Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

Best Practices for new Transfer Pricing disclosures & Peru’s new rules

http://www.kpmg.com/global/en/issuesandinsights/articlespublications/taxnewsflash/pages/peru-changes-to-transfer-pricing-obligations.aspx

The Peruvian tax authority (SUNAT) has implemented new rules for submission of a transfer pricing study annually by corporate taxpayers with transactions or revenue exceeding prescribed amounts.  This change will be effective for the 2012 year, to be submitted in October 2013.  Previously, as in many other countries, this report was required to be available upon request.

The transfer pricing report is in addition to an information return disclosing intercompany transactions.

This new rule highlights several important governance questions for new guidance on transfer pricing documentation, including the following:

  • How are members of the transfer pricing team (local/regional/global) informed of new disclosures timely for planning and process changes?
  • Are there gaps that could occur, resulting in last minute actions or untimely disclosures?  If so, controls are necessary to mitigate such gaps.
  • Is there an internal or external process documented, and used, to review new transfer pricing disclosure rules on a regular basis?
  • Is there timely engagement with the relevant Business Units to ensure alignment and execution?
  • What procedures are in place to implement new transfer pricing disclosures into the transfer pricing documentation and review process?
  • Is the information readily available, or are system changes required?
  • Have the new disclosures been discussed with the local auditors to ensure alignment?

This topic is increasing in importance, as countries initiate or expand contemporaneous information and transfer pricing documentation requirements.  Such disclosures include identification of transfer pricing methods used for intercompany transactions, assertion that relevant documentation exists and is readily available, amounts of intercompany transactions for goods and services, etc.

Category:

Tax Risk Management, Transfer Pricing

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Global Perspective & Challenges: VAT / GST/ Indirect taxes

http://www.pwc.com/gx/en/tax/indirect-taxes/shifting-balance.jhtml

PwC has recently published this report highlighting new challenges and forward looking insights for indirect taxes.  Detailed country summaries are presented for Brazil, Canada, China, China, Germany, India, Russia, Singapore, South Africa, United Kingdom, and the United States.  The article referenced at the end of the post highlights India’s intentions to introduce a GST.

VAT systems are present in more than 150 countries, with VAT receipts representing approx. 20% of total tax revenue in the OECD countries.  As VAT rates are increasing, tax bases are broadening, and EU joint audits with VAT are commencing, indirect taxes are requiring added focus for effective tax risk management.

The OECD’s Global Forum on VAT held its first meeting in November 2012, striving to increase collaboration and establish Best Practices in VAT administration and compliance.  The OECD International VAT/GST Guidelines will be finalized by year-end 2013, studying VAT neutrality, the destination principle for supply of services and intangibles, anti-abuse provisions, as well as enhancing mutual cooperation and dispute resolution mechanisms.

The report highlights Best Practice ideas, including the following:

  • Identifying responsibility and awareness for indirect taxes, including environmental taxes
  • Drafting contracts with provisions for new VAT/GST consequences in different jurisdictions
  • Import and export risks and opportunities for logistic planning
  • Risk awareness for indirect tax consequences
  • Reviewing refund opportunities based on case law precedents
  • Developing a methodology for reviewing and testing VAT characterizations and rate changes
  • Inclusion of indirect taxes as an integral component of the global tax strategy and Tax Risk Framework

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Category:

OECD / UN, Tax Risk Management

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Italy: New Co-operative Compliance Program

http://www.agenziaentrate.gov.it/wps/content/nsilib/nsi/documentazione/regime+di+adempimento+collaborativo+-+grandi+contribuenti/pilot+project+-+english+version

The Italian tax administration will be accepting applications until 31 July 2013 for their new Co-operative Compliance program.  The OECD Framework for Co-operative Compliance, as summarized in my posting of 13 June 2013, is intended to bring certainty into the tax filing and controversy process while  developing a win-win relationship.

Mutual cooperation and transparency are the keys to success for this new initiative.

Mandatory requirements

  • being qualified as a “Large Taxpayer” (under the section 27, paragraph 10, of decree-law no. 185/2008, as converted by section 1 of law no. 2/2009), i.e. taxpayers with total turnover or operating revenues not less than 100 million/€, with reference to the tax year 2011;
  • having implemented an organizational model pursuant to section 6 of legislative Decree no. 231/2001 or having adopted a “Tax Control Framework” to manage tax risks

Optional requirements

  • belonging to a multinational group of companies, or to carry out its business activity in Italy or abroad through permanent establishments;
  • having adopted similar cooperative compliance programmes in foreign jurisdictions or having subscribed a code of conduct with other tax administrations;
  • having already entered into initiatives falling within the concept of cooperative compliance in Italy, such as the International Tax Ruling (provided for by section 8 of decree-law no. 269 of 30 September 2003, converted with amendments into law no. 326 of 24 November 2003 and implemented with Regulation of the Director of the Revenue Agency of 23 July 2004) or having adopted the transfer pricing documentation requirements regime.

Note the importance of having established a Tax Control Framework to manage tax risks, a mandatory requirement for this program.

Category:

Audits, Tax Risk Management

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EY survey: Tax risk awareness gaps

Click to access 2012-13-Canadian-tax-governance-survey.pdf

This insightful survey, published by Ernst & Young, polled Canadian executives from 120 companies to review the tax level awareness in organizations.  The findings include the following observations:

  • 56% of non-tax business unit leaders are unfamiliar with risk management policies.
  • 7% of time spent by the tax function is devoted to tax risk management reporting.
  • 15% of tax risks and opportunities are identified timely.
  • Over 50% of the respondents are planning to improve existing tax risk policies and procedures.
  • Significant areas of tax risk requiring improvement include transfer pricing processes and controversy, foreign tax planning, and legal entity accounting.

The findings should be compared to current Best Practices within every organization.  Some ideas for consideration include:

  1. Develop / review the Tax Risk Management Policy.
  2. Communicate all significant tax risks, and corresponding Tax Risk Management Policy, to business leaders globally.
  3. Prioritize tax risk awareness, including reputation risk, in business reviews and training.
  4. Measure the time spent by the tax function on tax risk awareness and internal controls.  (Refer to 23 June blog posting)
  5. Develop a system to measure tax risks on a quarterly basis to address potential issues timely.
  6. Conduct tax risk workshops with the business leaders.
  7. Review significant risks, noting areas for improvement, and establish a timeline to address such risks.
  8. Address tax risk management as a priority agenda item for the global tax function.
  9. Develop an efficient process to address tax controversies around the world.

Tax risk awareness is a critical issue that should be prioritized within an organization, ensuring alignment with the CFO and Board of Directors.

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Tax Risk Management

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Board Oversight and Responsibilities for Tax Risk Management

Click to access item74308.pdf

Click to access Erle.pdf

Two excellent articles are linked to review Best Practices for tax risk management from a Board perspective.  The first article is by the Canadian Chartered Professional Accountants and poses various questions and concepts for Directors to ask.  The second article, approached from a practitioners point of view, was written by a KPMG partner.  A related article is also attached as reference at the end of this posting.

The first article reviews various tax risks, including risks of tax planning and subsequent implementation, financial disclosures, tax compliance and audits.  Examples of interesting insights and questions include the following:

  • Are outside consultants an integral part of tax planning?
  • Are direct, and indirect, tax risks addressed?
  • What are the capabilities of internal resources?
  • Are post implementation monitoring processes in place?
  • What are the trends of tax authorities in major jurisdictions?
  • How does the company keep up with change?
  • Is reputational risk considered in tax appeals or court filings?
  • What is the mindset of internal management in foreign jurisdictions re: alignment of overall strategies?
  • What are the source of tax planning ideas?
  • Have tax saving opportunities been missed?

The second article entitled “Tax Risk Management and Board Responsibility” defines a  tax philosophy and establishment of a Tax Risk Framework.  A tax philosophy pyramid is presented that correlates to tax risk.  In addition, the following components of a Tax Risk Management Strategy are discussed:

  • Strategy
  • Risk management
  • Tax profile, relationships and communication
  • Processes and technology
  • Internal qualifications of tax staff

Both articles are excellent reading, and should form a basis for Best Practices to ensure alignment with Board responsibilities and expectations.

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Tax Risk Management

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OECD FTA MAP forum to develop Best Practices

A new forum, open to all members of the Forum on Tax Administration (FTA), will convene later this year to discuss Best Practices for improving MAP.  Topics that may be discussed include:

  • Development of a strategic plan
  • Resource limitations
  • Relationship building
  • Identifying trends in disputes
  • Increasing APA’s and accelerated CA procedures
  • Roll-over adjustments
  • Multilateral case procedures
  • Taxpayer’s involvement in MAP resolution
  • Achieving certainty sooner for a win-win result

This new forum will be an interesting development for all.

Category:

Audits, OECD / UN, Tax Risk Management

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OECD report to the G20: Status, training, effectiveness

http://www.oecd.org/tax/2013-OECD-SG-Report-to-G20-Heads-of-Government.pdf

The OECD report provides relevant information worthy of review, including the following items:

  • 119 member jurisdictions have committed to the Transparency & Exchange of Information initiative (except for Lebanon),
  • Status of ongoing technical assistance and training objectives,
  • Competent Authority database is in place, containing information for over 70 jurisdictions,
  • Measurement techniques to determine effectiveness, and
  • Appendices listing various factors in providing exchange of information, including confidentiality provisions, rights and safeguards.

These notable efforts are ongoing, providing timely and informative information that should be shared.

Category:

OECD / UN, Tax Risk Management

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Best Practice Correlation: Risk Governance & Tax Resources

Tax jurisdictions and authorities are increasing their global focus in all aspects of tax risk, most recently promoting Beneficial Ownership transparency rules and other initiatives at the G8 Conference.  Conversely, multinational tax teams should also be increasing their resources, and time spent, on addressing global tax risks, enhancing internal governance including a Tax Risk Framework / Policy, scenario planning, and informing the business.

We can view this correlation as the increased significance of tax risks, including reputational risk, compared to tax resource allocation for risk governance.  It may also be beneficial to distinguish internal and external tax resources used in the risk methodology.  The comparison may provide interesting results, from which the proper emphasis could be used to form additional Best Practices.  This comparison could also be viewed in contrast to tax compliance and other tax projects for additional perspective.

I invite your comments on this thought, and Best Practices that you can share.

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Tax Risk Management

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OECD Global Forum on Transparency and Exchange of Information: Activities

http://www.oecd.org/tax/transparency

The Global Forum has 120 members and is the premier international body re: implementation of internationally agreed transparency standards and exchange of information.  This Forum is very active in today’s tax environment, as demonstrated by its recent activities including:

  • 2nd meeting of the Competent Authorities on 30-31 May 2013, attended by 174 delegates from 77 jurisdictions.  Delegates shared procedures for Exchange of Information networks to tackle tax evasion, tools to enhance effective communication between Competent Authorities, as well as providing opportunities to  share experiences and practices.
  • Regional Training Seminar in Brazil 7-10 May 2013, attended by 70 tax administrators from Argentina, Brazil, Columbia, Costa Rica, Dominican Republic, El Salvador, Paraguay and Uruguay.  Panama and the United Kingdom provided expert trainers, focusing on an OECD overview of Exchange of Information, the 2012 update to Article 26 of the OECD Model Tax Convention and its Commentary, and the Multilateral Convention on Mutual Administrative Assistance.
  •   Regional Training Seminar in Dakar, Senegal 24-26 April 2013, attended by 20 tax authorities in 8 francophone African countries (Burkina Faso, Cameroon, Democratic Republic of Congo, Gabon, Morocco, Niger, Senegal and Tunisia).  The African countries are recent members of the Global Forum and will have Phase 1 peer reviews in 2014.  Belgium and Qatar provided expert trainers, focusing on the peer review process and preparation for evaluation of legal and regulatory frameworks for the exchange of information.

The activities of this Forum are visibly expanding transparency initiatives and the exchange of information around the world.  The recent G8 conference encouraged all countries to join in order to share mutual benefits.

Regional and global tax teams should review internal processes to ensure global consistency and adherence with internal governance protocols.  Additionally, a dialogue should be established between tax and the business leaders to heighten global awareness and ensure strategic alignment.

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OECD / UN, Tax Risk Management, Transfer Pricing

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EU VAT forum / VAT Rulings test case

http://ec.europa.eu/taxation_customs/taxation/vat/key_documents/eu_vat_forum/index_en.htm

Click to access vat-forum-note-information_en.pdf

The EU VAT forum is a collaboration between tax authorities and business representatives to work on common interests.  The first link provides additional information, including a list of the member organizations that were appointed for a three year mandate starting on 1 October 2012.

Thirteen EU Member States have also agreed to participate in a test case for cross-border VAT rulings.  This program commenced on 1 June 2013 and is scheduled to last until 31 December 2013.  The link provides procedural rules for submission of a private ruling request.  The following Member States participate in this project:

  • Belgium
  • Estonia
  • Spain
  • France
  • Cyprus
  • Lithuania
  • Latvia
  • Hungary
  • Malta
  • Netherlands
  • Portugal
  • Slovenia
  • United Kingdom

It would be beneficial to follow developments of the EU VAT forum, including the test case for cross-border rulings, to build upon Best Practices developed globally and integrated into the tax risk framework.  Additionally, it would be an ideal time to form peer relationships, if not already developed, with business members of the EU VAT forum.

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Tax Risk Management

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OECD: A Framework for Co-operative Compliance

http://www.oecd.org/tax/administration/co-operative-compliance.htm

This insightful report focuses on practical experiences of 24 countries, with a chart summarizing each country’s status for this initiative.  Additional features are identified leading to successful “co-operative compliance” strategies.

A framework is developed, based on a business case approach, for revenue authorities to measure results, and success.  The report adopts a systematic approach to tax risk and discusses the five pillars established in 2008 based on understandings for:

  • Commercial awareness
  • Impartiality
  • Proportionality
  • Openness through disclosure and transparency
  • Responsiveness

Evolving concepts include:

  • Future direction of initiatives
  • Multilateral co-operative compliance
  • Approaches by tax authorities to measure results and success.

The report provides useful links in Appendix A for country specific information and is an excellent reference to develop further understanding into this rapidly growing initiative, while providing a foundation for Best Practices including:

  1. Documentation of the current enhanced relationship / co-operative compliance methods in use.
  2. Reviewing available co-operative compliance programs for the 24 countries in the report.
  3. Developing a process determining if, when and how the voluntary programs are to be adopted.
  4. Developing a measurement for success based on current initiatives, as well as benchmarking results and experiences with your peers.
  5. Reviewing this evolving initiative annually.
  6. Developing Memorandum of Understanding learnings, as programs are both formal and informal in approach.
  7. Advising regional teams of country developments for continual awareness and future opportunities.
  8. Comparing resource limitations with potential benefits for future co-operative compliance initiatives.

Category:

Audits, OECD / UN, Tax Risk Management

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Global Tax Policy in 2013: report by Ernst & Young LLP

Click to access TPC_outlook.pdf

This informative publication reviews tax policies in 60 countries, against a backdrop of today’s tax environment with continuing controversy and disputes as countries pursue general anti-avoidance rules (GAAR) and suggest public disclosure initiatives for tax payments by multinational corporations.

As OECD and UN tax initiatives are increasing in scope, coupled with developing countries continually evolving their tax proficiencies, this publication provides valuable context for the present and expectations in the near future.

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Tax Risk Management

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OECD: Tax Inspectors Without Borders 2013 initiative

Click to access Tax-Dev_3_CoChair_Statement.pdf

The OECD’s Task Force on Tax and Development will use this concept to assist developing countries by providing international auditing expertise and advice to better address tax base erosion, including tax evasion and avoidance.  This initiative  is led by the Commissioner General of the South Africa Revenue Service, South Africa’s Deputy Finance Minister and Director of the OECD’s Centre for Tax Policy and Administration.

The Tax Inspectors Without Borders program will match demand from countries requesting international tax audit assistance with a supply of international experts, primarily consisting of tax inspectors in other tax administrations.  Accordingly, the experts will now be made available to developing countries.

The initiative is being launched this year, thus communication with the auditors in developing countries should include a discussion on the use of this concept, a listing of the respective experts and the communications that could be shared with the corporation.

It will be interesting to see the development of this initiative, the sharing of information, memorandums of understanding with the corporation or, absent an explicit statement that the country is using this initiative, any impact on the appeal process resulting from assessments of this sharing program.  Additionally, it would be interesting to compare the developing countries that use this program versus, or along with, tax training from the United Nations, posted in the blog dated 2 June 2013.

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OECD / UN, Tax Risk Management

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GAAR: India & International Perspective

Click to access pwc-white-paper-on-gaar.pdf

This publication provides a very interesting treatise on the development of GAAR in India, including an international perspective in Appendix B for the United States, S. Africa, Germany, China, Canada, United Kingdom and Australia.

Importantly, the publication sets forth the OECD definitions for tax evasion, tax avoidance and tax planning for clarity.

This concept is increasing in importance, and should be followed closely with ideas of forming Best Practices re: tax planning, tax documentation, etc.

Ideas for Best Practice consideration:

  • Address the concepts of GAAR, formal or informal, as part of every tax planning exercise.
  • Ensure the global tax team is informed about the latest GAAR developments to increase awareness and responsibility.
  • Brainstorm ideas about GAAR, forming Best Practices for the organization.
  • Proactively ask for input from external advisors to gain different perspectives on this evolving topic.
  • Share your ideas with your peers from other organizations for a win-win result.

Category:

Tax Risk Management, Transfer Pricing

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New Tax Developments: Creating Efficiency & Effectiveness in a Tax Organization

We are all confronted with receiving several daily emails from many sources focused on the latest developments in all areas of tax: International, Federal, State, Direct / Indirect Taxes including VAT, etc.  Individuals in a tax organization, located in various parts of the world, generally try to browse the latest news for their area of responsibility, creating duplication of effort and the collective loss of valuable time.  Additionally, as tax responsibilities increase with limited talent resources and budget constraints, it becomes exponentially more difficult.  Opportunities may be lost, while risks of “not knowing” are also increasing.  The obligation to use new knowledge effectively could be viewed as a process to potentially gain efficiencies.

The following ideas are provided for consideration:

  • Share great resources and bookmarks with peers within your organization and global network, resulting in a Best Practice resource listing.
  • For tax teams organized by function, assign one team member of each function the daily task of reviewing the relevant sources of new developments, summarizing those articles that may be relevant and distribute to other team members to further investigate the impact upon the company and action steps.  This responsibility should be an objective, and measured, part of their job description to further enhance responsibility and accountability.  This change should create more time for other members within that function also browsing the latest, and often identical, developments.
  • Review the budget for cost/benefit effectiveness; coupled with a link to past success based on utilizing that particular resource.
  • Review fees incurred to obtain information, such as tax treaties, from external parties; could this resource be in-sourced more effectively?
  • Meet with your advisors providing tax developments; discuss the possibility of having them briefly summarize benefits (company specific) from key developments when you receive them, versus a straight transcript of all developments that contain many items that are not relevant.
  • Review key developments monthly within the functions and /or overall team to ensure relevant items are receiving priority and action plans.  This review could be internal, as well as coordinated with external advisors, to ensure there are no gaps.  Proactive advisors should recommend this action for a win-win result to encourage interaction and alignment, while also providing a good opportunity for brainstorming other ideas.
  • Review the legal structure efficiency, at least annually, to determine if business strategies have changed and/or new developments have occurred that provide opportunities.
  • Highlight developments aligned with your strategic tax objectives.
  • Align tax developments with the Tax Risk Framework.

I look forward to your insights.

Category:

Leadership, Tax Risk Management

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