Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

New Zealand GAAR & Parliament’s intentions

Click to access is1301.pdf

The New Zealand Inland Revenue has issued an interpretation statement about a “tax avoidance arrangement.”  It sets out the approach the Commissioner will take to ss BG 1 and GA 1 of the Income Tax Act 2007. Section BG 1 is the general anti-avoidance provision in the Act. Section GA 1 enables the Commissioner to make an adjustment as a result of the application of s BG 1.

Section BG 1 voids a tax avoidance arrangement. An “arrangement” is defined widely and includes formal, legally enforceable contracts through to informal, unenforceable understandings.

The Commissioner’s approach to analyzing and applying s BG 1 is set out in a flow chart that outlines the sequence of analysis undertaken to establish whether an arrangement is a tax avoidance arrangement.  There are also examples illustrating how the approach is worked.

The Commissioner has a broad discretion as to the adjustments that can be made to counteract the tax advantage. There is no duty to describe precisely the actual basis for an adjustment. Further, the Commissioner may adjust the taxable income of any person affected by the arrangement.  A person can be affected by an arrangement whether they are a party to the arrangement and whether they are aware that they benefited from a tax avoidance arrangement.

However, s BG 1 may apply even if there is a specific anti-avoidance provision that accompanies the provisions used or circumvented.

This “interpretation” is very subjective, outlining the manner in which a taxpayer may envision Parliament’s intentions.  The examples  and flowchart may be helpful, and the interpretation is a “must read” for documentation of significant planning transactions in New Zealand.

Best Practices for GAAR developments are included in prior posts including: GAAR; Poland’s reintroduction (8 August), EY 2013 survey; GAAR history/trends & Tax Treaty vs. domestic law application (7 August), and UK Finance Act 2013; GAAR has arrived (21 July).

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Tax Risk Management

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GAAR: Poland’s reintroduction

Click to access com_2012_722_en.pdf

Poland’s Minister of Finance plans to reintroduce a general anti-abuse rule (GAAR).  GAAR was in brief existence from 2003-2004, however the vague principles led to its removal.

The GAAR reintroduction follows the European Commission’s recommendation in December 2012, with a link attached for reference.  The European Commission Initiatives, Section 8, Recommendation on aggressive tax planning, states “The Commission also recommends a common GAAR.  This would help to ensure coherence and effectiveness in an area where Member State practice varies considerably.”

The GAAR proposal would apply to all types of taxes, with a 30% penalty of avoided tax via a “tax avoidance” transaction.  Appeal provisions are envisioned, in addition to advance rulings, although the time and expense for advance certainty may prove to be impractical.  A GAAR Council would provide an “expert” GAAR opinion that is not binding on the tax authorities.

Poland’s GAAR proposal should be analyzed for Best Practices, coupled with insights from prior posts: EY GAAR survey (7 August) and UK Finance Act 2013: GAAR has arrived (21 July).

It is hopeful that Poland will focus on learnings from the original GAAR introduction, as well as gain insight for Best Practices from other countries that have adopted a fair, and effective, GAAR.  It will be important to observe how the new GAAR legislation will correspond, or override, its double tax treaty provisions, and if the burden of proof will reside with the taxpayer and/or the tax authorities.

Most importantly, Best Practices should be continually reviewed, and revised,  for inclusion of new GAAR proposals and principles that are an integral part of the global Tax Risk Framework.  As stated in the European Commission report, each country’s practice is , and will continue to be, significantly different.  Robust documentation, in proactive tax risk management and planning memorandums, will provide directly relevant evidence to defend the subjective principles and guidelines of GAAR.

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Tax Risk Management

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EY 2013 survey: GAAR history/trends & Tax Treaty vs. domestic law application

Click to access GAAR_rising_1%20Feb_2013.pdf

The EY report is invaluable in explaining the origins of a general anti-avoidance rule (GAAR), recent developments and future trends.  It provides a comprehensive background on GAAR, including results from a survey of 24 countries.  The February 2013 report looks at various countries developing GAAR, European Commission recommendations, how and when GAAR measures may be invoked, and what companies can do to mitigate risk in their tax risk management.  One of the many highlights in the report is the comparison of tax treaties and domestic application of GAAR.

Examples of EY insights include the following:

  • GAAR is defined as a set of broad principles-based rules within a country’s tax code designed to counteract the perceived avoidance of tax.
  • Tax law designed to deal with particular transactions of concern are termed as either specific anti-avoidance rules (SAARs) or targeted anti-avoidance rules (TAARs).
  • China had started 248 GAAR cases in 2011, concluding 207 cases with taxes collected of $3.8 billion.
  • Each country will have its own definition of an “abusive” or “avoidance” transaction that could be the target of its GAAR.
  • A tax benefit, transaction or arrangement within GAAR regimes are not unified, thus requiring a close review of each country’s definitions.
  • GAAR independent review panels are developing to oversee its application
  • Virtually all countries have multiple SAAR and/or TAAR provisions, although only a few have been abolished with introduction of a GAAR.
  • Inconsistency of GAAR application to arrangements that have already been subject to one or more SAAR measures in that jurisdiction, including India, China and Chile.
  • China SAT seems to be expanding its beneficial ownership test into an anti-treaty shopping/anti-abuse test, creating more uncertainty.
  • The use of GAAR also extends to benefits provided by tax treaties.  Tax treaties include bilateral anti-avoidance provisions, although several countries are applying unilateral anti-avoidance measures via interpretations of existing treaties or applying domestic law GAAR provisions to treaty benefits.
  • Countries are including in their tax treaties explicit authorization of the application of domestic law anti-avoidance provisions.
  • Approx. 12 of 24 countries surveyed allow their GAAR provisions to override existing tax treaties, unilaterally or applying domestic GAAR.
  • 30% of participants from a 2012 GAAR webcast responded that they do not address GAAR within their tax risk management approach.
  • Best Practice: Use a tax governance framework with documented processes for significant transaction sign-off.
  • Best Practice: New GAAR, SAAR and TAAR proposals should be monitored and factored into the tax life cycle of a multinational business
  • Best Practice: Transaction documents should state the intended purpose of the overall transaction, as well as each step therein.
  • Best Practice: Document alternative positions considered, demonstrating that the final position was the only reasonable position to obtain the commercial objectives, and that there were no transactional steps taken that were explicable only in a tax benefit context.
  • Best Practice: Obtain external advice on significant transactions, including opinions on GAAR.

Several tables include insightful observations, including:

  1. Table 1, GAAR introduction timeline in various countries
  2. Table 2, Burden of proof for each country; taxpayer, tax authority, or shared
  3. Table 3, Examples of 2011-12 tax treaties with reference to application of domestic anti-avoidance rules in the treaty context.
  4. Table 4, Countries providing GAAR rulings/clearances

Additionally, eight questions are posed for a Board to ask in relation to GAAR:

  1. Does the transaction have a valid commercial purpose?
  2. Is the transaction unique and complex?
  3. Is the tax benefit material to the financial statement?
  4. Could the transaction  be undertaken in a different manner, without attracting the potential application of GAAR?
  5. Has an opinion been obtained that the transaction will more likely than not withstand a GAAR challenge?
  6. Is the transaction defendable in the public eye?
  7. What is the corporation’s tax risk profile both globally and locally?
  8. How comfortable is the corporation with litigation if it is required to defend the transaction?

The Appendix of the report provides answers, for each of the 24 countries, to the following queries:

  • Does a GAAR exist?  If so, year of introduction and effective date
  • Can the GAAR be applied retrospectively?
  • Do specific anti-abuse measures exist?
  • Does your country have specific legislation in place related to the indirect transfer of assets?
  • What are the circumstances in which the GAAR can be invoked?
  • Is the burden of proof on the taxpayer or taxing authority?
  • Does your country have a GAAR panel?
  • What is the attitude of the tax authority toward invoking a GAAR?
  • Is a clearance/rulings mechanism available?
  • Can the GAAR override treaties when invoked?
  • What penalties may result from the GAAR being invoked?
  • Provide a summary of key judicial decisions involving GAAR or other anti-abuse legislation.
  • Are there any legislative proposals or open consultations that may affect the future composition of a GAAR?

Prior posts for additional reference:

  • 6 August; U.N. Committee of Experts to address the Manual for Negotiation of Bilateral Tax Treaties in October 2013
  • 21 July; UK Finance Act 2013: GAAR has arrived
  • 19 July; OECD BEPS Report & Action Plan
  • 4 July; Italy: New Co-operative Compliance Program
  • 29 June; Board Oversight and Responsibilities for Tax Risk Management
  • 13 June; OECD: A Framework for Co-operative Compliance
  • 5 June; GAAR: India & International Perspective

This report is a comprehensive review of GAAR and should form a foundation for planning significant transactions and adopting Best Practices within the global Tax Risk Framework.  For example, the eight questions to be posed by the Board could form Best Practices for planning significant transactions.  The report is a valuable tool for regional and global tax teams as the trend of GAAR, and understanding its subjective principles, is becoming more complex in today’s ever-changing tax environment.   

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Tax Risk Management, Transfer Pricing

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U.N. Committee of Experts on International Cooperation in Tax Matters: update

http://www.un.org/esa/ffd/tax/

The U.N. Committee of Experts on International Cooperation in Tax Matters (U.N. Committee ) is responsible for drafting the U.N. model tax treaty and the Practical Manual on Transfer Pricing for Developing Countries.  The U.N. Committee’s work on international tax and transfer pricing developments should be watched closely by the international tax community.  Additionally, developments on important topics should be compared with that of the OECD, including its Revised Draft on Transfer Pricing Aspects of Intangibles (03 August post), White Paper on Transfer Pricing Documentation (31 July post) and the Base Erosion and Profit Shifting Action Plan (19 July post).

The attached link provides reference to its provisional agenda for the 21-25 October 2013 session, the appointment of 25 members to the U.N. Committee for a 4-year term expiring on 30 June 3017 and the U.N. Model Double Taxation Convention.

The 9th session of the U.N. Committee will address U.N. Model Tax Convention issues, including the following:

  • Article 4 (Resident): Application of treaty rules to hybrid entities
  • Article 5 (PE), including international VAT cases
  • Article 7 (Business Profits): Force of attraction principles
  • Article 9 (Associated Enterprises): Commentary update
  • Article 26 (Exchange of information)
  • Other topics, including provision on taxation of fees for technical services, issues for the next update of The Practical Transfer Pricing Manual for Developing Countries, and The Manual for Negotiation of Bilateral Tax Treaties between Developed and Developing Countries.

The 25 members were appointed by U.N. Secretary-General Ban Ki-moon and will act in their personal capacity.  A detailed biography of each member is included in the press release; a listing of their name and current position is provided herein for quick reference.

  1. Mr. Khalid Abdulrahman Almuftah, Deputy Director, Revenues and Tax Dept., Ministry of Economy and Finance, Qatar
  2. Mr. Mohammed Amine Baina, Chief, Division for International Cooperation, Dept. of Taxation, Ministry of Economy and Finance, Morocco
  3. Ms. Bernadette May Evelyn Butler, Legal Adviser, Ministry of Finance, Bahamas
  4. Mr. Andrew Dawson, Head, Tax Treaty Team, HMRC, UK
  5. Mr. El Hadj Ibrahima Diop, Director of Legislation and Litigation Studies, Ministry of Economy and Finance, Senegal
  6. Mr. Johan Cornelius de la Rey, Legal Officer, Legal and Policy Division, South African Revenue Service (SARS)
  7. Ms. Noor Azian Abdul Hamid, Director, Multinational Tax Dept., Inland Revenue Board (IRBM), Malaysia
  8. Ms. Liselott Kana, Head, Dept. of International Taxation, Internal Revenue Service, Chile
  9. Mr. Toshiyuki Kemmochi, Director, Mutual Agreement Procedures, National Tax Agency, Japan
  10. Mr. Cezary Krysiak, Director, Tax Policy Dept., Ministry of Finance, Poland
  11. Mr. Armando Lara Yaffar, Director General, Int’l Affairs, Dept. of Revenue, Ministry of Finance and Public Credit, Mexico
  12. Mr. Wolfgang Karl Albert Lasars, Director, International Tax Section, Federal Ministry of Finance, Germany
  13. Mr. Tizhong Liao, Deputy Director General of Tax Treaty, Dept. of International Taxation, State Administration of Taxation, China
  14. Mr. Henry John Louie, Deputy to the Int’l Tax Counsel (Treaty Affairs), U.S. Dept. of the Treasury
  15. Mr. Enrico Martino, Head, International Relations, Dept. of Finance, Ministry of the Economy and Finance, Italy
  16. Mr. Eric Nii Yarboi Mensah, Chief Tax Treaty Negotiator, Ghana Double Tax Treaty Convention Team
  17. Mr. Ignatius Kawaza Mvula, Assistant Director, Zambia Revenue Authority
  18. Ms. Carmel Peters, Policy Manager, Inland Revenue, New Zealand
  19. Mr. Jorge Antonio Deher Rachid, Tax and Customs, Embassy of Brazil, Washington, D.C.
  20. Mr. Satit Rungkasiri, Director General, Revenue Dept., Ministry of Finance, Thailand
  21. Ms. Pragya S. Saksena, Joint Secretary, Tax Policy and Legislation, Central Board of Direct Taxes (CBDT), Dept. of Revenue, Ministry of Finance, India
  22. Mr. Christoph Schelling, Head, Division for International Tax Affairs, State Secretariat for Int’l Financial Matters, Swiss Federal Dept. of Finance
  23. Mr. Stig B. Sollund, Director General and Head of Tax Law Dept., Ministry of Finance, Norway
  24. Ms. Ingela Willfors, Director, Int’l Tax Dept., Ministry of Finance, Sweden
  25. Mr. Ulvi Yusifov, Head, Int’l Treaties Division, Int’l Relations Dept., Ministry of Taxes, Azerbaijan

It will be interesting to observe the interaction of new U.N. Committee members, and most importantly the initiatives addressed against the backdrop of the OECD’s recent developments.

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OECD / UN, Tax Risk Management, Transfer Pricing

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EY 2013 Global Transfer Pricing survey: A sea of change

Click to access EY-2013-GTP-Survey.pdf

This very insightful, and timely, survey of senior tax professionals in 26 countries clearly portrays a significant increase in transfer pricing controversies and resulting double taxation.  The survey indicates that 66% of the respondents identified “risk management” as the highest transfer pricing priority.

Some challenges cited in the report include:

  • Governmental authorities expanding definitions of “aggressive tax planning”
  • Permanent Establishment (PE) assertions, including reliance on proposed changes to the commentary to Article 5 of the OECD Model Treaty
  • Reputational risks
  • Public perception
  • Increased transfer pricing complexity

Other findings include:

  1. 55% increase in Competent Authority cases from 2010
  2. 28% of the companies utilized Mutual Agreement Procedure (MAP)
  3. 26% of the companies entered into Advance Pricing Agreements (APAs)
  4. Master file documentation methodology may not be compliant in Africa, Asia and Latin America
  5. 41% expect intangibles to be the most important area in the next 2 years
  6. Intangible issues included assertion of uncompensated marketing intangibles and dispute over legal vs. beneficial ownership
  7. Over 75% of PE issues arose from frequent business travelers, seconded employees and providing services through employees or other personnel abroad (PE statistics on page 23)
  8. BRICs and Africa are #1 or #2 ranking in transfer pricing priority for 30% of such companies, although 75% of those companies have no full-time transfer pricing personnel located in those jurisdictions

The report concludes with detailed survey responses for each of the 26 countries, addressing the following topics:

  1. Importance of transfer pricing
  2. Audit and controversy experience
  3. Trends in transfer pricing approaches, topics and enforcement
  4. Operationalizing transfer pricing

Best Practice considerations presented for insight include:

  • Indirect taxes, including customs and VAT, should be an integral part of the transfer pricing process, notwithstanding different functional reporting
  • Attention to detail, via frequent reviews, for intercompany transactions should be  a recurring process to ensure substance matches the form cited in transfer pricing documentation
  • Review of current transfer pricing methodologies
  • Renewed focus on controversy and dispute resolution techniques, including MAP, APAs and arbitration
  • Reputational risk consideration

The survey provides a thoughtful perspective in addition to recently issued consultation documents by the OECD re: transfer pricing documentation and intangibles, as well as recent general anti-abuse rules (GAAR) drafted and/or legislated into law.

This survey is especially insightful when compared to prior posts re: OECD Revised Draft on Transfer Pricing Aspects of Intangibles (3 August), OECD White Paper on Transfer Pricing Documentation suggesting a Masterfile and Local file approach (31 July), UK Finance Act 2013: GAAR has arrived (21 July), OECD BEPS report and Action Plan (19 July), PwC PE survey: Trends & Challenges (14 July), OECD: A Framework for Co-operative Compliance (13 June), UN: Practical Manual on Transfer Pricing & Tax Training Initiatives (2 June), A new role: Head of tax controversy (3 May), Global Mobility & International Tax: Alignment for Best Practices (24 April), and  PE Risks & Best Practices for Awareness & Planning (14 April).

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Tax Risk Management, Transfer Pricing

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OECD (Revised) Draft: Transfer Pricing Aspects of Intangibles

http://www.oecd.org/ctp/transfer-pricing/intangibles-discussion-draft.htm

Working Party No. 6 of the Organization for Economic Cooperation and Development (“OECD”) has prepared a Revised Discussion Draft on Intangibles, following an earlier Discussion Draft in June 2012.  This revised Draft includes changes based upon comments received, including a public consultation, in 2012.

This Draft addresses, directly and indirectly, actions contained in the OECD Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”).  Refer to my 19 July 2013 post for information on the OECD BEPS Action Plan.

The changes in the Draft  include a new section addressing local market features, location savings, assembled workforce and group synergies, in addition to explanatory changes to the definition of intangibles.  As stated in the Revised Discussion Draft, a transfer pricing intangible is not solely determined by its general tax or accounting characterization.  The intangible definition is also mutually exclusive from the definition of royalties for purposes of Article 12 of the OECD Model Tax Convention.  Additionally, functions, assets and risks related to intangibles are determined via the functional analysis, and are not presumed to be held by the legal owner of the intangible.

The Draft includes an interesting discussion of the use of projected growth rates and discount rates, including examples in the Annex to illustrate the guidance on special considerations for intangibles.

Written comments may be submitted to the OECD on or before 1 October 2013.  A public consultation will also be held on 12-13 November 2013 in Paris, France, selecting speakers from those providing written comments.

Analogous to my 31 July 2013 post for the OECD White Paper on Transfer Pricing Documentation, this Revised Discussion Draft should be reviewed and compared with the current methodology for intangibles, noting significant variations for internal analysis.  Intangibles are a significant component of transfer pricing, thus this Draft should be seriously considered by all multinationals.

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OECD / UN, Tax Risk Management, Transfer Pricing

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OECD: White Paper on Transfer Pricing Documentation

http://www.oecd.org/tax/transfer-pricing-documentation.htm

The Organization for Economic Cooperation and Development (“OECD”) is quickly following up Step 13 in its Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”) for enhanced transparency, information on global income allocation, economic activity and taxes paid among countries, according to a common template.  Refer to my 19 July 2013 post for information on the OECD BEPS and Action Plan.

The White Paper takes a “big picture” approach, with interested parties invited to comment by 01 October 2013.  An insightful summary outlines significant differences in transfer pricing documentation requirements from country to country, concluding with a recommended two-tiered approach (“Coordinated Documentation Approach”) consisting of a Masterfile and a Local file.

The recommended Masterfile is broad in scope, requesting global legal ownership/structure, geographical location of principal operating entities, in addition to management structure and geographical location of key management personnel.  Major business lines would be described in extensive detail, as well as intangible strategies, intercompany financing activities, listing of APAs, MAP procedures and the consolidating income statement.

The Local File describes local management structure and geographical location of senior executives, recent business restructurings including transfers of intangibles, controlled transactions and financial information.

Annex 1 and 2 provide multi-country surveys on transfer pricing documentation and tax return disclosure requirements, with related sources of information for reference.

The OECD believes the Coordinated Documentation Approach offers a balanced trade-off between greater transparency and streamlined transfer pricing documentation requirements.

All international tax executives should follow public comments that are posted by  OECD for this new Coordinated Documentation approach, discuss advantages and disadvantages with their peers, in addition to determining if they will provide comments directly.  The current methodology of preparing transfer pricing documentation reports should be compared to this suggested approach to initiate insightful planning and efficiencies that will form Best Practices for future years.

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OECD / UN, Tax Risk Management, Transfer Pricing

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PwC transfer pricing survey: Intercompany loans, pooling, guarantees

http://www.pwc.com/gx/en/tax/transfer-pricing/navigating-the-complexity/download.jhtml

PwC has conducted a survey, as referenced in the attached link, of transfer pricing aspects for financial transactions in over 40 countries in the Americas, Asia Pacific and Europe.  The insightful information, current as of 1/1/2013, initially provides a comprehensive overview of intercompany loans, cash pooling and guarantees followed by transfer pricing details for each country.

Each country included in the survey provided responses to the following topics:

  • Transfer pricing rules and regulations, domestic / OECD guidelines
  • Thin capitalisation
  • Intercompany loans (arms-length nature, transfer pricing methodologies, etc.)
  • Cash pooling; transfer pricing methodologies
  • Intercompany guarantees
  • Documentation requirements
  • Advance certainty via APA, etc.

Transfer pricing questions and issues re: intercompany loans and various aspects of financial transactions are becoming more common and complex as businesses are continuing global expansion.  Accordingly, multinational tax and treasury departments need to be mutually aware of transfer pricing rules for arms-length principles, contemporaneous documentation requirements, and inherent risks / opportunities for intercompany financial transactions.

Evolving rules in this area dictate continual training, awareness and strategizing risks from a global tax and treasury perspective.  Transfer pricing training should be provided at regional / global treasury conferences;  conversely treasury should ensure tax is aware of new financing tools that arise in different markets to ensure alignment.

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Tax Risk Management, Transfer Pricing

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OECD Country MAP Profiles & Statistics – Valuable tools

http://www.oecd.org/ctp/dispute/countrymapprofiles.htm

http://www.oecd.org/ctp/dispute/mapstatistics20062011.htm

The links provide reference to the OECD Country MAP Profiles and MAP Statistics 2006-2011.  The OECD MAP content provides valuable information that should be included as an integral component of audit risk strategies.

The Country MAP Profiles provide the following content for OECD member countries, in addition to Argentina, People’s Republic of China, Russia, and South Africa:

  • Competent Authority contact information
  • Organisation of the Competent Authority
  • Scope of MAP & MAP Advance Pricing Arrangements (APAs)
  • References to domestic guidelines and administrative arrangements
  • MAP request content, timelines, fees and documentation requirements
  • Provisions on tax collection, penalties and interest pending outcome of the MAP process
  • Other dispute resolution mechanisms, and
  • Links to websites for the relevant jurisdiction.

The MAP Statistics include information on MAP inventories, cases initiated, completed, withdrawn, and average cycle time.  These statistics are provided for the OECD member countries and some non-OECD economies.  This information is very helpful in reviewing the trend of MAP filings in relevant jurisdictions.  There were 3,838 open MAP cases by OECD member countries at the end of 2011, with an average completion time of 25 months.

The OECD Forum on Tax Administration (FTA) convenes later this year to discuss Best Practices for improving MAP: refer to prior post 27 June 2013.

With the increase of transfer pricing controversies that are inherently complex and subjective in nature, MAP is a tool that is being used more frequently worldwide.  Examples of Best Practices to strategize MAP are provided for insight:

  • Document domestic and bilateral/multilateral avenues of appeal upon commencement of an audit to facilitate advance planning.
  • Review Double Tax Treaties for relevant Arbitration provisions that are providing an impetus for some jurisdictions to finalize negotiations.
  • Determine the interplay of domestic appeals (informal settlement, formal Appeals, Court filings, etc.) with MAP early in the audit process.
  • Outline deadlines for domestic appeals, MAP and other bilateral/multilateral tools (i.e. EU Arbitration Convention)
  • Develop a pro-forma multilateral calculation to strategize solutions minimizing double taxation.
  • Ensure MAP and other appeal strategies are integrated in the Tax Risk Framework.

    OECD Map with accession (green) and discussion...

    OECD Map with accession (green) and discussion (pink) countries added (Photo credit: Wikipedia the relevant jurisdictions)

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Audits, OECD / UN, Tax Risk Management

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OECD exchange of information: Multilateral Convention review

http://www.oecd.org/ctp/exchange-of-tax-information/conventiononmutualadministrativeassistanceintaxmatters.htm

This link provides access to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters prescribing procedures for the exchange of information between tax authorities, in addition to press releases and related documents.

The Convention, and its provisions, are becoming more important with increased tax transparency and sharing of Best Practices among tax jurisdictions.  The Multilateral Convention, as well as factors leading to its current and future importance provide valuable context in understanding the current state of affairs, and intentions to increase the exchange of information worldwide.

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OECD / UN, Tax Risk Management

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UK Finance Act 2013: GAAR has arrived

Click to access ukpga_20130029_en.pdf

http://www.hmrc.gov.uk/avoidance/gaar.htm

The links provide reference to the UK Finance Act 2013 and information about the development and intent of the new general anti-avoidance rule (GAAR).

The GAAR legislation, effective at date of enactment, includes various taxes with its stated purpose as counteracting tax advantages arising from tax arrangements that are abusive.  A “tax arrangement” must also be “abusive” for GAAR to apply. Part 5, in part, is provided herein for reference.

207 Meaning of “tax arrangements” and “abusive”

(1) Arrangements are “tax arrangements” if, having regard to all the circumstances, it would be reasonable to conclude that the obtaining of a tax advantage was the main purpose, or one of the main purposes, of the arrangements.

(2) Tax arrangements are “abusive” if they are arrangements the entering into or carrying out of which cannot reasonably be regarded as a reasonable course of action in relation to the relevant tax provisions, having regard to all the circumstances including

(a) whether the substantive results of the arrangements are consistent with any principles on which those provisions are based (whether express or implied) and the policy objectives of those provisions,

 (b) whether the means of achieving those results involves one or more  contrived or abnormal steps, and

(c) whether the arrangements are intended to exploit any shortcomings in those provisions.

The UK GAAR legislation, as in other countries, is principle based and subjective.  Accordingly,  a comprehensive understanding of the GAAR legislation, and inherent intent, is required.  An interesting aspect of the UK GAAR legislation is the formal procedure to be used by HMRC for application of GAAR.

Best Practices include preparation of a memorandum for planning transactions that objectively states the business / economic reasons to provide rationale for the proposal, thereby deriving business intent for application of the GAAR rules.  Additionally, benefits of early discussions with tax authorities in countries for which co-operative compliance programs are in place (refer to 13 June 2013 post: OECD – A Framework for Co-operative Compliance) should be considered.  

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OECD Base Erosion and Profit Shifting (BEPS) report & Action Plan

http://www.oecd.org/tax/beps.htm

Click to access OECD.pdf

The BEPS report, previously released, and the new Action Plan are available for public review, with many commentators already providing insight on the Action Plan.

The 24 month Action Plan is comprehensive and aggressive, with tax transparency and disclosure rules likely to be implemented early in that timeline.  The report also discusses an improvement of global rules in developing countries, further referenced by work of the Tax Inspectors without Borders study, as discussed in my 9 June 2013 post.

One very interesting proposal in the report is the development of a multilateral convention to address BEPS issues.  This will allow countries to rapidly implement some actions without formally renegotiating bilateral treaties.  Additionally, Appendix C provides examples of tax planning structures by multinational organizations.

The OECD BEPS report and Action Plan will provide additional momentum and debate for the proposed actions, for which multinationals should prepare an internal action plan to address such initiatives.

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OECD / UN, Tax Risk Management, Transfer Pricing

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Tax transparency; Seizing the initiative

Click to access EY_Tax_Transparency.pdf

I highly recommend reviewing this comprehensive publication by Ernst & Young, focusing on strategies and questions Boards should ask to prepare for tax transparency reporting.  One insightful section describes key stakeholders for tax transparency reporting, including consumers, NGOs, Parliamentarians, OECD, and the media.

The publication encompasses the following concepts:

  • Current context for transparency
  • Current tax transparency reporting requirements
  • What others are reporting
  • Information that could be disclosed
  • Challenges to be faced
  • Deriving value from tax transparency
  • Next steps

There is an excellent summary, at the end of the publication, depicting a structured approach for managing your tax profile, outlining ideas leading to a Best Practices strategy.

A Best Practices initiative for tax transparency reporting should be initiated, forming a framework to address challenges and identify opportunities.

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Tax Risk Management

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Australia: Tax return disclosures enacted into law

http://www.comlaw.gov.au/Details/C2013A00124

Australia has enacted tax return disclosures into law via amendments referenced in Schedule 5, Tax secrecy and transparency.  The Commissioner must, as soon as practicable after the end of the income year, make publicly available the following information for corporate tax entities with reported total income of $100 million or more, according to information reported in the entity’s tax return:

  • ABN
  • Total income for the income year
  • Taxable income or net income (if any) for the income year
  • Income tax payable (if any)

All multinationals should develop an action plan, if not already in place, outlining the method by which tax return disclosures are to be reported in Australia and other countries around the world.  The methodology should be aligned with the CFO, Board of Directors and senior leaders of the business.

The tax return information chosen for disclosure will not provide reasons why there may be significant differences between total income, taxable income and the resulting income tax payable (if any), and will likely provide a forum for public scrutiny and questions surrounding noted variances.

Accordingly, critical decisions re: additional voluntary disclosures, responses to questions generated by the disclosures, and other relevant factors should be considered within the context of the global Tax Risk Framework.  Valuable information can be obtained from tax disclosures of the extractive industries, including the impact of indirect taxes and non-tax contributions.

Tax transparency is a rapidly growing trend for which global strategies and Best Practices should be adopted to timely address current and future developments.

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Tax Risk Management

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PwC PE survey: Trends & Challenges

http://www.pwc.com/gx/en/tax/publications/permanent-establishments.jhtml

PwC has published results from a survey of more than 200 multinationals in Europe and the U.S., focused on Permanent Establishment (PE) challenges and trends.

Survey results include the following:

  • 86% cite increased mobility as a significant trend in triggering PE risk.
  • Difficulty in monitoring business activities, after PE guidance is provided.
  • Do’s and Don’ts provisions are hard to manage.
  • Audit readiness checks should be conducted to reduce PE risk.
  • Tax authorities are exhibiting more aggressiveness in assertions of PE, primarily focused in Europe.
  • Site visits and employee interviews are techniques used more often by tax authorities to identify risks.

My prior posts encompassing PE trends and Best Practices should be reviewed, including 14 April PE Risks and Best Practices, 24 April Global Mobility Alignment, 11 May and 20 May Branch activity risks.

Examples of Best Practices:

  • Confirmation of PE awareness and controls annually by CFO’s / Business Leaders, including Branches and emerging markets
  • PE template to facilitate audit readiness checks
  • PE internal reference guide
  • PE workshops with Internal Audit, Global Mobility and Business Leaders discussing examples of PE and addressing adequacy of controls
  • Discussion of PE cases in the media with regional and global tax teams to accurately and timely inform business leaders

PE risk is still increasing, thus additional focus should be directed to minimize this risk and integrate controls into the Tax Risk Framework.

Category:

PE, Tax Risk Management

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