Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

Denmark: (Super) GAAR?

The General Anti-Avoidance Rule (GAAR) has received a status of prominence during 2014, and continues its subjective and complex override provisions in domestic law that are interwoven with treaty provisions.

Denmark has proposed a (Super) GAAR, trumping the EU Parent-Subsidiary Directive, EU Interest-Royalty Directive, EU Merger Directive and Danish double tax treaties.  Notwithstanding its current status as a “proposal,” Denmark’s intent is clearly shown to provide an umbrella rule, evidently overriding the respective treaties, providing that a “main purpose” rule which achieves tax advantages would be used to disallow respective tax benefits of the transaction(s).  The proposed rule would be effective by 01 May, 2015.

PwC’s Insight has provided a brief summary of the proposal:

Click to access pwc-denmark-introduce-gaar-double-tax-treaties-directives.pdf

GAAR continues to be “the elephant in the room,” highly visible although the rules and appeal avenues are distinct and arbitrary for every country.  Some countries have GAAR rules, along with specific / targeted anti-avoidance rules (SAAR / TAAR).  Thereby, tax uncertainty and the risk of double taxation increases, dispute resolution (if available) avenues are further stressed, and arbitration measures may not be available.

With respect to arbitration, it should be adopted by every country to achieve mutuality with taxpayers, however some countries have expressly stated that they do not want to give up their control / sovereignty.  Unfortunately, OECD has not aggressively pursued this remedy for multilateral agreement.

Category:

OECD / UN, Tax Risk Management, Transfer Pricing

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Happy New Year

I wish all my readers a happy, healthy and joyful New Year.

Readers from 142 countries have viewed my posts during 2014; thank you for your interest and support.

Best wishes,

Keith

Category:

Tax Risk Management

Australia’s tax risk framework

The Australian Tax Office (ATO) has provided a concise summary of its framework by which four broad risk categories are categorized for each type of tax (income tax, GST, excise).  This classification framework will be used to provide their service focus.

The framework distinguishes key taxpayers and taxpayers with high, low and medium risk classifications.  Higher risk taxpayers will merit a continuous tax review, key taxpayer relationships will be developed focused on the MNE’s risk management and governance framework, medium risk taxpayers will fact reviews/audits, and lower risk taxpayers will be monitored to confirm its ongoing risk characterization.

A link to the ATO Fact sheet is provided for reference:

https://www.ato.gov.au/Business/Large-business/In-detail/Risk-Differentiation-Framework/Risk-differentiation-framework-fact-sheet/

This initiative is valuable in providing insight into a taxpayer’s risk characterization, although the review frequency and transparency details leading up to a relevant classification are not provided.  All taxpayers with Australian operations should be knowledgeable about the risk classification assigned to them for purposes of efficiently engaging with the ATO in a collaborative relationship.

This exercise is also helpful in identifying potential trends in other countries as the OECD’s country-by-country template guidelines are finalized and legislative actions are taken to formally assess risk using relevant data.

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Tax Risk Management

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The Davis Tax Committee: BEPS Report

The Davis Tax Committee has released its First Interim Report on Base Erosion & Profit Shifting (BEPS), including an introductory document and comprehensive analyses of the following BEPS Action Items:

  • 1, Digital Economy
  • 2, Hybrid Mismatches
  • 5, Harmful Tax Practices
  • 6, Treaty Abuse
  • 8, Transfer pricing re: intangibles
  • 13, Transfer pricing documentation
  • 15, Multilateral instrument
  • Summary of recommendations

The Committee’s objective is to assess South Africa’s tax policy framework and its role in supporting the objectives of inclusive growth, employment, development and fiscal sustainability.  Links to the Media Statement, Davis Tax Committee’s website and Report are provided for reference:

Click to access 20141223%20Davis%20Tax%20Committee%20Media%20Statement%20-%20Release%20of%20BEPS%20Report%20for%20Public%20Comment.pdf

Comments by all interested parties should be submitted by 31 March 2015.

The documents are a valuable reference in comprehending each of the OECD BEPS Action Items of the Report, not only the viewpoint of S. Africa.  Most importantly, it outlines the tax policies for continued foreign direct investment balanced against BEPS and General Anti-Avoidance Rule (GAAR) initiatives, while providing tax transparency and certainty with a balanced, sustainable tax policy going forward.

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Tax Risk Management

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Cooperative Compliance: Best Practices re: Global Mobility

Cooperative compliance is an initiative that is being used more regularly to further efforts by tax administrations for tax transparency.  (Refer to 13 June, 2013 post: OECD: A Framework for Co-operative Compliance)

The referenced PwC Tax Policy Bulletin highlights the use of this popular technique for Global Mobility compliance and Best Practices.  The Bulletin provides a primer for processes of global mobility compliance and integration of a cooperative compliance approach, including the relevant benefits and risks.

Click to access pwc-cooperative-compliance-global-mobility-tax-policy.pdf

Key observations:

  • Many countries have the potential to immediately negotiate an agreement to streamline mobile employee compliance.
  • There is an opportunity to minimize/control risks due to global talent shifts, short-term business travelers / assignees, targeted tax audits, administrative complexity, Permanent Establishment (PE) exposure, etc.
  • Tax control framework methodologies should be in place for review by tax authorities to review internal processes.
  • This initiative should be in synergy with the global / regional / country tax strategy for alignment.

This important initiative should be supported by tax expertise for the global mobility function via internal and/or external resources.  Accordingly, the impetus of tax transparency, complexity and corporate accountability may provide perfect timing to review the organizational structure of the global mobility function and inherent tax expertise provided, resulting in a Best Practice methodology as part of the global tax risk framework.

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Tax Risk Management

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French tax legislation

The 2014 Amended Finance Act and the 2015 Finance Act should enter into force by 31 December, 2014.  A PwC summary is provided for reference:

Click to access pwc-france-enacts-amended-finance-act-14-finance-act-15.pdf

Key observations:

  • Horizontal fiscal unity is allowable for “sister” companies held, directly or indirectly, by a EU or EEA parent company.
  • Effective 1/1/2015, the 95% participation exemption will not be allowable for dividends paid out of profits from activities not subject to corporate income tax (Note this provision was deleted in the final published draft), or that are deductible by the payor company (in alignment with the EU Parent-Subsidiary Directive).
  • A new transfer pricing penalty, for audits starting on or after 1/1/2015, is the greater of 0.5% of transactions with incomplete documentation, or 5% of the amounts reassessed by the French tax authorities with regards to these transactions.
  • A new procedure, effective the day following publication, allows a request to waive withholding tax on deemed distributions, subject to procedural rules.
  • Details of the tax credit for employment and competitiveness (CICE) shall  be detailed in the financial statements.
  • The employee bonus on dividends (Prime de partage du profit) is repealed at the end of 2014.
  • The 10.7% corporate income tax surcharge is to be repealed for fiscal years closing on or after 31 December 2016.
  • The Social solidarity contribution assessed on turnover should be repealed in 2017.

France has taken a one-year advance action in implementing the EU Parent-Subsidiary Directive, as well as introducing new transfer pricing penalties that need to be considered for adequate documentation.  Additionally, the horizontal fiscal unity initiative and repeal of the employee bonus rule should provide opportunities for planning French legal structures and repatriation going forward.

 

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Tax Risk Management

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Audit Diary = Tax Risk Best Practice

With the increasing complexity of audits, OECD BEPS incentivized unilateral legislation, General Anti-Avoidance Rules (GAAR), and cases proceeding to arbitration, appeals and Mutual Agreement Procedure (MAP), a comprehensive tax audit diary will prove to be of valuable reference during the audit, from commencement to final determination and thereafter.

Ideally, this diary could be signed/initialed contemporaneously by the company and tax authorities signifying agreement of the summary.

A tax audit diary may include the following components:

  • Summary of discussions at each audit meeting, including attendees, conclusions, future actions and promised timelines.
  • Paper/electronic copies of all written audit inquiries received, including a date stamp upon receipt.
  • Paper/electronic copies of all written audit inquiries provided, including the date provided to tax authorities.
  • Copies of all reports, including transfer pricing studies, provided.
  • Agreement as to what documents are not to be provided, with mutual consent of the company and tax authorities.
  • Documentation of BEPS related discussions / assessments not yet legislated into domestic law.
  • Summary of discussions re: jeopardy assessments / threats of additional assessments re: Competent Authority filings.
  • References to adequate / inadequate transfer pricing documentation, as a finding of “inadequate documentation” may provide a basis for additional interest, penalties and possible disallowance of treaty benefits, such as MAP.

The diary should be included in corporate governance documentation that will provide consistency upon changes in personnel during the course of an audit, including relevant appeals.

Additionally, this diary will be instrumental in providing information to Competent Authority personnel and advisors for clarity of the audit negotiations and discussions, as well as serving as one source of valuable reference for the audit, including similar audits of other legal entities in that jurisdiction, joint audits, etc.

A discussion of a joint audit discussion as a component of the Tax Risk Framework is included in an earlier post dated 25 October 2014 for related reference.

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Tax Risk Management

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MENA Regional Profile 2014: World Bank Report

The World Bank and the International Finance Corporation collaborated in providing a 2014 Doing Business Report for the Middle East and North Africa (MENA) Region.  A link to the report is attached for reference:

Click to access 834130DB140Mid0Box0382128B00PUBLIC0.pdf

Key observations:

  • Ease of Doing Business: UAE and Saudi Arabia were first (23) and second (26), while Libya rated 187th of 189 economies.
  • Total Tax Rate measures corporate income tax, social contributions and labor taxes, property taxes, dividend, capital gains and financial transaction taxes, waste collection, vehicle, road and other taxes.  Qatar, Kuwait, Bahrain, Saudi Arabia, UAE, the West Bank and Gaza all had a total tax rate less than 20%, while Tunisia was 62.4% and Algeria 71.9%.  The MENA Regional Average total tax rate was 32.3%.
  • Egypt made paying taxes more costly by increasing its corporate income tax rate.
  • Recent years have seen a reduction in Yemen’s corporate income tax from 35% to 20%, while UAE and Saudi Arabia have introduced online filing and payment systems for social security contributions.

The MENA Region is a significant area of focus for many MNE’s , with this report showing the tremendous progress and large gaps between countries in this interesting region.

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Tax Risk Management

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World Bank: Doing Business 2015 Report

The World Bank Group Report compares business regulations, including taxation, in 189 Economies.  A link to the report is attached for reference:

Click to access DB15-Full-Report.pdf

The Report provides an Ease of Doing Business Ranking for each economy, in addition to related sections for starting a business, dealing with construction permits, getting electricity, registering property, taxation, trading across borders, and various legal aspects including enforcing contracts and protecting minority investors.

Key summaries re: taxation:

  • Governments generally reduced the rates and broadened the base for corporate income tax while increasing the rates for the consumption or value added tax (VAT)
  • The total tax (profit, labor and other) rate averaged 43.1% of commercial profit in 2012 (Sub-Saharan Africa was 53.4% in 2012 versus over 70% in 2004, while the Middle East and North Africa region was approx. 35% in 2012 versus over 45% in 2004).

The report is useful in comparing trends and business related factors, in addition to taxation, that impact a MNE’s operations around the world.  The measurement of total tax is an interesting concept that many MNE’s are using in Corporate Sustainability Reports to reflect tax contributions around the world.

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Tax Risk Management

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Substance vs. Form: “Directive Shopping”

Today’s tax climate, OECD Base Erosion & Profit Shifting (BEPS) Action Plans, 2014 changes to the OECD Model Tax Convention re: “Beneficial Ownership” (refer to 22 July 2014 post), and General Anti-Abuse Rules (GAAR) all focus on increased substance of activities in an entity, versus pure legal form, to derive relevant treaty benefits.

A recent Austrian Administrative High Court decision (VwGH 26/6/2014, 2011/15/0080-13) focused on the EU Parent-Subsidiary Directive (PSD) re: “directive shopping.”  There were dividend distributions from an Austrian company to a pure holding company in Cyprus with no people or physical assets. Withholding tax was paid by the Austrian company, with a refund claimed by the Cypriot company in accordance with the EU PSD.  (Note the Cypriot company had a Russian shareholder, for which direct distributions from Austria to Russia would not have the benefit of the EU PSD.)

The High Court, confirming the tax authority’s view, stated the Cypriot company structure was abusive.  Accordingly, the withholding tax refund application of the Cypriot company was denied.

The substance vs. form application of the case highlights the potential withholding tax issues for a pure holding company located in a tax favorable jurisdiction.  Thus, all holding company structures should be reviewed under current law, and most importantly with respect to future international tax changes focusing on the proper substance to receive treaty benefits.

Category:

Tax Risk Management, Transfer Pricing

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Internal (tax) audit: Risk governance tool

Most MNE’s have an internal audit department, although the extent to which this audit team minimizes tax risks and enhances tax governance is generally not identified.

New out of the box ideas may be necessary for the internal audit function to address the evolution of transfer pricing and new challenges that will surely bring additional appeals and risks of double taxation.  

With the advent of the OECD’s BEPS Action Plans, parallel UN actions, increased tax audits and tax risks re: transfer pricing documentation, there has not been a significant increase in the role of internal audit teams to monitor and minimize potential tax risks, including double taxation. There is also a resource limitation on tax professionals, thus internal audit may provide a win-win opportunity.  The near future may include the addition of an internal tax audit team and/or adding tax professionals to the team.

Best Practice ideas for internal audit collaboration:

  • Tax topic training, including OECD’s BEPS actions
  • Tax risk awareness training, including Permanent Establishment (PE) and transfer pricing methodologies
  • Rotation of tax professionals in the internal audit team
  • Knowledge of tax policies, including intercompany service agreements and internal governance
  • Issues / trends in tax audits and hot topics
  • Treasury / financing issues subject to internal governance

The ideas are meant to promote thought and consideration for Best Practices.

Category:

Tax Risk Management

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El Salvador: Tax amnesty

The Salvadoran Congress has recently approved a three-month tax amnesty, ending on 9 December 2014.  The amnesty program applies to taxes and customs duties due prior to 9 September 2014 with a waiver on interest, charges and fines.  To the extent there are outstanding issues in El Salvador, this is an excellent time to review this initiative by the tax authorities to facilitate voluntary compliance.

Details of the program are outlined in the EY Global Tax Alert attached herein:

On 5 September 2014, the Salvadoran Congress approved a three-month tax amnesty program.1 The amnesty period began on 9 September and ends on 9 December 2014.

This amnesty program applies to all taxpayers subject to the taxes administered by the Tax2 and Customs Authorities.3 It applies to taxes and customs duties that had to be reported or that were due and payable prior to the entry into force of the program.

Taxpayers that pay initial or additional taxes due are granted a waiver on late payment interest, charges and fines. Amounts previously reported in tax returns can be modified without triggering a penalty.

The amnesty program is not available to taxpayers who are currently undergoing a criminal proceeding for tax crimes or customs violations.

Taxpayers may request from the Treasury Authority a grace period for the discharge of their payment obligations. An extension of up to six months may be granted depending on the amount of the liability.

Endnotes
1. Through Legislative Decree No. 793 approving the Temporary Law to facilitate voluntary compliance with tax and customs duties (in Spanish: Ley Transitoria para facilitar el cumplimiento voluntario de obligaciones tributarias y aduaneras).

2. In Spanish: Dirección General de Impuestos Internos.

3. In Spanish: Dirección General de Aduanas.

EYG no. CM4738

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Tax Risk Management

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TEI comments: BEPS Action Plan 11

Tax Executives Institute, Inc. (TEI) has provided comments to OECD BEPS Action Plan 11, data collection and BEPS actions.

The comments highlight the wariness of measuring BEPS actions and reacting thereto.  TEI discusses three key deficiencies of trying to measure such data and assess its effectiveness; (1) a lack of understanding  of the current state of affairs, lack of a defined goal to the OECD’s BEPS project, and lack of definition of BEPS behaviors.  The comments are referenced at:

Click to access TEI%20Comments%20-%20Action%2011%20Data%20Collection%20-%20FINAL%20to%20OECD%2017%20September%202014.pdf

Some key TEI comments:

  • Taxing authorities may use a subjective “we know it when we see it” approach rather than objective, evidenced-based measures.
  • The focus on a disconnect of taxable income from activity and value creation also raises concerns that tax authorities may use the measures developed by BEPS Action 11 to advance formulary apportionment approaches to transfer pricing.
  • TEI urges the adoption of a clear definition of BEPS and BEPS behaviors before attempting to develop mechanisms to differentiate inappropriate (if legal) tax results from “regular” corporate tax planning that may take advantage of government enacted tax incentives.
  • A central tracking mechanism for assessing an increase in mutual agreement procedure cases and tax controversy and litigation raising double taxation concerns should be developed.

As the BEPS Action Plans are reviewed and implemented by countries worldwide, it is helpful to review TEI’s comments to ensure there is a comprehensive understanding of the perceived abuses and risks that BEPS Action Plans have addressed.

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Tax Risk Management

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Poland taxes: CFC’s, Thin capitalization, participation exemption

The Polish President signed a tax bill, effective 1/1/2015 with some major tax reforms.

The changes include:

  • New Controlled Foreign Corp. (CFC) tax regime
  • Change in debt-to-equity ratio from 3:1 to 1:1, some planning opportunities available before year-end
  • Participation regime not applicable  for dividends that provided a deduction for the payor

EY’s Global Tax Alert provides a summary of the upcoming changes attached for reference:

Executive summary
On 16 September 2014, the Polish President signed a tax bill, approved by the Parliament on 29 August 2014, with several changes to the corporate tax rules. The new measures include the introduction of CFC (controlled foreign corporation) rules and much broader thin capitalization restrictions. Also, under the new measures, the participation exemption regime will not be applicable to taxpayers receiving dividends that gave rise to a deduction from the income (or other decrease in the taxable base or tax) of the distributing company. Furthermore, the new measures make the transfer pricing documentation requirements applicable to joint ventures and partnerships.

International groups may be affected by these changes to the Polish tax system that enter into force on 1 January 2015. Certain steps undertaken early enough may mitigate the impact of the changes.

Detailed discussion
Thin capitalization
New restrictions will limit the deductibility of interest on a much broader range of loans (generally on all intra-group financing). Currently only loans from a direct shareholder and/or direct sister company are subject to thin capitalization restrictions. However, loans granted by the end of 2014 may, under certain conditions, remain subject to the current liberal regulations.

The amended provisions introduce a 1:1 debt-to-equity ratio (currently 3:1) and a new definition of “equity.” In addition, taxpayers will have the option to use a new alternative thin cap calculation method based on a reference rate of the National Bank of Poland and the value of assets capped at a percentage of EBIT.

Taxpayers considering new debt placements may want to finalize plans by the end of 2014 to fall under the current rules. Taxpayers should make projections in order to be ready to choose the optimal calculation method (based on debt-to-equity ratio or the new one based on assets) before statutory deadlines.

CFC rules
2015 will witness an unprecedented change to the Polish tax system with the introduction of the CFC regime. The CFC regime will result in taxation of foreign companies’ income at the level of their direct or indirect Polish shareholders.

Depending on the date when the new law is published and on the tax year of the CFC, income of the CFC may be taxed shortly after the provisions enter into force.

Multinational groups should assess the impact of the CFC regime on their Polish companies with foreign subsidiaries and, if required, decide on steps to be taken to e.g., qualify for exemptions.

Other changes
In relation to the current legislation, it should be noted that General Anti Avoidance Regulations are planned to be introduced in Poland as of 1 January 2016.

Best Practice observation: How do these rules, as well as those from all other countries, get filtered and communicated timely to allow for planning in the current multinational tax structure.  As countries start to embark upon initiatives to change their domestic legislation, coupled with OECD BEPS Action Plan initiatives, there should be a proactive structure in place to review planning strategies and identify new risks in the global structure.

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Tax Risk Management

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France TP Disclosure form

The transfer pricing information return tax form has been released to provide 2013 information.  The form is to be completed in French with a due date of 20 November 2014.  A reference to the form is attached:

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/2014-1/france-final-version-information-return-transfer-pricing.aspx

Best Practice observation: As more countries initiate transfer pricing disclosure forms, including the types of transfer pricing methodologies being used, it is imperative to align these disclosures with the annual transfer pricing documentation.  Accordingly, there should be clear communication with the Business re: advice to properly file such disclosures.

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Tax Risk Management

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