The EY’s linked report summarizes 2015 disclosures in Sept. 2015 annual reports; most importantly the “acid test” summary, copied herein, provides an interesting perspective for addressing risks and a framework for the Board to consider.
As we conducted this review, we found that reading risk and viability disclosures in isolation was difficult. The importance of reviewing key related and relevant narrative disclosures e.g., business model and strategy, was brought to the fore. In our September 2015 report, ‘Reflections on the past, direction for the future’, we included an ‘acid test’ — a set of key questions that preparers or reviewers should be able to answer clearly having drafted the narrative within their ARAs.
We include our acid test here again to help preparers and reviewers put all disclosures in context. We believe that investors too should view the new disclosures with these same questions in mind.
Risk management and internal control disclosures:
- ► How are the principal risks mitigated and controlled by the company’s systems of internal controls and risk management?
- ► How does the board monitor material controls on an ongoing basis to gain assurance that principal risks are being effectively managed and to take corrective action if they are not?
- ► What did the board’s review of the effectiveness of these systems encompass?
- ► Has the board identified significant failings or weaknesses?
- ► What was the basis for determining what is ‘significant’?
- ► Is it clear what actions have been or will be taken to address significant failings or weaknesses?
- ► Over what time frame has the board considered the viability of the company and why?
- ► What process did the board use to assess viability?
- ► Does the board understand which,if any, severe but plausible risks (or combination of risks) would threaten the viability of the company?
- ► What assurance did the board obtain over relevant elements (e.g., stress testing)?
- ► What assumptions did the board use in reaching their conclusion?
- ► How does the company make its money?
- ► What are the key inputs, processes and outputs in the value chain, and how are the company’s key assets (including its physical assets, IP, people, technology, etc.) engaged in the value chain?
- ► What is the company’s competitive advantage?
- ► How does the business model help deliver and sustain this over time?
Key Performance Indicators (KPI’s)
- ► What did the board and its committees actually do in the year to govern the company?
- ► What, if any, changes were made to governance arrangements during the year and why?
- ► What areas for improvement were identified from the board evaluation and what progress was made against actions from the previous evaluation?
- ► How is board composition and succession planning being managed, giving due regard to skills, experience and diversity?
- ► How did the board seek to understand the views of shareholders during the year and what, if any, action was taken as a result of feedback?
Risk transparency and Board accountability for risks are increasing exponentially in the post-BEPS era, while tax authorities are simultaneously drafting risk-based legislation. The report is worthwhile reading and should provide an impetus for new Best Practices.
The South African Revenue Service (SARS) has reported a new inbound service disclosure requirement due in mid-April 2016. Penalties are applicable for late filing.
As the MAP process is acknowledged to be inefficient, ineffective and time-consuming, the OECD will establish a peer review process to monitor performance of countries’ in resolving Mutual Agreement Procedure (MAP) cases. The reviews should be ready in 2017.
Paascal Saint-Amans, director of the OECD’s Centre for Tax Policy and Administration, has stated: “I don’t know how successful the (BEPS) project will be in the long term, but what is for sure is that we have fed the political beast – the G-20 leaders and finance ministers – and they still have a lot of appetite. They are asking us for more. They need some more blood.”
The OECD’s Working Party 1 and the Forum on Tax Administration have started the peer review process under BEPS Action 14. Reviews will consist of checking number of cases, time needed to resolve, etc.
OECD believes this is a game-changer due to new accountability. However, without full transparency into what countries are doing, or not doing, how effective will the new peer review process be? The level of transparency should be commensurate with the transparency demanded from multinationals. It is hopeful this process will be a revolution for MAP, although many practitioners will be adopting a wait-and-see attitude.
The EU Economic and Financial Affairs Council (ECOFIN) has drafted a directive, subject to European Parliament’s opinion, for EU consistency of country-by-country (CbC) reporting.
The proposed EU legal instrument provides for:
- 2016 CbC reporting to the Member State where it is resident
- Optional provision for non-EU parent companies; 2016 reporting is optional via its EU subsidiaries and such “secondary reporting” will be mandatory for the 2017 tax year.
- Automatic exchange of CbC reports between EU Member States
This surprising draft directive will alleviate some concerns by US headquartered MNE’s (as 2016 CbC reports will probably not be required), although only within the EU. To the extent non-EU Member States have CbC reporting obligations for the 2016 tax year, a Surrogate Entity or local filing may still be required for US MNE’s.
The EU is still recognized as a leader in pushing forward BEPS Action items, and this directive would provide much-needed consistency among Member States for CbC reporting. This development is important to monitor going forward, as well as observing other non-EU countries for a follow-the-leader approach.
The OECD’s Task Force on Tax and Development met in Paris, France, on 1 March 2016, to discuss the new inclusive framework proposed by the OECD for the global implementation of the BEPS project and to support developing countries on their domestic resource mobilisation efforts. Over 180 participants attended.
Co-Chaired by South Africa and the Netherlands, the Task Force is a multi-stakeholder advisory group set up to help to improve the enabling environment for developing countries to collect taxes fairly and effectively.
Recognition and participation in the Tax Inspectors Without Borders partnership was also an agenda item, including present (and future) toolkits for developing countries as a practical resource to implement BEPS Actions.
Participants also highlighted the need for the documentation toolkit to provide clear guidance on how the Country-by-Country Report should be used for risk assessment purposes.
The Task Force will endeavor to take the following steps, commencing with the first meeting in Kyoto Japan, 30 June- 1 July 2016.
- Support the development of 7 further toolkits to translate the BEPS deliverables into user friendly guidance for developing countries by 2018.
- Starting now, fully endorse the ATAF/EC/OECD/WBG transfer pricing capacity building support to address the full range of BEPS challenges in developing countries.
- Support the Tax Inspectors Without Borders programme project to increase the number of TIWB deployment programmes to 20 by the end of 2017 and 30 by the end of 2018.
A copy of the press release is provided for reference:
Best Practices – To address mutual transparency, OECD and the member countries should be willing to share the contents, and objectives, of the various toolkits under preparation to better understand the risk process and actions by tax administrations around the world.
Effective as of 4 February 2016, Vietnam’s circular outlines how it determines levels of tax risk for a taxpayer, thereby having a direct impact upon the likelihood of an audit.
- Tax risk methodologies will apply for all levels of tax administration activities.
- Internal and external sources of risk will be evaluated.
- Six different levels of risk will be used to rate taxpayers.
- A low compliance rating can result from accumulated losses exceeding 50% of equity, or its VAT amounts are above the average of similar sector based companies.
A detailed summary of the new rules commences on page 15 of the referenced Deloitte’s World Tax Advisor.
A tax risk framework policy is essential for every MNE, as additional countries employ a risk-based approach to compliance and audits. The country-by-country reports to be provided via the OECD’s BEPS Action 13 guidelines will also become a risk tool used by many countries around the world.
Accordingly, all tax departments should be thinking of the post-BEPS world with risk-focused lenses that will yield insights previously not envisioned.