosures?  If so, controls are necessary to mitigate such gaps.
  • Is there an internal or external process documented, and used, to review new transfer pricing disclosure rules on a regular basis?
  • Is there timely engagement with the relevant Business Units to ensure alignment and execution?
  • What procedures are in place to implement new transfer pricing disclosures into the transfer pricing documentation and review process?
  • Is the information readily available, or are system changes required?
  • Have the new disclosures been discussed with the local auditors to ensure alignment?

This topic is increasing in importance, as countries initiate or expand contemporaneous information and transfer pricing documentation requirements.  Such disclosures include identification of transfer pricing methods used for intercompany transactions, assertion that relevant documentation exists and is readily available, amounts of intercompany transactions for goods and services, etc.

Global Perspective & Challenges: VAT / GST/ Indirect taxes

http://www.pwc.com/gx/en/tax/indirect-taxes/shifting-balance.jhtml

PwC has recently published this report highlighting new challenges and forward looking insights for indirect taxes.  Detailed country summaries are presented for Brazil, Canada, China, China, Germany, India, Russia, Singapore, South Africa, United Kingdom, and the United States.  The article referenced at the end of the post highlights India’s intentions to introduce a GST.

VAT systems are present in more than 150 countries, with VAT receipts representing approx. 20% of total tax revenue in the OECD countries.  As VAT rates are increasing, tax bases are broadening, and EU joint audits with VAT are commencing, indirect taxes are requiring added focus for effective tax risk management.

The OECD’s Global Forum on VAT held its first meeting in November 2012, striving to increase collaboration and establish Best Practices in VAT administration and compliance.  The OECD International VAT/GST Guidelines will be finalized by year-end 2013, studying VAT neutrality, the destination principle for supply of services and intangibles, anti-abuse provisions, as well as enhancing mutual cooperation and dispute resolution mechanisms.

The report highlights Best Practice ideas, including the following:

  • Identifying responsibility and awareness for indirect taxes, including environmental taxes
  • Drafting contracts with provisions for new VAT/GST consequences in different jurisdictions
  • Import and export risks and opportunities for logistic planning
  • Risk awareness for indirect tax consequences
  • Reviewing refund opportunities based on case law precedents
  • Developing a methodology for reviewing and testing VAT characterizations and rate changes
  • Inclusion of indirect taxes as an integral component of the global tax strategy and Tax Risk Framework

Italy: New Co-operative Compliance Program

http://www.agenziaentrate.gov.it/wps/content/nsilib/nsi/documentazione/regime+di+adempimento+collaborativo+-+grandi+contribuenti/pilot+project+-+english+version

The Italian tax administration will be accepting applications until 31 July 2013 for their new Co-operative Compliance program.  The OECD Framework for Co-operative Compliance, as summarized in my posting of 13 June 2013, is intended to bring certainty into the tax filing and controversy process while  developing a win-win relationship.

Mutual cooperation and transparency are the keys to success for this new initiative.

Mandatory requirements

  • being qualified as a “Large Taxpayer” (under the section 27, paragraph 10, of decree-law no. 185/2008, as converted by section 1 of law no. 2/2009), i.e. taxpayers with total turnover or operating revenues not less than 100 million/€, with reference to the tax year 2011;
  • having implemented an organizational model pursuant to section 6 of legislative Decree no. 231/2001 or having adopted a “Tax Control Framework” to manage tax risks

Optional requirements

  • belonging to a multinational group of companies, or to carry out its business activity in Italy or abroad through permanent establishments;
  • having adopted similar cooperative compliance programmes in foreign jurisdictions or having subscribed a code of conduct with other tax administrations;
  • having already entered into initiatives falling within the concept of cooperative compliance in Italy, such as the International Tax Ruling (provided for by section 8 of decree-law no. 269 of 30 September 2003, converted with amendments into law no. 326 of 24 November 2003 and implemented with Regulation of the Director of the Revenue Agency of 23 July 2004) or having adopted the transfer pricing documentation requirements regime.

Note the importance of having established a Tax Control Framework to manage tax risks, a mandatory requirement for this program.

EY survey: Tax risk awareness gaps

Click to access 2012-13-Canadian-tax-governance-survey.pdf

This insightful survey, published by Ernst & Young, polled Canadian executives from 120 companies to review the tax level awareness in organizations.  The findings include the following observations:

  • 56% of non-tax business unit leaders are unfamiliar with risk management policies.
  • 7% of time spent by the tax function is devoted to tax risk management reporting.
  • 15% of tax risks and opportunities are identified timely.
  • Over 50% of the respondents are planning to improve existing tax risk policies and procedures.
  • Significant areas of tax risk requiring improvement include transfer pricing processes and controversy, foreign tax planning, and legal entity accounting.

The findings should be compared to current Best Practices within every organization.  Some ideas for consideration include:

  1. Develop / review the Tax Risk Management Policy.
  2. Communicate all significant tax risks, and corresponding Tax Risk Management Policy, to business leaders globally.
  3. Prioritize tax risk awareness, including reputation risk, in business reviews and training.
  4. Measure the time spent by the tax function on tax risk awareness and internal controls.  (Refer to 23 June blog posting)
  5. Develop a system to measure tax risks on a quarterly basis to address potential issues timely.
  6. Conduct tax risk workshops with the business leaders.
  7. Review significant risks, noting areas for improvement, and establish a timeline to address such risks.
  8. Address tax risk management as a priority agenda item for the global tax function.
  9. Develop an efficient process to address tax controversies around the world.

Tax risk awareness is a critical issue that should be prioritized within an organization, ensuring alignment with the CFO and Board of Directors.

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