Strategizing International Tax Best Practices – by Keith Brockman

Archive for August, 2015

Tax disclosure framework: Map to transparency

KPMG has engaged with several UK headquartered multinationals to address how to proceed with future, and dissimilar, demands for transparency.  Although focused on UK based organisations, the framework promotes valuable Best Practices that can be used globally.  A link to the insightful article is provided for reference:

Click to access developing-a-common-frameword-for-disclosing-tax-information.pdf

Five themes for a tax disclosure framework:

  1. Strategy/policy and approach to tax
    1. Tax policy
    2. Tax planning and risk approach
    3. Engagement with tax authorities
  2. Tax risk governance
    1. Link between tax strategy and governance
    2. Tax compliance and tax risk monitoring
    3. Non-compliance governance tools
  3. Business model
    1. Overview, including tax attributes for effective tax rate and cash taxes
    2. Transfer pricing overview
    3. Operations in low tax jurisdictions
  4. Tax contribution
    1. Data/narrative re: sales, profits and taxes paid
    2. Types of taxes paid and use of a company’s profits
  5. Specific information related to material issues
    1. Tax losses/carryovers
    2. Tax incentives/holidays
    3. Material items, such as pension contributions

The above issues exemplify the difficulty in developing a comprehensive framework, or flexible tool, to meet the varying transparency demands resulting from OECD, EU and UN guidelines and unilateral legislation efforts around the world.

The most important point is that the timing for the thought processes for a tax disclosure framework is now; there are no signs of the demand for tax transparency diminishing.

Reputation risk: are you ready?

EY’s article highlights the importance of planning a proactive risk strategy re: reputation risk.  A link to the article is provided for reference:

http://taxinsights.ey.com/archive/archive-articles/six-actions-that-help-you-mitigate-reputation-risk.aspx

Key observations:

  • Six distinct actions
    • Actively monitor the changing landscape
    • Assess readiness/desire to respond
    • Enhance communication with stakeholders
    • Drill into the details to prepare the total tax picture
    • Decide on whom communication is  to be established
    • Embed reputation risk into daily business strategy
  • Questions for self-assessment, gleaned from this topic:
    • Who monitors media coverage of the company
    • Who monitors social media channels re: the tax function
    • Who monitors new tax disclosures to assess trends and new compliance requirements
    • Is the tax structure transparent re: taxes paid by country
    • Do profits and taxes paid align?  If not, rationalize the gap
    • Who follows tax litigation in each jurisdiction
    • Is the (tax) risk officer aligned with tax strategies
    • Are Board members aware of new documentation requirements to assess tax strategy around the world
    • Has the legal team been educated on BEPS actions and related company strategies
    • Is there a metric to measure reputation risk
    • What new disclosures are taking place
    • Will the company address questions from the public
    • Should more tax information be disclosed to mitigate reputation risk
    • What information is shared with investors; does the current process need to be reviewed
    • Is tax risk an element of every new business initiative/strategy
    • What functions are aware of BEPS and the changing landscape

This article is a snapshot for an increasingly important risk: a company’s reputation.  As new tax disclosures emerge around the world, interrelated with Board awareness and acknowledgment, it is imperative that the subject of reputation risk is addressed as an immediate priority by all companies.  As soon as there is damaging press, truthful or not, it may be too late to respond.

This subject is also of importance for tax administrations: tax information is confidential and technical areas may be unclear, thus a company’s rights should be protected while an issue is raised, investigated and ultimately resolved.  The tax administration’s reputation risk is also of paramount importance, as it looks to increase trust and establish an understanding of a company’s functions, assets and risks within the relevant jurisdiction.

Tax risks: Audit committee perspective

Deloitte’s Audit Committee Brief includes a summary and questions outlining Risk oversight and Tax considerations for audit committees.  A link to the publication is provided for reference:

Click to access ACBrief_NovemberDecember2014.pdf

Key observations:

  • Audit committees may have a risk committee (Will this be a continuing trend?)
  • Tone at the top is imperative for effective risk oversight
  • Insightful questions for consideration:
    • What internal controls are in place to address significant tax risks?
    • Is there a clear approach and justification for where risk issues are placed?
    • Is there a widely communicated process to quickly bring risk-related issues to the Board?
    • What issues should the audit (risk) committee be aware of when evaluating potential risks?

Risk governance is rapidly becoming the new norm, both by tax administrations to understand and rate risks of a taxpayer as well as an effective tax risk policy and framework for a multinational to identify and mitigate risks.  This trend will require additional resources to fulfill such commitments, immediately and ongoing.  

Angolan TP documentation penalty: Lessons learned

The Angolan transfer pricing documentation submission deadline was 30 June 2015 re: tax year 2014 for large taxpayers.  EY’s publication provides details on the recent enforcement penalties, including business limitations and reputational risk considerations notwithstanding the insignificant penalty amount for late filing.

Click to access 2015G_CM5706_TP_Angolan%20TAs%20apply%20penalties%20for%20failure%20to%20file%20TP%20documentation.pdf

Key observations / lessons learned:

  • Insignificant monetary penalties due to non-filing or incomplete transfer pricing documentation may be a consideration in modifying a standard OECD documentation template based on cost/benefit.  However, other factors that may be ignored in this analysis may have more inherent risks for consideration.
  • Business and reputational risks should be an essential input for filing complete, and accurate, transfer pricing documentation.  As countries seek to individualize such documentation, this task is more timely and costly, although ignoring such nuances may prove to be damaging.
  • In Angola, the list of non-compliant taxpayers are provided to the National Bank of Angola (via requirements of a Presidential Decree).  Accordingly, inclusion on this list may limit foreign exchange transactions ongoing.

ATO interim report: Corporate tax avoidance

The Senate Economics References Committee has published its interim report entitled “Corporate tax avoidance.”  Part I, “You cannot tax what you cannot see” provides an excellent frame of reference for the discussions therein.

It is worthwhile noting that there is a section “Government Senators’ Dissenting Report” expressing concerns about some recommendations therein; this should be a additional warning sign of the recommendations put forth.  Conversely, there are “Additional Comments from the Australian Greens” fully supporting the report in its entirety.

The final report is due in November 2015, although this interim release provides an indication of the thought trends currently in process by the Australian Tax Office (AT0).  A link to the report is provided for reference:

http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance/Report_part_1

Key observations:

  • 17 recommendations provided addressing (1) evidence of, and multilateral efforts to combat, tax avoidance and aggressive minimization, (2) multilateral actions to protect Australia’s revenue base, and (3) capacity of Australian government agencies to collect corporate taxes.
  • Australian government to work with other countries having significant marketing hubs to improve the transparency of information
  • Australian government continues to take the load re: OECD BEPS initiatives; international collaboration should not prevent the Australian Government from taking unilateral action
  • Mandatory tax reporting (transparency) code
  • Existing transparency laws to be identical for private and public companies
  • Public register of tax avoidance settlements reached with the ATO
  • Public excerpts from the Country-by-Country OECD reports, based on the EU’s standards
  • Annual public report on aggressive tax minimization and avoidance activities
  • Section 3.95 discusses a novel concept: “Effective tax borne” effective tax rate formula, a metric that seeks to reflect all of the channel profit derived from business activities involving Australia and the Australian and global tax paid on that channel profit.  Appendix 3 provides additional rules for application of this formula, noting that there has not yet been a consultation with taxpayers or other stakeholders.  The metric envisions that the entire supply chain profit is a profit of the economic group arising from Australian business activities (i.e. intercompany purchases of goods and services from offshore related parties).  Numerator is either the Australian tax paid on business activities by the economic group, or the global tax paid by such group.  Denominator is the total economic profit from business activities which are linked to Australia.  Withholding taxes of economic group profit are includable, whereas royalties and excises are not.  Numerous rules apply for intercompany adjustments.

Australia is still recognized as a leader in the pursuit of the BEPS objectives, using transparency as a weapon to fight ensuing battles.

This report not only extends the strong cry for public disclosure of tax information, it suggests a new concept to examine the effective tax rate of jurisdictions having activities with an Australian related party.  However, it is hopeful the envisaged complexity, cost/benefit and technical nuances of the “effective tax borne” concept are presented to stakeholders with enough time to review, plan and adjust/eliminate the final recommendation accordingly.

As Australia leads, many others follow.  This report is required reading for all interested parties, as the ideas presented have a high probability of appearing in other jurisdictions in a similar form and formulating the same intent for transparency.

BEPS global update

EY’s Global Tax Alert provides a succinct summary of the latest BEPS (incentivized) developments around the world.  A link to the Alert is provided for reference:

Click to access 2015G_CM5699_The%20Latest%20on%20BEPS%20-%2017%20August%202015.pdf

Overview of the Alert:

  • OECD: Documents re: initiative for automatic exchange of financial account information
  • Africa: Best Practice regional meeting to develop measures for countering BEPS
  • Australia: Exposure draft law re: transfer pricing documentation to be effective 1/1/2016
  • Brazil: Report to eliminate interest on net equity (INE) regime
  • Chile: Foreign residents are to provide a sworn statement to receive treaty benefits
  • Europe: TAXE Committee’s interim report re: tax rulings and BEPS related topics
  • Ireland: Knowledge development box
  • Italy: Patent box regime
  • Japan: Interest limitations
  • Korea: VAT re: electronic services
  • Luxembourg: EU Parent-Subsidiary Directive inclusions (anti-hybrid and anti-abuse clauses)
  • Saudi Arabia: Virtual Service PE
  • Spain: Patent box regime

The Alert highlights the continuous and frenzied pace of the BEPS measures, as well as the unilateral efforts that are mirroring the intent of BEPS, although not necessarily in a consistent and cohesive framework.

 

ATO Practice Statement: Tax benefits/avoidance & GAAR

The Australian Tax Office (ATO) has issued a very interesting Practice Statement Law Administration.  It is an informal policy document for which interested parties should submit comments by 25 September.  The Statement is a lengthy document, citing case law, that is very worthwhile reading, as Australia continues its proactive efforts driving change in the international tax arena.

Although informal, taxpayers can rely on such guidance for protection from interest and penalties.  A copy of the Statement is provided for reference:

http://law.ato.gov.au/atolaw/view.htm?docid=%22DPS%2FPSD200524%2FNAT%2FATO%2F00001%22

Key observations:

  • A general anti-avoidance rule (GAAR) cannot be applied before a determination by the Tax Counsel Network (TCN).
  • A GAAR decision is generally referred to a GAAR Panel (an independent advisory body) before a final decision is made.
  • The taxpayer may be invited to attend a Panel meeting to assist the deliberative process.
  • Concepts of a tax scheme and a tax benefit are discussed.  A tax benefit inclusive in Part IVA, the GAAR provision relates to: an amount not included in income, an allowable deduction, a capital loss, a tax loss carry back, a foreign income tax offset or withholding tax.
  • An alternative hypothesis” or “alternative postulate” identification is discussed; what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out.
  • It is for the court to determine objectively what alternative would have occurred if the scheme had not been carried out.
  • Arguably, there is no longer a test of reasonable exception, based on Parliament’s intention in enacting the Amendments.
  • Warning signs that GAAR may apply (which ATO must consider) are established:
    • Arrangement is out of step ordinarily used to achieve the commercial objective,
    • Arrangement seems more complex than necessary,
    • Tax result does not conform to the commercial or economic result,
    • Arrangement is low risk where significant risks  would normally apply,
    • Parties are operating in a non-arm’s length manner, or
    • Gap between substance and legal form.
  • Penalties are applicable.
  • Division 165 (a GST GAAR rule) is discussed, including permanent and timing differences.
  • A “dominant purpose” test is applicable for the GAAR and the GST provisions, with different factors includable in each.

The above provisions attempt to conceptualize objective factors for an inherently subjective GAAR determination.  As additional GAAR’s are introduced around the world, each applying a different level of subjectivity, the Statement is helpful in understanding the rationale and intent of the ATO.

Tax planning post-BEPS will require additional GAAR documentation for significant transactions, thereby requiring tax to be involved early in the discussions to understand the business intent and alternatives considered.

China – Tax risks re: outbound payments

The State Administration of Taxation (SAT) has focused its risk determinations for outbound payments.  Supplementing this focus, the State Tax Bureau of Zhejiang Province (Zhejiang STB) recently issued its Guideline for Administration of Tax Risks on Outbound Payments to Overseas Related Parties.

PwC’s Business Advisory provides details of this new focus on tax risk:

Click to access 635731620115472907_chinatax_news_jul2015_33.pdf

Key observations:

  • Incentivized by BEPS Acton Plans, and local tax practices
  • Six tests for profit shifting/base erosion:
    • Authenticity
    • Necessity
    • Benefit
    • Value creation
    • Duplication
    • Remuneration
  • Required relevant information  during record-filing for outbound payments

The timeliness of providing contemporaneous transfer pricing documentation, subjective tests for assessment of benefit / value for intercompany services, varying interpretations of internal guidance and lengthy appeal processes are becoming more common, evidenced by this recent focus by China and followed in many other jurisdictions.

The additional focus has introduced additional uncertainty, as well as less consistency, in jurisdictions around the world.  However, the concept of simultaneous corresponding adjustments are generally not addressed in such initiatives, thereby increasing the level of double taxation for MNE’s.

A Best Practice approach will require additional resources focused upon such efforts, as the probability of double taxation increases exponentially.

 

Australia’s draft law: CbCR, TP documentation

The Australian Treasury announced its draft law encompassing country-by-country reporting (CBCR) and transfer pricing documentation.

EY’s tax publication provides relevant details in the referenced Global Tax Alert:

Click to access 2015G_CM5672_Australia%20releases%20draft%20law%20implementing%20CbC%20reporting%20and%20increasing%20penalties%20for%20TA%20and%20TP.pdf

Key observations:

  • Conforms to OECD’s recommended 3-tier transfer pricing approach, CBCR, master file and local file.  The master file and local file will need to provided, whereas the CBCR may not be necessary if the group’s parent entity jurisdiction has an information sharing agreement.
  • It is expected the Australian Taxation Office (ATO) will release additional guidance for the CBCR, hopefully by year-end 2015.
  • Increases penalties for tax avoidance and transfer pricing where there is not a reasonably arguable position by the taxpayer.

Australia has been a leader in following the BEPS Actions and putting such intent into their domestic legislation.  As Australia continues to take this lead position, it is expected many other countries will follow similarly.  All multinationals should continue to monitor these developments, while accelerating planning and execution for the new CBCR and transfer pricing documentation regime.

CbC Bank Reporting Review: EU Parliament Group

This is a valuable insight into the use of country-by-country reporting, based on a report of 26 EU-based banks.  Although the reporting criteria is based on the Capital Requirements Directive IV (CRD IV), the interpolations and extrapolations indicate the trend by which such reports could be used, especially when viewed in isolation by recipients in the public domain.

A link to the report is provided for reference:

Click to access CRDivCBCR2015.pdf

Key observations:

  • The reporting was used to test the hypothesis that profits were overstated in low tax/offshore jurisdictions, with understatement of profits in base country or major operating locations.
  • Unitary tax reporting/allocation was used to determine the likelihood that there was base erosion and profit shifting.
  • Four methods of assessing profit shifting were used to provide an overall ranking.
  • If existing Directive is used, it should be used consistently across all EU jurisdictions.
  • Turnover should include intra-group sales  with reconciliation to reported group turnover.
  • The OECD’s template should be considered as an alternative reporting tool. 
  • Formulary comparisons are measured and used to reapportion the profits.

This report is indicative of conclusions that may be drawn, although data is incomplete and inconclusive, from a table of reported amounts in various jurisdictions.

Most importantly, the group utilized formulary apportionment to derive an expectation of profit levels among various jurisdictions.

Accordingly, all interested parties should review this report as the OECD is nearing completion of the BEPS Action Plans and CbC reporting.

Saudi Arabia: Virtual PE

Saudi Arabia’s Department of Zakat and Income Tax (DZIT) has issued internal guidelines defining a creative concept of Permanent Establishment (PE) that is not aligned with its legislated tax law, double tax treaties, OECD or UN Model Conventions.

This new approach may affect treaty-based withholding tax exemptions, as well as refunds.  Saudi Arabian customers may apply the domestic withholding tax rate as a result, thereby requiring the non-resident to apply for a tax refund.

EY’s Global Tax Alert provides additional details about this latest development:

Click to access 2015G_CM5642_Saudi%20Arabian%20tax%20authorities%20introduce%20Virtual%20Service%20PE%20concept.pdf

The PE definition, and related legislative thresholds, are being aggressively contested by various countries in an effort to capture additional taxes that have been paid in other jurisdictions.  However, such provisions usually have no offsetting adjustment for simultaneous relief from double taxation.  It is expected to see this trend continue, at least partially incentivized by OECD’s BEPS Acton Plans that have yet to be finalized.

The PE pursuits should be closely monitored, with the expectation that assessments will be issued and further appeals will be necessary to fairly address the issue within the intended legal context of that jurisdiction.

Chile: Treaty Requirements

Chile’s Internal Revenue Service (IRS) recently issued Resolution No. 48, prescribing rules for eligibility from a tax treaty including a sworn statement from the resident country beneficiary.

EY’s Global Tax Alert provides the relevant details:

Click to access 2015G_CM5654_Chile%20issues%20guidance%20on%20statement%20required%20to%20benefit%20from%20a%20Tax%20Treaty.pdf

Key observations;

  • A certificate of residence is required to be issued by the Competent Authority of the recipient jurisdiction.
  • A sworn / notarized statement must be provided, with the statement date requiring conformity with the month in which amounts are paid.

Failure to provide the requisite documents will allow the IRS to collect the amounts that should have been withheld, absent treaty benefits, in addition to fines.

Countries are placing formalistic and dissimilar requirements to receive treaty benefits, thereby requiring advance planning and awareness of treaty eligibility.  Such mechanisms continue to add to the international tax complexity for obtaining tax treaty benefits.

European Parliament urges CBCR public transparency

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.

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