Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

Monitoring Developments to address tax risk

A Board member may ask: How is the tax dept. monitoring daily developments of the OECD, BEPS Actions, European Commission, European Parliament, unilateral country actions, US Congress/Treasury, etc. to assess tax risk in this new era of transfer pricing interpretation?

For example, one University assigned this daily task to one individual who would report his findings for others to follow up.  However, many times this is not a proactive process, especially as new OECD transfer pricing guidelines, and perceptions of what a fair tax should be, develop for implementation in the foreseeable future.  If a tax department is fragmented for responsibilities of different areas (i.e. indirect tax, customs, direct tax, regional tax, country taxes, etc.) or regions, many people may be performing this function specifically to identify developments related to their narrow function.

Best Practice principles should be applied to allow time for planning, creating/revising new systems, interacting with other key stakeholders, etc.  Different tactics may be employed, although avoiding duplication of efforts and integrated communication should be the focus to identify efficiencies in a tax risk framework.  This need should be addressed in the short term, with long-term sustainability elements for new waves of ongoing actions by many interested parties.

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Tax Risk Management

Tax reputation / transparency survey: 2014-15

EY’s publication discussing tax reputation readiness and transparency provides suggestions for increasing readiness with good processes, robust documentation/audit trail and class-leading data management.  The publication is very timely, noting the recent European Parliament’s unanimous vote for public reporting of country-by-country (CbC) and beneficial ownership information.

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

Key points:

  • More than 60% of companies believe that engaging with the media is a “no-win” situation.
  • Excellent timeline/events of transparency initiatives commencing from 2003 until present, and future, state.
  • 65% of respondents have developed a more structured approach to managing their public tax profile in the previous 2 years.
  • 94% of respondents expect increased growth in global disclosure and transparency initiatives.
  • “Business can do more and be more proactive to prepare for new reporting obligations and, as one proposed step, either proactively or defensively,  Whatever choices a business makes, developing and sustaining the ability to source accurate data, in the right format and in a timely manner will be a critical factor for all large businesses in the years ahead.”
  • Multiple transparency initiatives are succinctly depicted in a table on page 9.
  • Transparency will be the new normal.
  • Quality information requires quality data.
  • Transparency readiness is a significant and underestimated need of companies.
  • Transparency readiness assessment questions are posed for consideration.
  • Detecting risk anomalies in the data is an important consideration; thoughtful questions are posed for review.
  • Companies that can quickly and clearly explain their tax transactions and strategies are best positioned to manage reputation risks.
  • Six proactive actions to consider:
    • Actively monitor the changing landscape
    • Assess readiness, and desire, to respond
    • Enhance communication with internal and external stakeholders
    • Develop steps to prepare the total tax picture
    • Decide with whom the company wishes to communicate
    • Embed reputation risk thinking into core business strategy

This survey provides an excellent approach and proactive roadmap in addressing the challenges, readiness and complex actions required to develop transparency readiness and engage reputation risk proactively.  Accordingly, this should be required reading for all MNE’s as a primer and self test mechanism to address the new era of international tax transparency and potential angles of attack for reputation risk.

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Tax Risk Management

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EU ownership registers: 2 year timeline

The European Parliament approved the maintenance of public registers listing ultimate ownership of EU companies, as part of the 4th Anti-Money Laundering Directive.  The new rules must be introduced in all EU Member States within the next 2 years.

A KPMG Euro Tax Flash outlines details of this proposal:

Click to access etf-248.pdf

Key points:

  • Beneficial ownership is broadly defined, covering individuals who ultimately (directly or indirectly) control the entity.  The control threshold is premised on a 25% ownership criterion although Member States may adopt lower percentages.
  • Information accessible by: competent authorities, financial intelligence units, “obliged entities” and persons/organisations that can demonstrate a “legitimate interest” (not a defined term).
  • Member States have 2 years from adoption to implement its provisions into their domestic legislation.

In an ever-increasing quest for transparency, this Directive will fulfill EU’s obligation to meet that objective.

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Tax Risk Management

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Reputation Risk: Insights

A recent Accounting Today article cites the uneasiness of corporate tax leaders re: reputation risk.

Excerpts from the article:

  • The company’s tax policy and principles are being enhanced with greater detail for clarity and transparency
  • Communication of tax strategies to the Board is becoming a primary focus
  • Tax controversy alignment with the Board is being communicated more frequently
  • Increased objective to develop more co-operative working relationships with tax authorities
  • Tax risk is an integral part of decision-making

A link to the article is attached for reference:

http://www.accountingtoday.com/blogs/debits-credits/news/corporate-tax-pros-concerned-about-reputations-74589-1.html

As BEPS Actions are currently being transformed into final Guidelines, the subject of reputation risk would be a worthy topic of focus in the interim to be prepared for an uncertain, complex and disparate trend in the world of international tax.

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Tax Risk Management

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Tax Transparency: Pension/Institutional focus

The referenced article provides additional evidence that tax transparency is growing more universal and attracting the interest of many interested parties.  A quote from the first portion of the article addresses interest in a taxpayer’s tax risk framework and governance procedures.

“In an exclusive interview with FTFM Local Authority Pension Fund Forum Chair Kieran Quinn has confirmed that the Forum has launched the Corporate Tax Transparency Initiative (CTTI), writing to every FTSE 100 company in late March seeking technical information via ten detailed taxation questions around tax related governance and accounting practices, taxation risk.”

management and minimisation strategies.http://www.lapfforum.org/news/lapff-seeks-tax-transparency-from-ftse-100

This article raises the question of what public tax posture, if any, companies want to exhibit to address tax authorities, individuals/companies having access to company data, individual / institutional investors, pension funds, etc.  This topic relates directly to reputational risk, and should be aligned with the Board and senior management.

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Tax Risk Management

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Audit Mutuality: France provides leadership

The French Ministry of Finance has released welcome initiatives comprising a list of aggressive tax structures, ten commitments for ways of working upon commencement of an audit, appointment of a national committee of experts in complex cases, and creating a R&D tax credit advisory board to provide consultation services to the taxpayer.

A link to PwC’s Tax Insights summary is provided for reference:

Click to access pwc-france-mof-transparency-measures.pdf

10 Audit commitments:

  1. Initial meeting to inform taxpayer of documents to be requested
  2. Ways of working in the tax audit
  3. First meeting devoted to understanding the business
  4. Milestone meetings
  5. Indicating the main audit objectives
  6. Taking consistent positions of similar issues in the same industry
  7. Meeting deadlines
  8. Providing a recourse process with access to auditor’s superior
  9. Maintaining confidentiality and tax secrecy as imposed by the law
  10. Identifying an individual within FTA for post-audit support procedures

This is a very welcome initiative that will provide win-win opportunities for audits and information requested.  Additionally, this process serves as a Best Practices memorandum of understanding that should be discussed with auditors from other jurisdictions.

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Tax Risk Management

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Audit committee agenda: Tax risk in focus

KPMG has provided a valuable reference re: 2015 audit committee topics, providing insight into company risks and the importance of governance.

The following extract, from the report provided as reference, addresses tax risks in the following manner:

Pay particular attention to the global “tax transparency and morality” debate being driven by notions of “fairness”and “morality,” and consider the impact of tax risk on the company’s reputation.Tax is no longer simply an expense to be managed; it now involves fundamental changes in attitudes and approaches to tax globally. Ensure that tax decisions take into account reputational risks and not simply whether the company has technically complied with tax laws. Monitor OECD and governmental efforts globally to address perceived transfer pricing abuses. Help shape the company’s tax risk appetite, and establish a clear communications protocol for the chief tax officer to update the audit committee regularly. Help ensure the adequacy of the company’s tax resources and expertise globally.

Click to access audit-committee-agenda-2015.pdf

Highlights of future trends:

  • Transparency
  • Reputation risk
  • OECD monitoring
  • Transfer pricing abuse
  • Tax risk appetite

To the extent the Audit Committee has not inquired into BEPS, tax risk frameworks, OECD Actions and transfer pricing governance,  a proactive effort should immediately begin to align the Board with the MNE’s tax risk posture and ongoing governance.  It is imperative a robust tax risk framework is established and communicated effectively.

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Tax Risk Management

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Tax strategies: New entry in Dow Jones Sustainability Assessment

The RobecoSAM 2014 Corporate Sustainability Assessment, referenced herein, introduced tax strategy criteria in their scoring to address critiques of MNE’s tax structures, tax reporting transparency and tax risks.

The publication discusses reputational risk in its new survey questions and is very informative re: companies not yet having a tax policy, as well as asking relevant questions addressing the license to operate in a country, relationship risks with host country and economic development risks in regions where the company is operating.

Click to access CSA_2014_Annual_Scoring_Methodology_Review.pdf

Tax strategies, policies and the perception gap are increasing in importance worldwide, with a kindly reminder for the necessity of developing a comprehensive tax framework that is flexible with today’s challenging international tax environment.

The enterprise risk management analyses for a MNE should have an integrated tax risk framework, coupled with functional interface between common risks that are multi-faceted.

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Tax Risk Management

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European Commission’s Tax Transparency Package: new era

The European Commission published a package of tax transparency measures on 18 March 2015.  The press release and other documents, linked herein for reference, include a tax transparency communication, Council Directive re: automatic exchange of information and Q and A’s of the comprehensive package. Significant initiatives are included in this package addressing corporate tax avoidance and harmful tax competition in the EU, key components of which are highlighted. http://europa.eu/rapid/press-release_IP-15-4610_en.htm http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_136_en.pdf http://ec.europa.eu/taxation_customs/resources/documents/taxation/company_tax/transparency/com_2015_135_en.pdf http://europa.eu/rapid/press-release_MEMO-15-4609_en.htm Press release:

  • The concepts of tax evasion, corporate tax avoidance, “pay their fair share,” aggressive tax planning and abusive tax practices are summarily stated, although corollary concepts for avoidance of double taxation and effective dispute resolution are noticeably absent.
  • Tax rulings will be automatically exchanged every 3 months.
  • Feasibility of public disclosure of certain tax information of MNE’s will be examined.
  • The EU Code of Conduct on Business Taxation will be reviewed to ensure fair and transparent tax competition within the EU.
  • The Savings Tax Directive is proposed to be repealed to provide efficiencies and eliminate redundant legislation in the Administration Cooperation Directive.
  • Next steps: The tax rulings proposal  will be submitted to the European Parliament for consultation and to the Council for adoption, noting that Member States should agree on this proposal by the end of 2015, to enter into force 1/1/2016.
  • Common Consolidated Corporate Tax Base (CCCTB) proposal will be re-launched later this year.

Tax Transparency proposal:

  • Existing legislative framework for information exchange will be used to exchange cross-border tax rulings between EU tax authorities.
  • The Commission will develop a cost/benefit analysis for additional public disclosure of certain tax information.
  • The tax gap quantification will be explored to derive more accuracy.
  • The global automatic exchange of information for tax rulings will be promoted by the EU.

Council Directive (amending Directive 2011/16/EU) re: automatic exchange of information:

  • Mandatory automatic exchange of basic information about advance cross-border rulings and advance pricing agreements (APAs).
  • Article I definition of “advance cross-border ruling:
    • any agreement, communication, or any other instrument or action with similar effects, including one issued in the context of a tax audit, which:
      • is given by, or on behalf of, the government or the tax authority of a Member State, or any territorial or administrative subdivisions thereof, to any person;
      • concerns the interpretation or application of a legal or administrative provision concerning the administration or enforcement of national laws relating to taxes of the Member State, or its territorial or administrative subdivisions;
      • relates to a cross-border transaction or to the question of whether or not activities carried on by a legal person int he other Member Sate create a permanent establishment, and;
      • is made in advance of the transactions or of the activities in the other Member State potentially creating a permanent establishment or of the filing of a tax return covering the period in which the transaction or series of transactions or activities took place.
  • Automatic exchange proposal is extended to valid rulings issued in the 10 years prior to the effective date of the proposed Directive (Article 8a(2)).
  • In addition to basic information exchanged, Article 5 of the Directive should provide relevant authority for the full text of rulings, upon request.
  • EU central repository to be established for submission of information by Member States.
  • Confidentiality provisions should be amended to reflect the exchange of advance cross-border rulings and APAs.

Q and A’s:

  • Corporate tax avoidance, as explained, undermines the principle that taxation should reflect where the economic activity occurs.
  • Standard/template information for the quarterly exchange of information includes:
    • Name of taxpayer and group
    • Issues addressed 
    • Criteria used to determine an APA
    • Identification of Member States most likely to be affected
    • Identification of any other taxpayer likely to be affected
  • Commission could open an infringement procedure for Member States not following the disclosure obligations.
  • Domestic tax rulings are exempt.
  • The EU could be a global standard setter of tax transparency.
  • The EU Code of Conduct criteria are no longer adequate, and it lacks a strong enough mandate to act against harmful tax regimes.

The EU Tax Transparency Package is required reading for all MNE’s and other interested parties, as it is an ambitious effort to provide globally consistent procedures for the exchange of tax rulings/APAs. Additionally, it is interesting to note the EU’s aggressive actions and timing in its efforts to align, as well as expand, the OECD’s efforts to address BEPS Action Items.  These actions are also intended to be a standard for global setting in the new era of international tax transparency.     As a Best Practice, the 10-year look-back provision for rulings implies that MNE’s should have a similar central database for prior, and future, cross-border rulings.  Additionally, this automatic exchange is another element of consideration prior to formally requesting a tax ruling.    

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OECD / UN, PE, Tax Risk Management, Transfer Pricing

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UK: Name and shame scheme of promoters

HMRC has published new guidance providing for publication of names re: high risk promoters.  To the extent a promoter has not complied with the terms of a Conduct Notice previously communicated to them, the promoter will be publicly named and they will need to inform their clients of this monitoring action.

The first Conduct Notice has already been issued, as part of HMRC’s ambitious intent to address “tax avoidance.”

A link to the news story is provided:

https://www.gov.uk/government/news/high-risk-promoters-of-tax-avoidance-face-government-clampdown

The timing is also noteworthy, as it precedes final drafting of the Diverted Profits Tax proposal which will soon be followed by elections.

Advisors, as well as MNE’s, should monitor this trend of “name and shame,” as it is generally considered too late for damage control after one’s name and reputation are subject to public perception in this new age of addressing “tax avoidance.”

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Tax Risk Management

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African Tax Research Network 1st Annual Congress, Call for Papers

The African Tax Research Network (ATRN) requests research papers for its 1st Annual Congress entitled Contemporary Tax Challenges for African Countries.  A link to the conference details is provided for reference;

http://www.123contactform.com/form-1143642/AFRICAN-TAX-RESEARCH-NETWORK-ATRN-CALL-FOR-PAPERS

The African Tax Research Network (ATRN) is a newly established platform for African inspired dialogue, research and collaboration mainly among researchers, policy makers and tax administrators. Its establishment results from the need to identify potential synergies and linkages, in areas of research, between academics, policymakers, researchers and tax officials from the African Tax Administration Forum’s (ATAF) member countries. Launched in 2009, the African Tax Administration Forum is a platform to promote efficient, effective and service-oriented tax administrations and currently consists of 38 African member states. The ATRN, which is housed in the ATAF Secretariat in South Africa, is pleased to announce its 1st Annual Congress from 02 – 04 September 2015 in Victoria Falls, Zimbabwe.

This congress presents an opportunity for academics, researchers, tax administrators, students, tax practitioners, consultants and decision-makers on fiscal and tax policy to gather and discuss different aspects relating to national, regional and international tax matters.

The theme of the Annual Congress is “Contemporary Tax Challenges for African Countries”.
Prospective authors, both academics and practitioners, are invited to submit original and innovative papers on any topic related to this broad theme. Suggested topics of interest to be covered under the main theme include:
Natural resources taxation
Local taxation and fiscal decentralisation
International taxation
Customs & domestic taxation
Indirect taxation
Taxation in the digital economy
Tax treaties
Taxation in banking, telecommunication, insurance
Environmental tax
Taxation and regional integration
Tax compliance
Taxation & the distribution of income & wealth
Taxation and Human Rights (including taxation & gender)
Tax incentives

This conference is an excellent opportunity for interested parties to submit their ideas and presentations to form a win-win opportunity for taxpayers and tax administrations.  A collaborative relationship will enhance future efficiencies in this rapidly growing region.

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Tax Risk Management

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Tax risk roadmap

EY’s extract highlights operational tax risks, Best Practices and a roadmap to implement opportunistic changes.

http://www.ey.com/CA/en/Services/Tax/TaxMatters-February2015-Eight-steps-to-handle-tax-risks

Highlights:

1. Establish and sustain effective tax policies

2. Enhance performance management

3. Organize globally

4. Recruit and retain the best people

5. Implement, monitor and constantly upgrade tax processes and controls

6. Improve data quality

7. Implement the right technology

8. Consider whether existing compliance and reporting capabilities meet today’s needs

Commencing with a global tax policy encompassing a comprehensive tax risk framework, BEPS induced changes are accelerating transparency initiatives and a risk-based focus.

Tax administrations are looking beyond details of data for a country-by-country reporting template for an overall risk assessment of all taxes and relevant processes.  A comprehensive risk framework and system of mitigation controls will also present win-win opportunities for co-operative compliance relationships and discussions of tax risk controls between the taxpayer and tax administration.

 

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Tax Risk Management

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Indirect Taxes: 2020 & Beyond

KPMG’s informative tax guide not only provides detailed insight into the indirect tax schemes of 21 APAC countries, but most importantly offers valuable insight into the future including the role of Big Data.  Indirect tax developments are becoming more significant, evidenced by a new GST for Malaysia effective 1 April 2015.

Click to access 2015-asia-pacific-indirect-tax-country-guide.pdf

Key Summary:

  • The indirect tax base will become more comprehensive and a global framework for cross-border services and intangibles will form a consistent “destination” principle approach.
  • Post-2020 Big Data propositions:
    • Real time tax settlement
    • Big Data will close the VAT/GST gap
    • Tax transparency debate will shift to indirect taxes
    • Data quality and analysis will be the new audit background
    • You won’t control all your own data
    • Your data will become very interesting to others
    • Indirect tax rules will be written with data analytics in mind
    • Tax manager role will be redundant by 2020

The Guide provides valuable thoughts about the future of indirect taxes, while providing a comprehensive reference for APAC indirect taxes of 21 countries.  This trend is already seen with ERP data analyses conducted by IS experts within the tax administrations.  As BEPS induced transparency has become the new focus for direct taxes, indirect taxes will surely be the next frontier.

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Tax Risk Management

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Ireland GAAR: New rules

Ireland’s new Finance Bill has introduced a new General Anti-Avoidance Rule (GAAR), effective as of 23 October 2014.

The GAAR rule provides that where a taxpayer enters into a transaction, the tax authority may invoke the GAAR rule if it would be reasonable to consider that it is a “tax avoidance” transaction resulting in a tax advantage.  Accordingly, any reduction in tax payable is disallowed, in addition to a 30% surcharge.

PwC’s recent summary of Ireland’s tax developments is included for reference, including the GAAR rule on page 20:

Click to access 2014-pwc-ireland-budget-finance-bill.pdf

Key observations:

  • No time limit for raising a GAAR assessment.
  • A “protective notification” procedure is provided, protecting the taxpayer from the surcharge.
  • The taxpayer is obliged to furnish all documentation pertaining to the transaction along with an opinion as to why they believe the transaction does not fall within the GAAR provisions.

The GAAR rules are imposing additional arenas of uncertainty, dependent on the subjective interpretations and conclusions of the tax administration.  For Ireland, there is no time limitation and significant penalties are imposed for such assessments.

Due diligence procedures should be provided as an internal governance process to identify and review GAAR rules, domestic and/or treaty application, and possible avenues of appeal for transactions that may be affected.  (Note, details of the EU Parent-Subsidiary Directive GAAR provisions are provided in the 11 December, 2014 post)

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Tax Risk Management, Transfer Pricing

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Japan’s tax reform proposals, including BEPS initiatives

EY has provided a concise summary of Japan’s tax reform proposals, including the limitation for a participation exemption of dividends that are deductible by the payor in alignment with OECD BEPS initiatives and matching the recent change in the EU Parent-Subsidiary Directive.  As Japan, and other countries, enact tax reforms that include OECD BEPS initiatives, it is imperative to review legal structures and potential impacts of such changes, including BEPS reforms.

Trends are also developing as countries follow similar changes of other countries, eager to adopt a “Follow the Leader” approach if it may attract additional tax revenues and economic growth.

EY’s Alert is included herein for reference:

On 30 December 2014, Japan’s coalition leading parties released the 2015 Tax Reform Outline (Outline). The Outline includes both favorable proposals, such as a corporate tax rate reduction and unfavorable proposals, such as lowering an annual net operating loss (NOL) deduction limitation. A tax reform bill will be prepared based on this Outline. The bill will be submitted to the Diet and enacted by the end of March 2015. This Alert summarizes key provisions relevant to multinational corporate taxpayers.

Corporate tax rate reductions
The national corporate tax rate will be reduced to 23.9% from 25.5% for taxable years beginning on or after 1 April 2015.
The local enterprise tax rate applicable to income base will be reduced to 6% from 7.2% for taxable years beginning on or after 1 April 2015.
The combined national and local effective corporate tax rate will be reduced to 32.11% from the current 34.62%.1
A further rate cut is planned in a 2016 tax reform, which would make the combined effective tax rate 31.33%.
The Government is planning to lower the combined effective tax rate to below 30% over several years.
Amendment to NOL deduction and carryover period
A 65% limitation for an annual NOL deduction (compared to the current 80%) is proposed for taxable years between years beginning on or after 1 April 2015 and years beginning on or before 31 March 2017. A further reduction to 50% will apply to taxable years beginning on or after 1 April 2017.
The current 9-year carryover period is extended to 10 years for NOLs incurring for taxable years beginning on or after 1 April 2017.
Small and medium enterprises (SMEs)2 are eligible for a 100% NOL deduction and a 9-year/10-year NOL carryover period.
A special rule will apply to a newly established corporation and a corporation emerging from bankruptcy, which allows a 100% NOL deduction for a seven-year period.
Amendment to domestic dividend received deduction (DRD) rule
The proposed new DRD rates apply to domestic shareholders holding 33.33% or less interest in a Japanese distributing company as follows:3
Ownership percentage
Current
Amendment
At least 25% and 33.33% or less
100%*
50%
More than 5% and less than 25%
50%*
5% or less
20%
* The amount of interest expense allocable to the acquisition cost of stocks will be reduced from the amount of DRD.

For insurance companies, the applicable DRD rate for stocks owned 5% or less will be 40%.
Reduction in income tax base (local enterprise tax)
Local enterprise tax consists of three elements – capital, value added and income. While the total combined tax revenues are intended to remain unchanged, income base percentages over a total enterprise tax are expected to be reduced from the current 75% to 62.5% and 50% for 2015 and 2016, respectively.
Amendment to research and development (R&D) tax credit
The R&D tax credit limitation4 will be reduced from the current 30% to 25% of national corporate tax liability of a taxable year.
A new R&D tax credit limitation of up to 5% of national corporate tax liability will be introduced for special experiment and research expenses.
The carryover of unused creditable amount will be repealed.
International taxation
The proposal will change the effective tax rate from the 20% or less to less than 20% when determining a foreign tax haven subsidiary status.
A 95% participation exemption for dividends paid by a foreign subsidiary will no longer be available for dividends that are deductible in the country where the foreign subsidiary is located.
Consumption tax
The second phase of the consumption tax rate increase (from 8% to 10%) will be postponed for 18 months to 1 April 2017.
Provision of digital services (e.g., e-books, internet-delivery of music, advertisement, etc.) provided by a foreign person to Japanese customers will be subject to consumption tax from 1 October 2015. For business to consumer transactions, the foreign service provider will be required to register as a taxable entity and file consumption tax returns. For business to business transactions, a reverse-charge mechanism will be introduced, which requires a Japanese service recipient to declare taxable sales and related tax due on its consumption tax return.
Endnotes
1. Some local jurisdictions impose higher local inhabitant and enterprise tax rates than the standard rate. The current combined national and local effective tax rate applicable to a corporation located in Tokyo area with capital of more than JPY100 million is 35.64%, and this will be reduced to 33.1% based on the Outline.

2. An SME is generally defined as an entity with capital of JPY100 million or less. An entity that is wholly owned by a shareholder whose capital amount is JPY500 million or more is excluded from the SME regime.

3. Shareholders who hold more than 33.33% interest are eligible for a 100% DRD.

4. The change is only for the base credit portion. For additional information, see EY Tax Alerts, Japan releases 2012 tax reform outline, dated 15 December 2011 and Japan’s tax reform outline announced, dated 4 October 2013.

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Tax Risk Management

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