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.
Click to access 2018-kpmg-tdr-benchmarking-report.pdf
The Council of the European Union has proposed a draft EU Directive, to be in effect by June 30 2019, that would resolve double taxation disputes between Member States. A summary of the Draft Directive is provided, as well as referenced herein.
This proposal is based upon the foundation of the Union Arbitration Convention (90/436/EEC) re: cross-border tax disputes.
- 3 years, from first notification, to file a complaint by the taxpayer
- Each competent authority (CA) acknowledges receipt within 2 months
- Additional 3 months by CA’s to request additional information, by which the taxpayer has 3 months to provide
- Approx. 6 months later, CA’s decide to accept or reject the complaint; or a CA can decide to resolve unilaterally by which the Directive is terminated
- Taxpayer may appeal per national rules a rejection of the complaint
- CA’s try to resolve issue within 2 years, which may be extended by 1 year
- Upon taxpayer’s request, an Advisory Commission shall be established where the complaint is rejected by not all of the relevant CA’s, or a failure by CA’s to reach agreement. This request can be denied by a Member State on a case by case basis where a question of dispute does not involve double taxation.
- Advisory Commission = Chair, 1-2 representatives of each CA, and 1-2 independent persons by each CA
- Advisory Commission to adopt a decisions within 6 months
- CA’s may, alternatively, set up an Alternative Dispute Resolution Commission instead of the Advisory Commission; this commission has freedom of techniques to settle
- Professional secrecy standards are prescribed
- Advisory or Alternative Commission opines in 3-6 months
- CA’s shall agree within 6 months of the opinion on how to resolve the complaint; they can decide on a decision that deviates from the opinion or be bound by the opinion
- Final decision does not constitute a precedent
- (Redacted) decision is published and maintained in an online central repository
- Evaluation of process by June 30, 2024 and issue a report
As the key point summary infers, there are many provisions in the Draft Directive, requiring a proactive effort by the taxpayer and relevant CA’s. The Directive can be reviewed via the attached link:
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.
Click to access 2016G_02849-161Gbl_MX%20Tax%20Authorities%20to%20start%20e%20audits%20during%20September%202016.pdf
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.
Click to access TaxTalk-Alert-Tax-Controversy-01Feb14.pdf
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.
A new forum, open to all members of the Forum on Tax Administration (FTA), will convene later this year to discuss Best Practices for improving MAP. Topics that may be discussed include:
- Development of a strategic plan
- Resource limitations
- Relationship building
- Identifying trends in disputes
- Increasing APA’s and accelerated CA procedures
- Roll-over adjustments
- Multilateral case procedures
- Taxpayer’s involvement in MAP resolution
- Achieving certainty sooner for a win-win result
This new forum will be an interesting development for all.
This insightful report focuses on practical experiences of 24 countries, with a chart summarizing each country’s status for this initiative. Additional features are identified leading to successful “co-operative compliance” strategies.
A framework is developed, based on a business case approach, for revenue authorities to measure results, and success. The report adopts a systematic approach to tax risk and discusses the five pillars established in 2008 based on understandings for:
- Commercial awareness
- Openness through disclosure and transparency
Evolving concepts include:
- Future direction of initiatives
- Multilateral co-operative compliance
- Approaches by tax authorities to measure results and success.
The report provides useful links in Appendix A for country specific information and is an excellent reference to develop further understanding into this rapidly growing initiative, while providing a foundation for Best Practices including:
- Documentation of the current enhanced relationship / co-operative compliance methods in use.
- Reviewing available co-operative compliance programs for the 24 countries in the report.
- Developing a process determining if, when and how the voluntary programs are to be adopted.
- Developing a measurement for success based on current initiatives, as well as benchmarking results and experiences with your peers.
- Reviewing this evolving initiative annually.
- Developing Memorandum of Understanding learnings, as programs are both formal and informal in approach.
- Advising regional teams of country developments for continual awareness and future opportunities.
- Comparing resource limitations with potential benefits for future co-operative compliance initiatives.
Click to access UN_Manual_TransferPricing.pdf
This link directs you to the final version of the U.N’s Practical Manual on Transfer Pricing for Developing Countries. This version corrects minor technical errors in the 2012 version. The separate country guidance is already attracting controversy since these countries are provided an official platform to express their views on location-specific advantages, etc. that compete with OECD guidelines.
In addition to this document, Alexander Trepelkov, Director of Financing for Development Office (FFDO), U.N. Department of Economic and Social Affairs has stated three primary initiatives of the FFDO. The three initiatives will create tax training tools to:
- Strengthen developing nations’ capacity to conduct transfer pricing analyses,
- Negotiate, administer, and interpret tax treaties, and
- Develop tax administration systems.
Transfer pricing analyses initiative:
- A meeting is being held this week to determine the scope and content of the project, focused on supporting tax administrators apply the arms-length principle to transactions between associated enterprises.
Tax treaty initiative: Training tools in development for tax administrators
- Fundamentals of tax treaties course, including similarities/differences between the U.N. models, is planned for early 2014
- Advanced tax treaty course to be developed jointly with the OECD, ensuring materials covering the U.N. model are included
- A joint project to create training tools on tax treaty administration with the German Federal Ministry for Economic Development and Cooperation.
Develop tax administration systems initiative:
- A joint project with the Inter-American Center of Tax Administrations to develop an empirical method to measure and assess tax administration cost. Pilot programs are taking place in Costa Rica and Uruguay.
These developments should be closely followed, especially in developing countries that are developing transfer pricing expertise and non-OECD countries that have publicly stated their views in the U.N.’s Practical Manual on Transfer Pricing for Developing Countries. This insight is also valuable information to review in a pre-audit strategy for such countries, having advance knowledge of their stated positions and differences with OECD methodology.
This post is a complement to my 5 April Pre-Audit Strategies blog. Pre-audit strategies are addressed, the audit is conducted, ultimate settlement is achieved and workpapers are returned to the files. Post-audit tax strategies can be utilized to address learnings for future audits, critique the pre-audit strategy approach, and form Best Practices to minimize global risks.
The following ideas should be beneficial in a post-audit tax strategy review:
- List all items in the pre-audit strategy checklist, using my prior blog as a reference along with your ideas. Based on hindsight, provide a rating of 1 to 5 for each strategy with comments.
- Revise the global checklist, if applicable, for future audits.
- Cross-reference the pre-audit checklist against the top risks encountered / not initially settled in the audit for correlation. Are there items that should have been performed before commencement of the audit that were not foreseen at the time?
- Review utilization of tax counsel in the audit to address significant risks; were they involved, should they have been involved earlier, was counsel appropriate for the risks being contested, what learnings can be gained?
- Were audit meetings negotiated efficiently using the appropriate individuals? Should there have been additional training to address significant tax risks, educate the auditor in the company’s transfer pricing methodology, etc.?
- Should a company overview have been provided, if applicable, to provide context for the auditor prior to requests for data?
- Conduct a 360 feedback with everyone involved in the audit to gain efficiencies in the ways of working.
- Were there basic misunderstandings between the auditor and the company that could have been addressed differently?
- Assess the consistency of audit responses with other audits being conducted globally; are they globally consistent to form a uniform basis for discussions between tax authorities sharing information?
- Are there new risks identified that should be included in the global Tax Risk Framework?
- Were audit defense mechanisms reviewed timely to plan effectively?
- For US multinational companies, were memorandums prepared for foreign audits to obtain additional assurance for receiving the benefit of a Foreign Tax Credit? Foreign counsel should be proactive in this effort from the beginning of the audit, outlining cost/benefit relationships, practical appeal opportunities, probability of success for alternative appeals, etc. This memorandum should be discussed early in the audit to align expectations.
- Review precedents established for future years, and applicability for post-audit years.
- Review tax reserves established for the audit years, and all open years.
- Provide a brief memoranda to the audit participants and senior management, summarizing the audit and successful interaction of internal and external resources.
- Were Double Tax Treaty, bilateral and/ or multilateral defenses used? Review their effectiveness, or choice not to use.
- Review the interaction of internal and external resources; who was in control of the strategy?
- In today’s environment of increased collaboration between the tax authorities and multinational companies, should an enhanced collaborative tax return / audit strategy be considered to provide timely certainty?
- Develop a post-audit tax checklist as a learning tool for individuals engaged in tax audits.
The above points should form a foundation to engage in this beneficial exercise, highlighting learnings and opportunities, while adopting a Best Practices approach.
I look forward to your valuable comments.
A proliferation of complex and significant tax risks are at the forefront of global news. Aggressive tax planning, tax avoidance, tax evasion and fraud are terms used interchangeably to describe actions by multinationals. Tax authorities, governments, G8, G20, among others, are discussing new ways to combat these perceived risks in the form of additional tax transparency, audit resources, new legislation, etc. Similarly, tax organization structures should also be reviewed based on a tax risk management approach. Ideas for developing Best Practices in tax risk management include the following:
- List the top 5 tax risks; then align these risks with the tax personnel whose primary function it is to focus on such risks.
- Are the top 5 risks being managed efficiently internally and / or externally?
- Is each risk the top priority of one or more members of the tax team?
- Is the strength of each tax member aligned with the respective risk?
- Are you currently able to shift resources away from geographical / functional responsibilities to address current risks?
- Are the tax members adding focus on these risks in addition to their other responsibilities?
- Have specific strategies been developed to address the top tax risks, and champions assignable for each risk?
- Are specific training courses being developed to better inform the tax team and the business of developing risks?
- Are proactive discussions being held with senior management and the Board to ensure efficient tax risk management?
- Is there a quarterly tax risk review to assess status and future actions?
- Have internal procedures been reviewed, as well as mitigating controls, to address potential risk gaps?
- Is the business aware of such risks on an ongoing basis?
- Is this an opportunity to review tax resources to achieve the proper focus on the top tax risks?
- Compare the current tax organizational structure with the tax risks; is it fit for purpose?
- Review Best Practices for obtaining APA’s, entering mutual audit procedures such as CAP, horizontal monitoring, enhanced cooperation in today’s increased emphasis on mutuality and and tax transparency with tax authorities.
- Who conducts audit meetings with tax authorities around the world? Is this an opportunity to minimize risks at an early stage? Are these individuals knowledgeable of the top tax risks? Do you conduct training for audit meetings, including negotiation skills?
- Is internal audit aligned to identify tax risk gaps in their routine audit reviews?
- Is Global Mobility trained to identify potential PE risks? Consider a review of their internal processes for assignments.
- Who reviews Branch activities to ensure such activities do not inadvertently lead to a PE?
- Review the Transfer Pricing documentation framework to address transfer pricing issues early.
- Ensure Treasury is aligned with the tax risks and processes are in place for intercompany loan arrangements.
- Align cross-functionally to ensure new strategies, or a change in current strategies, are reviewed for tax risk exposure.
In summary, I would encourage a review of the tax organization structure based upon a creative tax risk approach, as compared to the present organization to highlight opportunities and Best Practices.
The Commission adopted on 27th June 2012 a Communication on the fight against tax fraud and tax evasion. An Action Plan which details concrete proposals to strengthen the fight against tax fraud and tax evasion was adopted on 6th December 2012.
One of the 34 measures contained in the Action Plan is the development of a European Taxpayer’s Code which is described as follows (action 17):
“In order to improve tax compliance, the Commission will compile good administrative practices in Member States to develop a taxpayer’s code setting out best practices for enhancing cooperation, trust and confidence between tax administrations and taxpayers, for ensuring greater transparency on the rights and obligations of taxpayers and encouraging a service-oriented approach.
The Commission will launch a public consultation on this at the beginning of 2013. By improving relations between taxpayers and tax administrations, enhancing transparency of tax rules, reducing the risk of mistakes with potentially severe consequences for taxpayers and encouraging tax compliance, encouraging Member States’ administrations to apply a taxpayer’s code will help to contribute to more effective tax collection.”
In anticipation of this initiative, some points worthy of consideration are:
- Does your company have a Taxpayers’ Code or Best Practices within a Tax Policy or Tax Risk Policy?
- Should the concept of a Taxpayers’ Code be discussed at the beginning of an audit to enhance trust and confidence?
- Will this initiative be helpful in a simultaneous or joint audit?
- Should a discussion be initiated with the auditor to establish a mutual Taxpayers’ Code?
I look forward to your thoughts on this interesting topic.
Some examples of Best Practice strategies to strategize for audits, before they begin.
- Audit defense file for significant transactions and potential risks
- Transfer pricing documentation; contemporaneous, available within the audit request period, without significant penalties
- Inter-company Agreements: signed, readily available; does substance of transactions match the form
- Tax reserves on statutory financials: review, know how to respond to auditor’s queries
- Loan agreements, review for arms-length documentation, rationalize different loans with different interest rates
- Audit notice/telephone call: is there a global communication process for prompt notification and pre-audit planning
- Change of finance personnel, ensure a seamless transition for audit defense files and documentation
- Identify the first point of contact for an audit “raid”
- Who will meet with auditors regularly, company personnel/outside advisors
- Company information, organization charts, etc.; identify what should and should not be provided
- Information for other entities/years not under audit; be prepared to react to such queries quickly and consistently
- Consistency of global methodologies, ensure there is a governance process as tax authorities do exchange information
- Amnesty provisions; how are you made aware of them, process for review if applicable
- Annual review of pre-audit Best Practice strategies for awareness and governance
Hope this is helpful, I look forward to your valuable ideas.