Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

TEI: European Commission’s VAT Expert Group (re)appointment

As a long-standing advocate of Tax Executive Institute’s (TEI’s) expertise and peer networking for all executive tax members of multinationals, their reappointment as a member of the VAT Expert Group is a sound testament to their advice for the international tax community.

Additionally, TEI’s training programs, and opportunities to be a guest speaker, should be taken advantage of if one has the opportunity.

TEI Appointed as Member to the European Commission’s VAT Expert Group
TEI Staff

On September 30, 2016, the European Commission reappointed TEI as a member of the VAT Expert Group for a three-year term. The VAT Expert Group was established in 2012 for the purpose of “advis[ing] the Commission on the preparation of legislative acts and other policy initiatives in the field of VAT” and “provid[ing] insight concerning the practical implementation of legislative acts and other EU policy initiatives in the field of VAT.” The VAT Expert Group’s next meeting will take place on October 17, 2016 in Brussels.

TEI has participated as a member of the VAT Expert Group since its inception. Allard van Nes will continue to continue to serve as TEI’s primary representative and Lorry G. Limbourg will serve as Mr. van Nes’ alternate. TEI wishes to thank Lynne Clare for her work as the alternate representative during TEI’s prior terms.

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Tax Risk Management

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E-auditing: Mexico’s plan

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

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Audits, Tax Risk Management

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Branch mismatches-OECD’s cure

The OECD released a discussion draft on Aug 22 addressing branch mismatch structures, following up its action under BEPS Action 2 re: hybrid mismatch arrangements.  In summary, the draft provides rules that neutralize different legal prescriptions between the branch and head office countries.  It is made clear that taxation at a higher tier structure is not a mismatch, and a secondary rule is also addressed that would address this mismatch at the head office country.

Interested parties should respond with their comments by Sept. 19th.

The EY Global Tax Alert and OECD draft links are provided for reference.

Based on this clear intent, it is imperative for all MNE’s to review all branch structures for current mismatch arrangements to asses the potential impact and future actions, as applicable.  

Click to access 2016G_02575-161Gbl_OECD%20releases%20Discussion%20Draft%20on%20branch%20mismatch%20structures.pdf

http://www.keepeek.com/Digital-Asset-Management/oecd/taxation/neutralising-the-effects-of-hybrid-mismatch-arrangements-action-2-2015-final-report_9789264241138-en#page1

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Tax Risk Management

US: international developments

The US Treasury and IRS released the 2016-2017 Priority Guidance Plan, which highlights intended final regulations re: Sec. 956 for loans to foreign partnerships, and Sec. 367(d) transfers of intangible property to foreign corporations.

Treasury has stated its acknowledgment of concerns re: 385 rules, and intends to address them in rules still going forward for release in several weeks.  These rules are far-reaching (per the current proposed Regulations) and merit immediate attention by tax and treasury practitioners in all MNE’s.  Most importantly, the Sec. 385 rules re: loans/distributions are in addition to the current subjective debt/equity subjective rules and a long history of case law.  Accordingly the impact on documentation should be completed within the next 3 months by all MNE’s.

EY’s Global Tax Alert provides further details on the US international developments.

Click to access EY-are-you-ready-for-your-close-up.pdf

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Taiwan’s new rules: CFC/Place of effective management

Taiwan’s recent amendments to its Income Tax Act provides rules for determination re: Controlled Foreign Corporations (CFC’s) and, most importantly, guidelines for determination of a company’s place of effective management (PEM) in Taiwan.

The PEM rules are becoming more important as MNE’s are arranging board meetings and making strategic directions in locations around the world, and not restricted to an entity’s country of incorporation.  Not restricted to Taiwan, PEM rules should be a strategic focus as its importance is significant, with similar rules being enacted in other countries.  

All MNE’s conducting business in Taiwan should be knowledgeable about these changes going forward, and planning accordingly.

EY’s Global Alert provides details of this development.

Click to access 2016G_02129-161Gbl_TW%20issues%20final%20regs%20on%20cfc%20rules%20and%20place%20of%20effective%20mgmt.pdf

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Tax Risk Management

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US: Country-by-country (CbC) reporting

The US administration has released final regulations on its CbC reporting requirements.  This guidance provides voluntary filing for a 2016 calendar year US MNE, whereas 2017 is the required reporting year, due in 2018.  The OECD has also issued guidance to provide impetus for countries to accept voluntary filings by US MNE’s with IRS, rather than rely solely on its legislation for 2016.  However, this premise should be carefully reviewed, as countries have already enacted legislation and may not wish to change it.

Additionally, the filing period for a US MNE is Sept. 15th for a calendar year taxpayer, accelerating the Dec. 31st date proposed by the OECD.

This guidance will have widespread impact and contains many clarifications that should be  understood prior to collecting data.

Click to access 2016US_01933-161US_Final%20US%20CbC%20reporting%20regulations%20analyzed%20in%20depth.pdf

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OECD, Tax Risk Management

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UK: Be careful what you wish for

As everyone knows, there is alot of uncertainty and doubt about what lies ahead for the UK as they will be leaving the EU, final timeline yet to be determined.

From a tax perspective, the linked EY Global Tax Alert summarily describes foreign exchange issues, alignment with EU court cases and Directives (including country-by-country reporting), ongoing BEPS alignment and conformity, treaty / immigration issues, EU State Aid, VAT and the need for transitional review.

Apart from BEPS, this change will compound the tax (un)certainty of the UK for the near future.

This is an excellent time for legal and operational review of UK operations, ensuring old structures and loans are dissolved, if possible, to mitigate future risks.  All multinationals should align with all stakeholders to face this radical change.  

http://www.ey.com/Publication/vwLUAssets/The_United_Kingdom_votes_to_leave_the_European_Union/$FILE/2016G_01773-161Gbl_UK%20United%20Kingdom%20votes%20to%20leave%20the%20EU.pdfUK

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Tax Risk Management

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US update: 385 rules still in play

The controversial final Section 385 regulations are still being debated, with Treasury focusing on earnings stripping issues, although seemingly has heard valuable comments as to its detrimental effect on physical or notional cash pooling.  Every MNE should have read the proposed Reg’s and educated their treasury and finance functions accordingly, which should be an immediate priority due to its expansive potential effect on treasury, legal and tax structures going forward.  

The US House is set to release its tax blueprint next week, which may become more important if a Republican president is elected with potential reforms again in play.

EY’s Global Tax Alert discusses these topics and some BEPS updates.

Click to access 2016G_01618-161Gbl_Report%20on%20recent%20US%20international%20tax%20developments%20-%2017%20June%202016.pdf

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Australia’s Diverted Profits Tax salvo

The Australian Tax Office (ATO) has recently released a consultation paper re: implementation of a Diverted Profits Tax (DPT); comments are due by 17 June 2016.  Although Australia has taken a long look at the DPT in concert with UK’s quickly enacted provisions, it took a breather while the OECD urged restraint on a far-reaching “tax” that may go beyond the intent of the OECD’s Guidelines.  A link to the paper is provided for reference:

http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2016/Implementing%20a%20diverted%20profits%20tax/Key%20Documents/PDF/Diverted-profits-tax_discussion-paper.ashx

The focus of the paper is summarized in the first sentence: “The Government is strongly committed to ensuring that multinationals pay their fair share of tax in Australia.”

Highlights of the proposal:

  • 40% penalty tax (non-deductible) rate, not offset by another jurisdiction’s tax (30% tax rate if an amended tax return is filed)
  • Subjective determination (i.e. reasonable to conclude)
  • Will not operate on a self-assessment basis
  • Pay first, discuss later philosophy, copying UK’s direction (12-month review period and a right to appeal)
  • Effective for years commencing on or after 1 July, 2017
  • Flow chart appendix
  • Efective for transactions that have an effective tax mismatch test (objective test) and insufficient economic substance (subjective test)
  • Draft guidance will be developed in consultation with stakeholders.

All interested parties should review this consultation paper, and provide comments to the ATO for potential changes.  It is interesting to see that transactions failing the effective mismatch test will be left exclusively with subjective determinations for possible assessments by the ATO without the benefit of dual transparency.  Additionally, the philosophy of assess now and discuss later will not be a mechanism to effectively provide more trust by taxpayers as UK, Australia and other jurisdictions are creating unilateral laws to capture taxes payable on income in other jurisdictions, potentially without the right to access treaties, claim an offset in the other jurisdictions and have access to the full process of appeals prior to payment.  As a result, the incidence of double taxation will increase.

It is hopeful the ATO will consider the comments received, and include changes to the current proposal to enhance transparency and mutuality by all parties.

 

 

 

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Tax strategies: UK transparency

The public transparency of a company’s tax strategies is nearing reality with the advancement of recent updates to the UK’s Finance Bill.

The UK is continuing its leadership objectives in adopting BEPS initiatives, as shown in this latest initiative.

EY’s Global Tax Alert is provided for reference:

Click to access 2016G_00446-161Gbl_UK%20amends%20mandatory%20requirement%20for%20businesses%20to%20publish%20tax%20strategy.pdf

The legislation stipulates that the published tax strategy must cover in relevant, up-to-date detail regarding the:

• Approach of the UK group to risk management and governance arrangements in relation to UK taxation

•Attitude of the group to tax planning (so far as affecting UK taxation)

•Level of risk in relation to UK taxation that the group is prepared to accept

• Approach toward dealings with HMRC

The process of developing the public UK tax strategy should be aligned with the global policy and tax risk framework, especially as other countries look to follow the UK’s lead.  Transparency is the key driver that continues to drive post-BEPS legislation, with no apparent slowdown envisaged.  

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Tax Risk Management

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Risk disclosures: Best Practices

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.

Click to access EY-Rising-to-the-Challenge.pdf

Our ‘acid test’

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?

Viability statement:

  • ►  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?

Business model:

  • ►  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?

Strategy:

  • ►  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 are the key metrics the board uses to measure progress against its strategic objectives?

    ► How has the company performed against these metrics and how are these linked to the remuneration of key executives?

Governance:

  • ►  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.

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SARS service disclosures – Risk review

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.

It is expected that SARS will use the information collated to assess the risk of tax exposures resulting from permanent establishments, transfer pricing, VAT, employees’ tax and potential exchange control violations.

EY’s Global Tax Alert is provided for reference.

Click to access 2016G_CM6317_ZA%20new%20reportable%20argmt%20requires%20urgent%20action%20in%20relation%20to%20inbound%20svs.pdf

Best Practice thoughts for local disclosures:

  • How does HQ/Regional Tax identify local tax (primarily BEPS related) disclosures that require information possibly not known by the local entity?
  • What type of governance/control process exists to ensure important filings are not missed?
  • Are external advisor(s) being relied upon to inform a MNE of all such disclosures?
  • Is a master calendar available for such filings?
  • Who is responsible for identifying new disclosures?
  • Is there a single point of tax contact for such filings?
  • Are internet sites relied on partially/exclusively for updates?

This new disclosure brings Best Practice ideas into action, as such filings are easy to miss if not identified timely.  

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Tax Risk Management

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Vietnam’s risk strategy outlined

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.

Click to access dtt-tax-worldtaxadvisor-160226.pdf

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.

 

 

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CbC Surrogate: A reporting trap!

OECD’s BEPS Action 13 provides for a Surrogate Entity substitution concept if the headquarter jurisdiction of a multinational does not provide for country-by-country (CbC) reporting for the 2016 tax year.  The concept is ideal, if a CbC reporting country considers this Surrogate Entity concept in its legislation.

A review of CbC legislative actions by different countries reveals that such legislation will be inconsistent and will require the multinational to file separate CbC reports in various countries, irrespective of its choice of appointing a surrogate country that has an extensive tax treaty network with exchange of information provisions.  

For example, the legislative language of Spain does not provide for the Surrogate Entity concept, thereby requiring a Finnish (and possibly U.S., dependent on Final Regulations) based multinational to file the 2016 Spanish CbC report in Euros.  One of the Spanish tax authority representatives recently expressed an opinion that no advance rulings/arrangements will be acceptable for CbC Surrogate Entity filing: The law is the law.

Several issues for consideration by a multinational thinking of a Surrogate include:

  • Every country’s CbC adopted legislation will require review to determine if a Surrogate filing is acceptable.
  • For countries that will require a local filing, adoption of such country’s CbC rules will be required re: content, timing, reporting currency, etc.
  • Upon conclusion of the dynamic review, the CbC template may require adaptation for  local filings of countries that have OECD + CbC legislation, adding details beyond those prescribed in BEPS Action 13.   
  • Most countries have penalties (fines/civil/criminal) applicable for failure to file a CbC report.

The definition of a Surrogate Entity, in addition to BEPS Action 13, are included for reference.

Click to access beps-action-13-country-by-country-reporting-implementation-package.pdf

The term “Surrogate Parent Entity” means one Constituent Entity of the MNE Group that has been appointed by such MNE Group, as a sole substitute for the Ultimate Parent Entity, to file the country-by-country report in that Constituent Entity’s jurisdiction of tax residence, on behalf of such MNE Group, when one or more of the conditions set out in subsection (ii) of paragraph 2 of Article 2 applies.

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OECD / UN, Tax Risk Management

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Poland’s GAAR: “Artificial”

The comment period, that ends 20 January, will be followed by an introduction of a general anti-avoidance rule (GAAR) that is broad and subjective in nature.

The Proposal defines tax avoidance as an act (or series of acts) applied in order to receive a tax benefit, which in certain circumstances defeats the object and purpose of the tax act, provided the way of conduct in the particular case was artificial. The determination of an artificial arrangement is further elaborated on via examples, including unjustified split of an operation, involvement of intermediary entities without substance, and a measure of economic vs. tax risk, among others.

This measure should be followed closely, as it can be applied very broadly, inconsistently and subject to the tax administration’s view of what is considered “artificial.”  It also is focused on the use of holding companies without substance.  EY’s Global Tax Alert provides further details on this development.

Click to access 2016G_CM6150_Polish%20Gov%20publishes%20draft%20amendments%20to%20Tax%20Code%20including%20new%20GAAR%20provision.pdf

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