KPMG has published their 2018 tax dispute benchmarking survey, interviewing 159 senior tax professionals of US based multinationals.
- State tax disputes have accelerated, more than IRS or foreign tax audits
- State authorities are not developing risk assessment proficiencies
- All audits are taking longer to resolve
- Canada, India, China, Germany and Italy rank as the most difficult to resolve
- Transfer pricing remains as the top issue of examination
- 58% of respondents did not have a dispute resolution budget
- Tax disputes are not monitored by technology, with ⅓ Excel tracking
- External law firms are being engaged at the start of the proposed assessment
As tax disputes, and the difficulty of resolving them, are escalating, it is revealing that most companies in the survey do not have a process in place for audits before they commence. This survey should be reviewed, with Best Practices and learnings, in mind for the future.
Mexico has has announced its proactive e-auditing plan, as detailed in EY’s Tax Alert.
This type of audit will require a new skill set by the business:
- E-mail governance, as the lack of a response signifies deemed acceptance of an assessment
- Proactive audit management, not relying on letters and physical meetings
- Coordination with Corp. HQ/Regional Tax for advance appeal planning
- Pre-audit electronic reconciliation
- Electronic cross-reference processes during the year for self-verification to identify gaps
- IS expertise to ensure proper governance
This type of auditing, as well as joint audits, etc. signify a new trend for tax administrations having to cope with less resources and the intent to capture a fair share of tax.
The referenced PwC Alert highlights the proactive efforts by the Australian Tax Office (ATO) to initiate dispute resolution mechanisms in the audit process, as well as focus on relevant internal training to successfully accomplish these objectives.
The ATO is committed to the following objectives:
- Early engagement and direct negotiation with taxpayers
- Improving all dispute resolution processes starting with the assessment
- ADR utilization at every stage of the dispute resolution process
- Independent review of the audit position prior to conclusion of the audit aimed to narrow / reconsider the issues
- Internal ADR training
- Focused “risk-focused” approach to managing disputes
The ATO’s initiatives are timely, relevant and a welcome effort to adopt Best Practices to resolve disputes prior to costly and time-consuming formal unilateral, bilateral or multilateral appeal avenues via domestic legislation and/or double tax treaty relief.
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:
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:
- 23 July, OECD exchange of information: Multilateral Convention review
- 27 June, OECD FTA MAP forum to develop Best Practices
- 25 June, OECD report to the G20: Status, training, effectiveness
- 20 June, OECD Global Forum on Transparency and Exchange of Information: Activities
- 18 June, OECD: Tax Transparency report.
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 (pink) countries added (Photo credit: Wikipedia the relevant jurisdictions)
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.
- 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
- 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.