Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

UK’s Large Business Compliance Consultation: TEI’s comments

Tax Executives Institute (TEI) has provided practical and insightful comments in response to UK’s Large Business Compliance Consultation by HMRC, which is far-reaching.  A link to TEI’s comments is provided for reference:

Click to access TEI-Comments-UK-Public-Consultation-Improving-Large%20Business-Tax-Compliance-FINAL-to-HMRC-14-October-2015.pdf

Key points:

  • The Consultation is focused on UK HQ companies, although the proposals also apply to non-UK based multinationals (MNE’s).
  • The underlying principle is unclear, especially for non-UK based MNE’s, and should be amended accordingly.
  • A separate UK tax strategy is an unrealistic expectation for most MNE’s, and will provide little relevance if enacted.
  • A UK Code of Practice is also unrealistic for MNE’s.
  • UK taxes, paid or accrued, generally bears little relevance to the global effective tax rate and is not relevant.
  • UK’s current tools of general anti-avoidance rules (GAAR), Senior Accounting Officer (SAO) tax framework, newly enacted Diverted Profits Tax, a Customer Relationship Manager (CRM) and other anti-abuse rules are already in place and would seem to remedy HMRC’s concerns.
  • Special measures are subjective and not subject to a formal independent panel for review prior to execution.
  • Board-level accountability may not be practical, while the SAO framework may accommodate this proposal.
  • Signing, or not signing, the Code of Practice should not be a trigger for public disclosure or risk assessment.
  • The Code of Practice includes determinations that transactions meet the intent of Parliament, an inherently subjective test that may be applied at will regardless of the law.

The tax transparency see-saw has now tilted to a dangerous level, in that transparency objectives no longer seem to meet the needs of tax authorities.

Information is being requested to satisfy presumed needs of the public and tax administrations, although similar efforts are not being made to have discussions with taxpayers to better understand tax risk and the relevant functions, assets and risks for which transfer pricing should be based in the relevant jurisdiction.

The UK proposal, and similar initiatives, may indeed erode the trust for which the tax authorities are seeking.  It would be a novel concept to include the business community in discussions around these proposals prior to drafting, a welcome initiative that would better represent a win-win opportunity.  Additionally, all audits should begin with a formal understanding of the transfer pricing practices of the MNE in that jurisdiction to focus tax queries accordingly and efficiently.      

As the UK Diverted Profits Tax model has strayed from the OECD’s intent re: the BEPS Action Items, it has nonetheless been followed by other countries.  This proposal may have a similar result, magnifying the concern of MNE’s and merits a detailed review by all MNE’s irrespective of UK business presence.

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Tax Risk Management

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CTO Best Practices

KPMG’s Chief Tax Officer (CTO) Insights provides Best Practices for improving relations with key stakeholders, including sample metrics that are a valuable working tool.

Click to access CTO_%20Insights_Issue%20Spotlight_Oct15.pdf

Key points:

  • Regularly scheduled meetings should be scheduled.
  • Individualized dashboards should be presented for different stakeholders.
  • A Tax Value Report should be presented once or twice a year, including important metrics as cash tax savings, cash flow processes and people initiatives.
  • An on-boarding program for new stakeholders should be developed.
  • Sample metrics may include
    • Number of audits
    • Tax rates/effective tax rates/cash tax rates– Benchmarks relative to peers

      – Country-specific for global operations

    • Various internal measures regarding risk management
    • Provision-to-return changes
    • Tax exposures and tax opportunities
    • Partnering with the business

    Similar to a tax risk framework that is shared with the larger business and finance leaders, a CTO’s Best Practice tools provide win-win opportunities to interact with key stakeholders and provide assurance for the importance, and recognition, of the tax function in a multinational organizaiton.

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Tax Risk Management

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BEPS: Indirect tax impact

EY’s Global Tax Alert highlights the indirect tax consequences resulting from final guidance of the BEPS Action Items:

Click to access 2015G_CM5836_Indirect_OECDs%20recommendations%20on%20BEPS%20project%20has%20wider%20indirect%20tax%20implications.pdf

Key observations:

  • Interaction of Article 1 (Digital Economy) and Article 7 (PE) may create a wider gap for findings of a indirect tax “fixed establishment” and a direct tax “permanent establishment” (PE), although some countries do not respect such distinction.  Thus , business models merit a review for such changes.
  • Article 8 (Intangibles) set forth changes in allocation and valuation that may affect customs valuations.
  • Actons 8-10 (transfer pricing) may invite additional focus by tax authorities on VAT/GST and customs.
  •  Action 13 (country-by-country reporting) may invite scrutiny of indirect taxes.

The focus of BEPS has been on direct taxes, while its impact will now be measured for purposes of indirect taxes.  Thus, a BEPS review should encompass direct and indirect tax effects, including VAT/GST and customs.  

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OECD, Tax Risk Management

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UK’s CbC Draft Regulations: accuracy check by HMRC

HMRC has provided a technical consultation and explanatory memorandum for new regulations of UK’s country-by-country (CbC) reporting.  Comments are due by 16 Nov. 2015.  A link is provided for reference:

https://www.gov.uk/government/publications/technical-consultation-country-by-country-reporting

An interesting, and debatable, provision is Section 9 of the technical consultation, Provision for information, which is copied herein.  To the extent that a company is considered a “reporting entity,” the provision provides for a request of information, that may reasonably be required, (within 14 days in a form specified by HMRC) to substantiate the accuracy of the CbC report.  

On the heels of the OECD release of the Action Items, including Action 13 CbC reporting, HMRC has released this documentation for consultation.  However, Section 9 may be far-reaching in that there is no transparency into the intent of HMRC or purpose of such potential request.

For example, does this exercise include the accuracy of all entities included in the CbC report?  What type of documentation would be requested, and in what form?  Should the request be limited to UK entities only?  If there are potential inaccuracies in countries other than the UK, what happens then?  What transparency is provided for this process?  Will this request be reviewed prior to informing the taxpayer?  Will such review be shared with other countries?

This provision seems to be far-reaching, and could be followed by other countries.  Therefore, it is paramount that all multinationals monitor such developments, as this will significantly increase complexity.

Provision of information

9.—(1) An officer of Revenue and Customs may, by notice in writing, require a reporting entity to provide the officer with such information (including copies of any relevant books, documents or other records) as the officer may reasonably require for the purposes of determining whether information contained in a country-by-country report filed by that entity is accurate.

(2) A notice under paragraph (1) may specify or describe the information to be provided.

(3) Where a person is required to provide information under paragraph (1), the person must do so—

  1. (a)  within such period, being no less than 14 days; and
  2. (b)  at such time, by such means and in such form (if any),

as is reasonably specified or described by Revenue and Customs.

Category:

OECD, Tax Risk Management, Transfer Pricing

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EU Customs Code changes: time to act

EY’s Global Tax Alert highlights important changes to be introduced by the EU Customs Code.

Click to access 2015G_CM5815_Indirect_Implementation%20of%20EU%20Customs%20Code%20to%20bring%20substantial%20changes%20to%20customs%20valuation.pdf

Key points:

  • First Sale for Export rule abolished, although some planning opportunities exist in the short-term.
  • Bonded warehouse transactions are somewhat unclear.
  • Royalties, license fees and trademark intangible transactions are undergoing major changes.

As the OECD is preparing to issue final Guidelines for the BEPS Actions tomorrow, it is a critical time to ensure that tax and customs practices for multinationals are integrated in their operations while sharing Best Practices and learning how the international tax world is being transformed.  

The EU Customs Code changes merit immediate review for planning opportunities, as well as time to change systems accordingly for the new rules.

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Tax Risk Management, Transfer Pricing

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Spain’s tax law changes

Spain’s tax law changes have been published, effective as of October 2015.

Click to access 2015G_CM5807_Spain%20amends%20its%20General%20Tax%20Law.pdf

Key observations:

  • The Law introduces a new penalty for a specific anti-abuse provision in cases for application of GAAR.
  • The statute of limitations period of CIT years in which an entity has generated losses and tax credits has been extended from 4 years to 10 years. The Law now extends this provision to all other taxes.
  • Duration of an audit has been extended from 12 to 18, or 27, months.
  • A Statute of Limitations period of 10 years has been established for EU State Aid cases.

As new penalties are being legislated, in Spain and elsewhere, for subjective provisions in the tax law it is becoming mandatory to assess such provisions in the tax planning stages for significant transactions.  This is especially true when the subjective interpretations of GAAR, and the tax authorities, are inherently uncertain and potentially leading to double taxation.

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Tax Risk Management, Transfer Pricing

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New age of transparency / reputational risks

The latest EY tax risk and controversy survey series, entitled A new mountain to climb, provides some insights re: preparing for and proactively management tax / reputational risks.  A link to the report is provided for reference:

Click to access ey-managing-tax-transparency-and-reputation-risk.pdf

Key observations:

  • Media coverage of how much companies pay in tax / low effective tax rates is extensive, although engaging with the media is seen by many companies as a “no-win” situation.
  • Leading companies have transformed  the process of communication for tax risks and controversy to internal and external stakeholders.
  • Transparency is providing information to tax authorities re: how much tax is being paid in other jurisdictions as a tool to decide if the company is paying enough tax in their jurisdiction.
  • Global disclosure and transparency requirements will continue to grow in the next two years.
  • Transparency readiness of companies is a significant and underestimated need.
  • Direct ERP access by tax authorities represents a next phase of risk assessment.
  • Transparency readiness can help mitigate reputation risk.
  • Reputation risk strategy elements:
    • Actively monitor the changing landscape.
    • Assess readiness/desire to respond.
    • Enhance communication with internal and external stakeholders.
    • Gain insight into the total tax picture through the lens of public perception.
    • Decide with whom the company wishes to communicate.
    • Embed reputation risk thinking into core business strategy.
  • Transparency is the new norm, and (media) reputation risk may be a permanent risk.

Transparency demands have created a new toolbox required by all multinational organisations.

A tax policy and reputation risk strategy should be essential tools in a comprehensive tax risk framework.  The EY report is required reading for all parties interested in learning more about tax risk trends and Best Practice ideas to proactively address the new world of transparency.

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Tax Risk Management

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US CA relief: LOB / BEPS focus

The IRS issued Rev. Proc. 2015-40 recently, and this EY summary provides details re: the Limitation on Benefits (LOB) provisions for granting competent authority assistance.

The new rules highlight rules focusing on recent proposals for the US Model Tax Convention as well as the intent of BEPS re: “special regimes.”

Click to access 2015US_CM5749_US%20IRS%20releases%20revised%20procs%20for%20obtaining%20assistance%20from%20US%20CA.pdf

These changes are critical to resolving issues, and the impact of double taxation, accompanying an increasing trend in foreign tax adjustments.  This new procedure will become more visible as more countries implement BEPS guidelines via unilateral legislation and adoption of the OECD multilateral instrument.

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Tax Risk Management

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French EU dividend tax: refund opportunity

EY’s notice provides details re: an opportunity to receive a refund of the 5% French tax for dividends received from EU subsidiaries.  The French rule was not consistent with the freedom of establishment principle of EU law.

A refund of such French taxes can be filed for taxes paid within the last two years. 

The 3% dividend tax for dividend distributions by a French parent to a non-EU subsidiary, versus intra-group French dividends, may encounter discrimination challenges due to its dissimilar application.

Accordingly, protective refunds should also be considered re: the French 3% dividend tax and similar EU  unilateral legislative provisions to ensure potential opportunities are not lost due to timing as to when the taxes were paid.  

Click to access 2015G_CM5739_CJEU%20holds%20French%20taxation%20of%20EU-source%20dividend%20incompatible%20with%20EU.pdf

“On 2 September 2015, the Court of Justice of the European Union (CJEU) rendered its decision on the Steria case, relating to the French taxation of dividends from European Union (EU) subsidiaries. The CJEU ruled that fully exempting dividends received from French, tax consolidated subsidiaries, but including a 5% fraction of dividends received from EU subsidiaries in the French taxable income, amounted to a discrimination infringing the freedom of establishment.”

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Tax Risk Management

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BEPS TP & CbC reporting: EY Survey

EY’s survey of nearly 100 jurisdictions provides timely insight into unilateral activities and required legislative efforts to implement OECD BEPS Actions 8-10, transfer pricing guidelines, and Action13, transfer pricing documentation / country-by-country (CbC) reporting.

A link to the survey is provided for reference:

Click to access EY-country-implementation-of-beps-actions-8-10-and-13.pdf

Key observations:

  • OECD TP Guidelines:
    • 7 countries (including the UK) to adopt the changes without need for legislative/administrative action
    • 54 countries refer to OECD TP Guidelines by tax authorities/courts for interpretation, but are not binding
    • 21 countries refer to OECD TP Guidelines in domestic legislation
  • TP Guidelines are meant to be an extension of the Commentary to the arm’s length principle in Article 9; if the revised Guidelines go beyond such rules a change in existing treaties will be required for implementation, although the multilateral instrument in development under Action 15 may remedy this
  • Tax authorities have used BEPS initiatives for leverage in Australia, Spain, Hungary, New Zealand, Finland, Indonesia, France and India
  • TP and CbC documentation may be provided as an exchange of information if they are “foreseeably relevant”
  • Legislative action will be required in most countries with current TP legislation to implement Master / Local File requirements
  • Most countries will require a change in law for CbC reporting; 38 countries are/will have such implementation legislation, 49 countries are not yet known, while only 11 countries are not expected to implement in the short/medium term
  • CbC information will be widely exchanged via exchange of information articles in double-tax treaties, tax information exchange agreements or Article 6 of the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (and the corresponding Multilateral Competent Authority Agreement)

The survey is a “must read” for interested parties that will be affected by OECD Actions 8-10 and 13; it magnifies the imperative of collecting such information timely and is not dependent on which countries adopt certain provisions the first year (as information will be exchanged quickly around the world regardless of which jurisdiction the parent entity resides in).

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Tax Risk Management

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Tax disclosure framework: Map to transparency

KPMG has engaged with several UK headquartered multinationals to address how to proceed with future, and dissimilar, demands for transparency.  Although focused on UK based organisations, the framework promotes valuable Best Practices that can be used globally.  A link to the insightful article is provided for reference:

Click to access developing-a-common-frameword-for-disclosing-tax-information.pdf

Five themes for a tax disclosure framework:

  1. Strategy/policy and approach to tax
    1. Tax policy
    2. Tax planning and risk approach
    3. Engagement with tax authorities
  2. Tax risk governance
    1. Link between tax strategy and governance
    2. Tax compliance and tax risk monitoring
    3. Non-compliance governance tools
  3. Business model
    1. Overview, including tax attributes for effective tax rate and cash taxes
    2. Transfer pricing overview
    3. Operations in low tax jurisdictions
  4. Tax contribution
    1. Data/narrative re: sales, profits and taxes paid
    2. Types of taxes paid and use of a company’s profits
  5. Specific information related to material issues
    1. Tax losses/carryovers
    2. Tax incentives/holidays
    3. Material items, such as pension contributions

The above issues exemplify the difficulty in developing a comprehensive framework, or flexible tool, to meet the varying transparency demands resulting from OECD, EU and UN guidelines and unilateral legislation efforts around the world.

The most important point is that the timing for the thought processes for a tax disclosure framework is now; there are no signs of the demand for tax transparency diminishing.

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Tax Risk Management

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Reputation risk: are you ready?

EY’s article highlights the importance of planning a proactive risk strategy re: reputation risk.  A link to the article is provided for reference:

http://taxinsights.ey.com/archive/archive-articles/six-actions-that-help-you-mitigate-reputation-risk.aspx

Key observations:

  • Six distinct actions
    • Actively monitor the changing landscape
    • Assess readiness/desire to respond
    • Enhance communication with stakeholders
    • Drill into the details to prepare the total tax picture
    • Decide on whom communication is  to be established
    • Embed reputation risk into daily business strategy
  • Questions for self-assessment, gleaned from this topic:
    • Who monitors media coverage of the company
    • Who monitors social media channels re: the tax function
    • Who monitors new tax disclosures to assess trends and new compliance requirements
    • Is the tax structure transparent re: taxes paid by country
    • Do profits and taxes paid align?  If not, rationalize the gap
    • Who follows tax litigation in each jurisdiction
    • Is the (tax) risk officer aligned with tax strategies
    • Are Board members aware of new documentation requirements to assess tax strategy around the world
    • Has the legal team been educated on BEPS actions and related company strategies
    • Is there a metric to measure reputation risk
    • What new disclosures are taking place
    • Will the company address questions from the public
    • Should more tax information be disclosed to mitigate reputation risk
    • What information is shared with investors; does the current process need to be reviewed
    • Is tax risk an element of every new business initiative/strategy
    • What functions are aware of BEPS and the changing landscape

This article is a snapshot for an increasingly important risk: a company’s reputation.  As new tax disclosures emerge around the world, interrelated with Board awareness and acknowledgment, it is imperative that the subject of reputation risk is addressed as an immediate priority by all companies.  As soon as there is damaging press, truthful or not, it may be too late to respond.

This subject is also of importance for tax administrations: tax information is confidential and technical areas may be unclear, thus a company’s rights should be protected while an issue is raised, investigated and ultimately resolved.  The tax administration’s reputation risk is also of paramount importance, as it looks to increase trust and establish an understanding of a company’s functions, assets and risks within the relevant jurisdiction.

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Tax Risk Management

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Tax risks: Audit committee perspective

Deloitte’s Audit Committee Brief includes a summary and questions outlining Risk oversight and Tax considerations for audit committees.  A link to the publication is provided for reference:

Click to access ACBrief_NovemberDecember2014.pdf

Key observations:

  • Audit committees may have a risk committee (Will this be a continuing trend?)
  • Tone at the top is imperative for effective risk oversight
  • Insightful questions for consideration:
    • What internal controls are in place to address significant tax risks?
    • Is there a clear approach and justification for where risk issues are placed?
    • Is there a widely communicated process to quickly bring risk-related issues to the Board?
    • What issues should the audit (risk) committee be aware of when evaluating potential risks?

Risk governance is rapidly becoming the new norm, both by tax administrations to understand and rate risks of a taxpayer as well as an effective tax risk policy and framework for a multinational to identify and mitigate risks.  This trend will require additional resources to fulfill such commitments, immediately and ongoing.  

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Tax Risk Management

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Angolan TP documentation penalty: Lessons learned

The Angolan transfer pricing documentation submission deadline was 30 June 2015 re: tax year 2014 for large taxpayers.  EY’s publication provides details on the recent enforcement penalties, including business limitations and reputational risk considerations notwithstanding the insignificant penalty amount for late filing.

Click to access 2015G_CM5706_TP_Angolan%20TAs%20apply%20penalties%20for%20failure%20to%20file%20TP%20documentation.pdf

Key observations / lessons learned:

  • Insignificant monetary penalties due to non-filing or incomplete transfer pricing documentation may be a consideration in modifying a standard OECD documentation template based on cost/benefit.  However, other factors that may be ignored in this analysis may have more inherent risks for consideration.
  • Business and reputational risks should be an essential input for filing complete, and accurate, transfer pricing documentation.  As countries seek to individualize such documentation, this task is more timely and costly, although ignoring such nuances may prove to be damaging.
  • In Angola, the list of non-compliant taxpayers are provided to the National Bank of Angola (via requirements of a Presidential Decree).  Accordingly, inclusion on this list may limit foreign exchange transactions ongoing.

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Tax Risk Management, Transfer Pricing

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ATO interim report: Corporate tax avoidance

The Senate Economics References Committee has published its interim report entitled “Corporate tax avoidance.”  Part I, “You cannot tax what you cannot see” provides an excellent frame of reference for the discussions therein.

It is worthwhile noting that there is a section “Government Senators’ Dissenting Report” expressing concerns about some recommendations therein; this should be a additional warning sign of the recommendations put forth.  Conversely, there are “Additional Comments from the Australian Greens” fully supporting the report in its entirety.

The final report is due in November 2015, although this interim release provides an indication of the thought trends currently in process by the Australian Tax Office (AT0).  A link to the report is provided for reference:

http://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/Corporate_Tax_Avoidance/Report_part_1

Key observations:

  • 17 recommendations provided addressing (1) evidence of, and multilateral efforts to combat, tax avoidance and aggressive minimization, (2) multilateral actions to protect Australia’s revenue base, and (3) capacity of Australian government agencies to collect corporate taxes.
  • Australian government to work with other countries having significant marketing hubs to improve the transparency of information
  • Australian government continues to take the load re: OECD BEPS initiatives; international collaboration should not prevent the Australian Government from taking unilateral action
  • Mandatory tax reporting (transparency) code
  • Existing transparency laws to be identical for private and public companies
  • Public register of tax avoidance settlements reached with the ATO
  • Public excerpts from the Country-by-Country OECD reports, based on the EU’s standards
  • Annual public report on aggressive tax minimization and avoidance activities
  • Section 3.95 discusses a novel concept: “Effective tax borne” effective tax rate formula, a metric that seeks to reflect all of the channel profit derived from business activities involving Australia and the Australian and global tax paid on that channel profit.  Appendix 3 provides additional rules for application of this formula, noting that there has not yet been a consultation with taxpayers or other stakeholders.  The metric envisions that the entire supply chain profit is a profit of the economic group arising from Australian business activities (i.e. intercompany purchases of goods and services from offshore related parties).  Numerator is either the Australian tax paid on business activities by the economic group, or the global tax paid by such group.  Denominator is the total economic profit from business activities which are linked to Australia.  Withholding taxes of economic group profit are includable, whereas royalties and excises are not.  Numerous rules apply for intercompany adjustments.

Australia is still recognized as a leader in the pursuit of the BEPS objectives, using transparency as a weapon to fight ensuing battles.

This report not only extends the strong cry for public disclosure of tax information, it suggests a new concept to examine the effective tax rate of jurisdictions having activities with an Australian related party.  However, it is hopeful the envisaged complexity, cost/benefit and technical nuances of the “effective tax borne” concept are presented to stakeholders with enough time to review, plan and adjust/eliminate the final recommendation accordingly.

As Australia leads, many others follow.  This report is required reading for all interested parties, as the ideas presented have a high probability of appearing in other jurisdictions in a similar form and formulating the same intent for transparency.

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Tax Risk Management, Transfer Pricing

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