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.
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:
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
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.