Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

ATO Practice Statement: Tax benefits/avoidance & GAAR

The Australian Tax Office (ATO) has issued a very interesting Practice Statement Law Administration.  It is an informal policy document for which interested parties should submit comments by 25 September.  The Statement is a lengthy document, citing case law, that is very worthwhile reading, as Australia continues its proactive efforts driving change in the international tax arena.

Although informal, taxpayers can rely on such guidance for protection from interest and penalties.  A copy of the Statement is provided for reference:

http://law.ato.gov.au/atolaw/view.htm?docid=%22DPS%2FPSD200524%2FNAT%2FATO%2F00001%22

Key observations:

  • A general anti-avoidance rule (GAAR) cannot be applied before a determination by the Tax Counsel Network (TCN).
  • A GAAR decision is generally referred to a GAAR Panel (an independent advisory body) before a final decision is made.
  • The taxpayer may be invited to attend a Panel meeting to assist the deliberative process.
  • Concepts of a tax scheme and a tax benefit are discussed.  A tax benefit inclusive in Part IVA, the GAAR provision relates to: an amount not included in income, an allowable deduction, a capital loss, a tax loss carry back, a foreign income tax offset or withholding tax.
  • An alternative hypothesis” or “alternative postulate” identification is discussed; what would have happened or might reasonably be expected to have happened if the particular scheme had not been entered into or carried out.
  • It is for the court to determine objectively what alternative would have occurred if the scheme had not been carried out.
  • Arguably, there is no longer a test of reasonable exception, based on Parliament’s intention in enacting the Amendments.
  • Warning signs that GAAR may apply (which ATO must consider) are established:
    • Arrangement is out of step ordinarily used to achieve the commercial objective,
    • Arrangement seems more complex than necessary,
    • Tax result does not conform to the commercial or economic result,
    • Arrangement is low risk where significant risks  would normally apply,
    • Parties are operating in a non-arm’s length manner, or
    • Gap between substance and legal form.
  • Penalties are applicable.
  • Division 165 (a GST GAAR rule) is discussed, including permanent and timing differences.
  • A “dominant purpose” test is applicable for the GAAR and the GST provisions, with different factors includable in each.

The above provisions attempt to conceptualize objective factors for an inherently subjective GAAR determination.  As additional GAAR’s are introduced around the world, each applying a different level of subjectivity, the Statement is helpful in understanding the rationale and intent of the ATO.

Tax planning post-BEPS will require additional GAAR documentation for significant transactions, thereby requiring tax to be involved early in the discussions to understand the business intent and alternatives considered.

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Tax Risk Management

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China – Tax risks re: outbound payments

The State Administration of Taxation (SAT) has focused its risk determinations for outbound payments.  Supplementing this focus, the State Tax Bureau of Zhejiang Province (Zhejiang STB) recently issued its Guideline for Administration of Tax Risks on Outbound Payments to Overseas Related Parties.

PwC’s Business Advisory provides details of this new focus on tax risk:

Click to access 635731620115472907_chinatax_news_jul2015_33.pdf

Key observations:

  • Incentivized by BEPS Acton Plans, and local tax practices
  • Six tests for profit shifting/base erosion:
    • Authenticity
    • Necessity
    • Benefit
    • Value creation
    • Duplication
    • Remuneration
  • Required relevant information  during record-filing for outbound payments

The timeliness of providing contemporaneous transfer pricing documentation, subjective tests for assessment of benefit / value for intercompany services, varying interpretations of internal guidance and lengthy appeal processes are becoming more common, evidenced by this recent focus by China and followed in many other jurisdictions.

The additional focus has introduced additional uncertainty, as well as less consistency, in jurisdictions around the world.  However, the concept of simultaneous corresponding adjustments are generally not addressed in such initiatives, thereby increasing the level of double taxation for MNE’s.

A Best Practice approach will require additional resources focused upon such efforts, as the probability of double taxation increases exponentially.

 

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Tax Risk Management, Transfer Pricing

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CbC Bank Reporting Review: EU Parliament Group

This is a valuable insight into the use of country-by-country reporting, based on a report of 26 EU-based banks.  Although the reporting criteria is based on the Capital Requirements Directive IV (CRD IV), the interpolations and extrapolations indicate the trend by which such reports could be used, especially when viewed in isolation by recipients in the public domain.

A link to the report is provided for reference:

Click to access CRDivCBCR2015.pdf

Key observations:

  • The reporting was used to test the hypothesis that profits were overstated in low tax/offshore jurisdictions, with understatement of profits in base country or major operating locations.
  • Unitary tax reporting/allocation was used to determine the likelihood that there was base erosion and profit shifting.
  • Four methods of assessing profit shifting were used to provide an overall ranking.
  • If existing Directive is used, it should be used consistently across all EU jurisdictions.
  • Turnover should include intra-group sales  with reconciliation to reported group turnover.
  • The OECD’s template should be considered as an alternative reporting tool. 
  • Formulary comparisons are measured and used to reapportion the profits.

This report is indicative of conclusions that may be drawn, although data is incomplete and inconclusive, from a table of reported amounts in various jurisdictions.

Most importantly, the group utilized formulary apportionment to derive an expectation of profit levels among various jurisdictions.

Accordingly, all interested parties should review this report as the OECD is nearing completion of the BEPS Action Plans and CbC reporting.

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Tax Risk Management

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Chile: Treaty Requirements

Chile’s Internal Revenue Service (IRS) recently issued Resolution No. 48, prescribing rules for eligibility from a tax treaty including a sworn statement from the resident country beneficiary.

EY’s Global Tax Alert provides the relevant details:

Click to access 2015G_CM5654_Chile%20issues%20guidance%20on%20statement%20required%20to%20benefit%20from%20a%20Tax%20Treaty.pdf

Key observations;

  • A certificate of residence is required to be issued by the Competent Authority of the recipient jurisdiction.
  • A sworn / notarized statement must be provided, with the statement date requiring conformity with the month in which amounts are paid.

Failure to provide the requisite documents will allow the IRS to collect the amounts that should have been withheld, absent treaty benefits, in addition to fines.

Countries are placing formalistic and dissimilar requirements to receive treaty benefits, thereby requiring advance planning and awareness of treaty eligibility.  Such mechanisms continue to add to the international tax complexity for obtaining tax treaty benefits.

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Tax Risk Management

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European Parliament urges CBCR public transparency

The European Parliament adopted a resolution to tackle tax avoidance and tax evasion via transparency measures to ameliorate limited resources of tax administrations.  A summary and full content of the proposal are referenced herein:

http://www.europarl.europa.eu/oeil/popups/summary.do?id=1396472&t=d&l=en

http://www.europarl.europa.eu/sides/getDoc.do?type=TA&language=EN&reference=P8-TA-2015-0265

Key observations:

  • Publish country-by-country reporting (CBCR) template as part of annual reporting; The European Commission is to provide a legislative proposal to amend the Accounting Directive accordingly.
  • Establish a consistent definition of “tax havens” by the end of 2015.
  • Provide a blacklist of countries that do not combat tax evasion or that accept it.
  • New treaties with developing countries should tax profits where value is created.
  • EU Member States should agree on a Common Consolidated Corporate Tax Base (CCCTB).
  • The EU should be taking a leading role to combat tax havens, tax fraud and evasion, leading by example.
  • Beneficial information should be public; the Financial Action Task Force’s (FAFT) anti-money laundering recommendation is a minimum.
  • Public scrutiny of tax governance and the monitoring of tax fraud cases; protect whistleblowers and journalistic sources.
  • Transition period for developing countries to adopt the Automatic Exchange of Information mechanism.

These initiatives are accelerating the focus and intent for public tax disclosures in the very near future.

Most importantly, inclusion of the CBCR template as required documentation of annual reporting will automatically accelerate the due date for completion of such information.  Thus, the year-end 2017 timeline proposed by the OECD will give way to this proposal and similar unilateral actions.

Category:

OECD, Tax Risk Management

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Tax Risk Training: Tax Risk Framework element

As tax authorities, most recently Australia and UK, place added focus on a tax risk framework and providing evidence of diligence re: such procedures, it is critical that new financial leaders receive tax risk training upon entering an organization as well as a review on a recurring basis.  The training should also be reviewed and updated annually for new developments.

Examples of topics for discussion:

  • Beneficial ownership & disclosures (coordinated with Treasury Know Your Customer perspective)
  • Permanent Establishment (PE)
  • General Anti-Avoidance rules (GAAR)
  • Transfer pricing methodologies, internal governance procedures
  • Transfer pricing documentation process
  • BEPS governance strategies
  • Financial statement tax reserve criteria and timing
  • Interrelationship of domestic law and double tax treaties
  • Tax policy
  • Elements of tax risk framework
  • Tax audit protocol
  • Tax audit methodologies
  • Customs / Transfer pricing coordination
  • BEPS Country-by-Country report, future trends

The training generally provides additional awareness, thereby mitigating tax risk exposures and providing a win-win opportunity that cascades across the organization.

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Tax Risk Management

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Brazil: Tax loss offsets / new tax return disclosures

The Brazilian government has announced two new programs:

  • Use of tax losses to offset currently disputed Federal tax liabilities
  • Disclosure of tax planning structures that avoid, reduce or postpone taxes; such measures are meant to improve relationships between tax authorities and taxpayers.  This requirement is also meant to align with the OECD BEPS guidelines.  For planning structures implemented in 2014, disclosure is due by 30 Sept. 2015.  

Click to access 2015G_CM5636_Brazil%20uses%20tax%20losses%20to%20encourage%20cos%20to%20settle%20disputed%20tax%20liabilities.pdf

Additional disclosures and initiatives, aligned with BEPS guidelines, will be introduced in legislation by other countries, resulting in additional diligence requirements to avoid penalties.  Tax governance is becoming increasingly difficult and complex, underpinned by dissimilar compliance demands of each country.

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Tax Risk Management

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UK risk proposals: Public tax strategy, Voluntary Code of Practice and Special Measures

HMRC has issued consultation documents proposing requirements to publish a “tax strategy,”, voluntary Code of Practice corporate tax processes and creation of a “special measures” regime.  Comments are due by 14 October 2015 for each Consultation document.

These proposals follow closely upon the heels of the ATO issuance of Best Practice methodologies addressing a taxpayer’s tax risk.

Three documents are provided for reference: (1) A Clifford Chance Briefing note, (ii) HMRC’s Consultation document for Improving Large Business Tax Compliance and (iii) HMRC’s Consultation document on Strengthening Sanctions  for Tax Avoidance.

http://www.cliffordchance.com/briefings/2015/07/mandatory_tax_strategiesacodeofpracticean.html

Click to access Improving_Large_Business_Tax_Compliance.pdf

Click to access Strengthening_Sanctions_for_Tax_Avoidance_-_A_Consultation_on_Detailed_Proposals.pdf

Executive brief:

  • Public availability of a company’s tax strategy (financial penalty for non-disclosure) including:
    • Tax internal governance arrangements
    • Risk management approach
    • Tax planning attitude and tax risk appetite, including affirmation that it aims to satisfy the spirit, as well as the letter of the law
    • Attitude to relationship with HMRC
    • Target UK effective tax rate (if applicable), and what measures are being taken to achieve it
  • Voluntary Code of Practice, including affirmations that:
    • Tax planning is consistent with the economic consequences
    • Transactions provide a tax result that is in accordance with the intentions of Parliament: “HMRC will consider a purposive construction of the legislation, and will also consider whether Parliament can realistically have intended to give the proposed result in circumstances that are very different from those that prevailed at the time”
    • Transparent relationship is maintained with HMRC
    • Tax obligations are met
    • Early dialogues for engagement with HMRC to discuss tax planning, strategy, risk, significant transactions and full disclosure of areas providing significant uncertainty
    • Objective evidence is provided to HMRC that decisions with tax implications have been approved by a senior decision maker
  • Special Measures for companies entering into aggressive tax planning / failing to transparently engage withHMRC, including:
    • Providing all documentation (including third party tax advice) related to tax
    • Refusal to provide non-statutory clearances
    • Public naming
    • Automatic 100% tax penalties

Observations in the Documents:

  • Attitudes to tax avoidance and aggressive tax planning have altered significantly, including political interest
  • Intention is to create Best Practices
  • The Government is awaiting the EU Tax Transparency Package consultation, and will consider its findings carefully
  • Proposal is separate from the current SAO regime, as well as the OECD’s country-by-country reporting guidelines
  • A company could be required to state in their tax strategy whether they are a signatory to the Voluntary Code of Practice
  • Non-publication of a tax strategy will be a consideration of HMRC’s tax risk reviews
  • Evidence of “governance in action” to be provided
  • Voluntary Code of Practice is aimed at tax planning that crosses over into tax avoidance
  • The company should reasonably believe that transactions give a tax result which is not contrary to Parliament’s intentions
  • Special measures will remain for a minimum of 2 years

A higher standard of tax excellence is being demanded by public pressures and tax administrations in the form of an objective tax risk framework overseen at the Board level and subject to internal control testing.  HMRC’s proposals are being followed by other countries worldwide, and similar measures would not be unexpected in other jurisdictions.  Accordingly, all interested parties should review the documents, and provide comments thereto.

 

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Tax Risk Management

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ATO Tax Risk Guide: Board is an integral player

The Australian Tax Office (ATO) has issued comprehensive and detailed rules addressing requirements for a formal tax risk framework, from which a taxpayer’s risk will be measured.  The guidance includes a tax risk management and governance review guide, in addition to appendices for control testing and directorship responsibilities. The risk guide is focused upon Board and Managerial level responsibilities. EY’s Global Alert and ATO’s tax risk guide and appendices are provided for reference:

Click to access 2015G_CM5625_AU%20TO%20issues%20new%20guidelines%20on%20tax%20corporate%20governance.pdf

https://www.ato.gov.au/business/large-business/in-detail/key-products-and-resources/tax-risk-management-and-governance-review-guide/#Boardlevelresponsibilities

https://www.ato.gov.au/business/large-business/in-detail/key-products-and-resources/tax-risk-management-and-governance-review-guide/?anchor=Directorshipresponsibilities#Directorshipresponsibilities

Key actions:

  • Express requirements for Directors
  • Mandatory self-assurance processes for tax governance for which the ATO may rely in assessing risk
  • A lack of requisite tax controls will affect the risk rating
  • Board controls:
    • Formalized tax control framework (Tax strategy document and policies endorsed by Board of Directors)
    • Formalises company director roles / responsibilities for tax risk management
    • Formal evidence of tax risk review and familiarity with tax risk matters
    • Periodic internal control testing, including senior management’s attestation / formal board review of the testing results
  • Managerial level responsibilities:
    • Clearly defined and documented tax compliance and risk management roles / responsibilities
    • Senior management’s active role and governance with objective criteria  to demonstrate Best Practices
    • Identification of significant transactions via a policy, process, risk rating
    • Ensuring data controls are in place
    • Record-keeping policies, including a formal tax record-retention policy
    • Documented internal control framework
    • Documented procedures explaining significant differences between accounting disclosures, financial statements and the tax return
    • Complete and accurate tax disclosures, including compliance risk review and tax return review
    • Tax governance policies addressing legal and administrative changes
  • Appendices
    • A: Testing of controls to test control design effectiveness, with a (comprehensive) example of a walk-through scenario
    • B: Directorship responsibilities, including a penalty regime, and an appointed public officer

The ATO has set forth new expectations and Best Practices for multinational organisations. The Board of Directors for all MNE’s, not only those operating in Australia, should review the new guidelines, as they set the standard for the future to regulate tax risk management.  

Astute Boards will be acting proactively to ensure all controls are in place to effectively manage global tax risk in this brave new world of post-BEPS introspection.

Other countries will surely follow, limited only by current resources.  

Accordingly, the concept of a Tax Risk Officer and additional focus on tax risk management / governance policies (supported by objective testing) are becoming the new norm for which all MNE’s should embrace.  

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Tax Risk Management

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CTO Insights

KPMG has provided valuable ideas and observations in the June edition of its Chief Tax Officer (CTO) Insights publication.

Topics addressed in this edition include:

  1. Business Case for Tax Transformation
  2. OECD releases; BEPS impact
  3. Effective Communications
  4. Talent Management
  5. Shared Services Model

Click to access cto-insights-june-2015.pdf

Interesting questions:

  • How do you stay current with emerging trends in tax and governance?
  • Has BEPS changed your international  tax planning model?
  • Do you have a formal dashboard/scorecard to convey metrics?
  • How do you develop internal talent?
  • Has tax moved to a shared service/outsourced model?

These questions are provocative and inviting, as it leads to Best Practice thinking and implementation.  The publication is a valuable and welcome reference tool for CTO’s and other interested parties.

Category:

Tax Risk Management

European Parliament’s resolution: Ambitious disclosure plan

The European Parliament, following its recent push for public disclosure (03 June 2015 post), passed a non-binding resolution by 550 votes to 57 to make this happen.

A copy of the press release is provided for reference:

http://www.europarl.europa.eu/news/en/news-room/content/20150703IPR73914/html/Tax-MEPs-advocate-country-by-country-reporting-to-help-developing-countries

Key observations:

  • Country-by-country tax reporting (CbCR) should be publicly disclosed to fight tax evasion and avoidance.
  • Perceived benefits of public disclosures include better tax justice and an end to tax havens.
  • All countries should adopt CbCR.
  • Company ownership should be in the public domain.
  • EU institutions should monitor actions by the Member States to determine ongoing funding decisions.

The EU continues to be a proactive force in introducing public disclosure changes, which will be a spark for all other countries to follow.  Accordingly, monitoring such activities will be a key to understanding future trends and disclosures that can be planned for currently.

 

 

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Tax Risk Management

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UAE: Tax system on the horizon?

EY’s Alert provides an update on discussions being held in the UAE.

A corporate tax law has been drafted and a common value added tax (VAT) law framework for Gulf Cooperation Council (GCC) countries has also been drafted.  These discussions are now in an advanced stage, although implementation of a tax would take additional time to implement.

Click to access 2015G_CM5575_Update%20on%20the%20proposed%20introduction%20of%20corporate%20taxation%20in%20the%20UAE.pdf

In efforts to provide financial sustainability, this initiative should be closely followed to plan for the potential impact in the UAE and the Region.

 

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Tax Risk Management

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Tax Function of the Future; Insights

PwC’s publication, referenced herein, provides revealing predictions and insights into the tax function of the future.

Click to access pwc-tax-function-of-the-future.pdf

Key observations:

  • Reputation is being impacted by external perceptions, therefore companies need to respond clearly and succinctly to a wider stakeholder base.
  • A course must be charged for continual transformation.
  • Many jurisdictions will legislatively require adoption of a tax control framework, which will be shared with tax authorities.
  • Dedicated tax data hubs will become mainstream; data is the new business currency.
  • Most global tax compliance and reporting activities will be performed via shared service centers and/or third parties.
  • Tax professionals will require strategic risk management skills.

As post-BEPS time nears, with inherent complexities and global disparities, the time to examine current and ideal states of the tax function should be an immediate priority to avoid recurring reactive responses.

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Tax Risk Management

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Poland’s latest Draft Bill accelerates CbC reporting

Poland’s latest amendments to its Draft Bill incorporates a major change to the date for submission of a country-by-country report (CbCR).

The original draft (refer to 28 May 2015 post) provided a 1/1/2016 effective date, with the CbCR due at the end of 2017 for 2016 data.  However, the latest draft moves the effective date of the Bill to 1/1/2017, however it also states that the CbCR must be attached to the 2016 corporate income tax return, generally due 3 months after the end of the tax year.

The final version of the bill should be monitored closely, as it would accelerate submission of the CbCR to 31 March 2017 for 2016 activity, which is significantly earlier than the 31/12/2017 date (for calendar year taxpayers) envisioned by the OECD’s BEPS Action 13 Discussion Draft.

The latest changes reflect the increasing emphasis on transparency and assessment of transfer pricing risk, a trend that is closely followed by all other countries in assessing their urgent need for transparency.

The EY publication link is attached for additional reference:

Click to access 2015G_CM5559_TP_Poland%20amends%20draft%20bill%20on%20TP%20documentation.pdf

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OECD, Tax Risk Management

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New Customs and TP Guide by WCO

The World Customs Organization (WCO) has published a new Guide to Customs Valuation and Transfer Pricing.

The Guide will:

  • Provide a policy/audit/control tool for Customs officials
  • Cross reference transfer pricing documentation that may be relevant for customs purposes
  • Address transfer pricing misconceptions
  • Reconfirm “transaction value” as the starting point for customs valuation
  • Encourage consideration of transfer pricing studies
  • Encourage consistency of transfer pricing adjustments
  • Encourage the provision of advance customs valuation rulings
  • Provide Best Practices for business, integrating customs and transfer pricing documentation/discussions

A succinct summary by DLA Piper, and the Guide, are provided for reference:

https://www.dlapiper.com/en/uk/insights/publications/2015/06/wco-publishes-guide-to-customs-valuation/

http://www.wcoomd.org/en/topics/key-issues/revenue-package/~/media/36DE1A4DC54B47109514FFCD0AAE6B0A.ashx

The Guide should also be used as a proactive tool to review reporting structures of transfer pricing and customs employees/advisors, functional integration, etc. to address the new changes in transfer pricing and the possible effect on customs valuations and documentation going forward.

 

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Tax Risk Management

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