Strategizing International Tax Best Practices – by Keith Brockman

Archive for August, 2013

Meetings: team collaboration for success

Meetings are designed to be collaborative and solution oriented, with all members of the team aligned going forward.  The author of this article, Fed Kofman, has provided a valuable approach to meetings, with all attendees actively participating and contributing to the overall objective.  The article is thought provoking and insightful to further Best Practices.

http://www.linkedin.com/today/post/article/20130827185129-36052017-put-your-meeting-on-the-wall

Fred Kofman, Ph.D. in Economics, is Professor of Leadership and Coaching at the Conscious Business Center of the University Francisco Marroquín and a faculty member of Lean In. He is the author of Conscious Business, How to Build Value Through Values (also available as an audio progra

OECD Multilateral Convention: Automatic information sharing among G20 countries

With China’s commitment on 27 August 2013, all G20 countries have signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Convention), resulting in automatic exchange of information as the new global standard.

Tax authorities are cooperating multilaterally and automatically, as the Convention provides for spontaneous exchange of information, simultaneous tax examinations and tax assistance.  The accompanying press release, including a list of the 56 signatories, is available at:

http://www.oecd.org/tax/china-joins-international-efforts-to-end-tax-evasion.htm

What are the implications on Best Practices for these continuing developments?  Ideas for consideration include the following:

  • Providing taxpayer information to one authority should be viewed as being provided to many countries worldwide, thus maintaining consistency is essential.  A formal methodology will ensure Best Practices are being followed.
  • Tax assistance, simultaneous examinations and joint audits should be envisioned for reviewing the global Tax Risk Framework.
  • Best Practices for implementation of Mutual Agreement Procedure (MAP) are a topic of frequent discussion by tax authorities worldwide; thus Best Practices for Multinationals should also be focused on risk identification, measurement and application of MAP.
  • Related posts for reference:
  1. 23 July, OECD exchange of information: Multilateral Convention review
  2. 27 June, OECD FTA MAP forum to develop Best Practices
  3. 25 June, OECD report to the G20: Status, training, effectiveness
  4. 20 June, OECD Global Forum on Transparency and Exchange of Information: Activities
  5. 18 June, OECD: Tax Transparency report.

PE Best Practices Risk Review: BEPS Action Plan, OECD & UN Model Conventions

A Permanent Establishment (PE) risk review is an integral component of a global Tax Risk Framework, increasing in importance with issuance of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan.  The PE risk review should be monitored on a recurring basis against the backdrop of current and future developments.  The OECD and UN Model Conventions, with related Commentaries, provide insight into the development and current state of international PE guidelines.  The Conventions provide a useful framework to document specific PE criteria, and exceptions thereto, for risk analysis.

Action 6 (Prevent Treaty Abuse) of the BEPS Action Plan states that the definition of PE must be updated to prevent abuses.  Action 7 (Prevent the artificial avoidance of PE status) provides additional PE initiatives.  Actions 6 and 7 are designed to implemented by September 2014 and September 2015, respectively.  It will be paramount to note any changes in the “preparatory or auxiliary” exception.  A link to the BEPS Action Plan is hereby provided for reference:  http://www.oecd.org/ctp/BEPSActionPlan.pdf

Article 5 of the OECD Model Convention provides an outline for PE determination, including a “fixed place of business” standard, building site or installation project criteria, the “preparatory or auxiliary character” exception, dependent agent rules and further exceptions for activities of an independent agent and related entities.  The OECD Model Convention can be accessed at: http://www.oecd.org/tax/treaties/oecdmtcavailableproducts.htm

The OECD Commentaries are required reading to fully comprehend the history, and intended meaning, of Article 5.  Paragraph 2 of the Commentary provides an outline for determination of a “fixed place of business,” consisting of (i) the existence of a “place of business,” (ii) this place of business must be “fixed,” and (iii) the carrying on of the business through this fixed place of business.  Paragraph 24 of the Commentary states that , for application of the “fixed place of business” rule, “the decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole.”  Paragraph 33 further provides that “the authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise.”

The attached reference provides access to the UN Model Convention, Letter from India (13 Aug 2012), revised commentary on existing Article 5 and definition of PE for comprehensive understanding of the current PE Article.  The UN Model Convention contains an Introduction, Part One (including the Articles), and Part Two with Commentaries.  Paragraph 20 of the Commentaries states that the Commentaries on the Articles are regarded as part of the UN Model Convention, along with the Articles themselves.  Most importantly, Part Two cites differences of the UN and OECD Model Conventions, such as the UN inclusion of a services standard, exceeding 183 days in any 12-month period, that is not within the OECD guidelines.   http://www.un.org/esa/ffd/tax/unmodel.htm

Best Practice ideas for outlining PE risk include:

  • Documenting potential significant PE risks by legal entity, with specific reference to the PE attribute that attracts such risk, such as a fixed place of business or dependent agent.
  • Outlining availability of the preparatory or auxiliary character exception for potential risks.
  • Inclusion of objective and subjective evidence that provides defense for a potential PE determination, including wording from the applicable Convention and Commentaries.
  • Tools available to reduce double taxation upon determination of a PE, such as the Mutual Agreement Procedure (MAP).

The above Best Practices should be combined with Best Practice ideas in former posts:

  • 14 April PE Risks: Best Practices for Awareness & Planning
  • 14 July: PwC PE survey: Trends & Challenges

PE determination is increasing in importance in today’s changing tax world, thus a detailed risk matrix is essential to determine current potential risk areas, as well as provide valuable information to assess proposed changes by the OECD and/or UN.

China APA Report 2012: More APAs

http://www.chinatax.gov.cn/n8136506/n8136608/n9947993/n9948014/n12360820.files/n12360827.pdf?goback=%2Enmp_*1_*1_*1_*1_*1_*1_*1_*1_*1_*1#%21

THe 2012 Annual Report outlines China’s Advance Pricing Agreement (APA) process, in addition to statistics for 2005 – 2012.  The agenda of the report includes:

  • APA Program definition and advantages
  • Legislation and Development of APA program
  • APA Procedures
  • Taxpayers’ Rights
  • Statistics and Contacts
  • Appendices, including formal meetings and applications

A Best Practices methodology addressing APA’s should be outlined in the global Tax Risk Framework for every multinational corporation.  This methodology will summarize some of the following points:

  • A description of the decision matrix for an APA and its implementation
  • Preference for unilateral or bilateral APAs
  • Implementation of global/regional/country proactive and/or reactive risk management tools
  • Outline of significant jurisdictions, timelines, work plan, and accountability for implementation
  • Integral coordination with tax counsel, and other functional business units
  • Review plan for an APA methodology in today’s rapidly changing tax environment (evidenced recently by the change in administrative leadership for the India APA program)
  • Review of applicable gaps that may exist to retrieve information readily for proactive, or reactive, APAs

Tax jurisdictions, and MNEs, are increasing their focus on APAs amidst a trend of growing uncertainty and complexity in international transfer pricing principles.  The China APA Report provides good preparation for a better understanding of the complex, and lengthy, preparation needed by all parties to obtain an APA.

Presentation Skills, A Valuable Leadership Attribute

Presentation and negotiation skills are two critical factors that  distinguish an exemplary leader.  Emphasis on these valuable personal attributes should be addressed by everyone continually, and formally reviewed once or more annually to measure success.

This post will address some ideas for the use of presentation skills, with recommended sources of reference.  My prior post, 14 August, discusses negotiation skills and tools for development.

Suzanne Bate’s books and personal coaching camps are highly recommended, with a link provided to her informative website.   I have also updated her power speaker blog on my Recommended Links page. I can personally attest to the valuable lessons learned from her personalized classes.

http://www.bates-communications.com/our-people/suzanne-bates/

Suzanne is author of Speak Like a CEO: Secrets for Commanding Attention and Getting Results (McGraw Hill), which went to #6 on the bestseller charts on amazon.com in 2005. The book has also been published in 5 languages including Chinese, Russian and Indonesian.  Suzanne has since published two more books, Motivate Like a CEO: Communicate Your Strategic Vision and Inspire People to Act!, and Discover Your CEO Brand: Secrets for Embracing and Maximizing Your Unique Value as a Leader, with McGraw Hill, and both books have become business best-sellers on amazon.com.

Some ideas for improving presentation skills include:

  • Different participants should present topic agenda items at meetings.
  • Formalizing presentation training goals in a personal development plan.
  • Organizing presentation exercises / workshops.
  • Practice telling a powerful story, starting with individual passions.
  • Review effectiveness of Power Point presentations for lessons to be learned.
  • Provide a mentor relationship.
  • Encourage individuals to sign up as presenters at relevant conferences.
  • Discuss Best Practices in company publications, providing encouragement for others.
  • Develop a source of Best Practice presentation resources, including those of Suzanne Bates.

The above references and ideas will hopefully provide inspiration for current and future leaders.

The Art of Negotiation: Improve your leadership skills

Negotiation is an art and acquired skill; as such it should be a continuous journey for every tax executive.  Negotiation is used by everyone every day, personally and professionally.  For example, it can be used to develop a win-win result in cross-functional issues with a geographically diverse team or equally in discussions with tax authorities to concisely explain transfer pricing concepts.

In today’s world of tax subjectivity and controversy, negotiation is a requisite (and often neglected) skill for local, regional and global tax teams, as well as other leaders in the business.  Conveying technical tax terms and complicated transactions simply, succinctly and convincingly is a leadership skill that becomes more important as one’s career progresses.  Notwithstanding this necessity, negotiation is a skill that is not an integral part of everyone’s development program.

Books, presentations and conferences are focused on negotiation, and I will pass along some tremendous resources I have used that are easy to read and implement daily.  It is also fun to see  the results!  Gerry Spence, a U.S. renowned trial lawyer, has written the following two books for your consideration:

  • How to Argue and Win Every Time – At Home, at Work, in Court, Everywhere, Every Day
  • Win Every Case: How to Present, Persuade and Prevail – Every Place, Every Time

I highly recommend the above resources, related articles posted herein, and look forward to your ideas on this important leadership topic.

Cover of "How to Argue and Win Every Time...

Cover of How to Argue and Win Every Time

Please ensure you, and your teams, have a negotiation goal for 2013!

New Zealand GAAR & Parliament’s intentions

http://www.ird.govt.nz/resources/1/0/10876180402363a989fbef5d802abedf/is1301.pdf

The New Zealand Inland Revenue has issued an interpretation statement about a “tax avoidance arrangement.”  It sets out the approach the Commissioner will take to ss BG 1 and GA 1 of the Income Tax Act 2007. Section BG 1 is the general anti-avoidance provision in the Act. Section GA 1 enables the Commissioner to make an adjustment as a result of the application of s BG 1.

Section BG 1 voids a tax avoidance arrangement. An “arrangement” is defined widely and includes formal, legally enforceable contracts through to informal, unenforceable understandings.

The Commissioner’s approach to analyzing and applying s BG 1 is set out in a flow chart that outlines the sequence of analysis undertaken to establish whether an arrangement is a tax avoidance arrangement.  There are also examples illustrating how the approach is worked.

The Commissioner has a broad discretion as to the adjustments that can be made to counteract the tax advantage. There is no duty to describe precisely the actual basis for an adjustment. Further, the Commissioner may adjust the taxable income of any person affected by the arrangement.  A person can be affected by an arrangement whether they are a party to the arrangement and whether they are aware that they benefited from a tax avoidance arrangement.

However, s BG 1 may apply even if there is a specific anti-avoidance provision that accompanies the provisions used or circumvented.

This “interpretation” is very subjective, outlining the manner in which a taxpayer may envision Parliament’s intentions.  The examples  and flowchart may be helpful, and the interpretation is a “must read” for documentation of significant planning transactions in New Zealand.

Best Practices for GAAR developments are included in prior posts including: GAAR; Poland’s reintroduction (8 August), EY 2013 survey; GAAR history/trends & Tax Treaty vs. domestic law application (7 August), and UK Finance Act 2013; GAAR has arrived (21 July).

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