Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Tax Risk Management’ Category

UN: Practical Manual on Transfer Pricing & Tax Training Initiatives

Click to access UN_Manual_TransferPricing.pdf

This link directs you to the final version of the U.N’s Practical Manual on Transfer Pricing for Developing Countries.  This version corrects minor technical errors in the 2012 version.  The separate country guidance is already attracting controversy since these countries are provided an official platform to express their views on location-specific advantages, etc. that compete with OECD guidelines.

In addition to this document, Alexander Trepelkov, Director of Financing for Development Office (FFDO), U.N. Department of Economic and Social Affairs has stated three primary initiatives of the FFDO.  The three initiatives will create tax training tools to:

  1. Strengthen developing nations’ capacity to conduct transfer pricing analyses,
  2. Negotiate, administer, and interpret tax treaties, and
  3. Develop tax administration systems.

Transfer pricing analyses initiative:

  • A meeting is being held this week to determine the scope and content of the project, focused on supporting tax administrators apply the arms-length principle to transactions between associated enterprises.

Tax treaty initiative: Training tools in development for tax administrators

  • Fundamentals of tax treaties course, including similarities/differences between the U.N. models, is planned for early 2014
  • Advanced tax treaty course to be developed jointly with the OECD, ensuring materials covering the U.N. model are included
  • A joint project to create training tools on tax treaty administration with the German Federal Ministry for Economic Development and Cooperation.

Develop tax administration systems initiative:

  • A joint project with the Inter-American Center of Tax Administrations to develop an empirical method to measure and assess tax administration cost.  Pilot programs are taking place in Costa Rica and Uruguay.

These developments should be closely followed, especially in developing countries that are developing transfer pricing expertise and non-OECD countries that have publicly stated their views in the U.N.’s Practical Manual on Transfer Pricing for Developing Countries.  This insight is also valuable information to review in a pre-audit strategy for such countries, having advance knowledge of their stated positions and differences with OECD methodology.

 

 

 

Category:

Audits, OECD / UN, Tax Risk Management

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Post-Audit Strategies: Best Practices

This post is a complement to my 5 April Pre-Audit Strategies blog.  Pre-audit strategies are addressed, the audit is conducted, ultimate settlement is achieved and workpapers are returned to the files.  Post-audit tax strategies can be utilized to address learnings for future audits, critique the pre-audit strategy approach, and form Best Practices to minimize global risks.

The following ideas should be beneficial in a post-audit tax strategy review:

  •  List all items in the pre-audit strategy checklist, using my prior blog as a reference along with your ideas.  Based on hindsight, provide a rating of 1 to 5 for each strategy with comments.
  • Revise the global checklist, if applicable, for future audits.
  • Cross-reference the pre-audit checklist against the top risks encountered / not initially settled in the audit for correlation.  Are there items that should have been performed before commencement of the audit that were not foreseen at the time?
  • Review utilization of tax counsel in the audit to address significant risks; were they involved, should they have been involved earlier, was counsel appropriate for the risks being contested, what learnings can be gained?
  • Were audit meetings negotiated efficiently using the appropriate individuals?  Should there have been additional training to address significant tax risks, educate the auditor in the company’s transfer pricing methodology, etc.?
  • Should a company overview have been provided, if applicable, to provide context for the auditor prior to requests for data?
  • Conduct a 360 feedback with everyone involved in the audit to gain efficiencies in the ways of working.
  • Were there basic misunderstandings between the auditor and the company that could have been addressed differently?
  • Assess the consistency of audit responses with other audits being conducted globally; are they globally consistent to form a uniform basis for discussions between tax authorities sharing information?
  • Are there new risks identified that should be included in the global Tax Risk Framework?
  • Were audit defense mechanisms reviewed timely to plan effectively?
  • For US multinational companies, were memorandums prepared for foreign audits to obtain additional assurance for receiving the benefit of a Foreign Tax Credit?  Foreign counsel should be proactive in this effort from the beginning of the audit, outlining cost/benefit relationships, practical appeal opportunities, probability of success for alternative appeals, etc.  This memorandum should be discussed early in the audit to align expectations.
  • Review precedents established for future years, and applicability for post-audit years.
  • Review tax reserves established for the audit years, and all open years.
  • Provide a brief memoranda to the audit participants and senior management, summarizing the audit and successful interaction of internal and external resources.
  • Were Double Tax Treaty, bilateral and/ or multilateral defenses used?  Review their effectiveness, or choice not to use.
  • Review the interaction of internal and external resources; who was in control of the strategy?
  • In today’s environment of increased collaboration between the tax authorities and multinational companies, should an enhanced collaborative tax return / audit strategy be considered to provide timely certainty?
  • Develop a post-audit tax checklist as a learning tool for individuals engaged in tax audits.

The above points should form a foundation to engage in this beneficial exercise, highlighting learnings and opportunities, while adopting a Best Practices approach.

I look forward to your valuable comments.

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Audits, Tax Risk Management

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The Tax Foundation: an informative resource

http://taxfoundation.org

The Tax Foundation is a nonpartisan research organization that monitors U.S. fiscal policy.  “The Tax Foundation’s Center for Federal Tax Policy produces and promotes timely and high-quality data, research, and analysis on federal tax issues that influences the debate toward economically principled policies.”  There are interesting articles and publications available at their website.

In a report dated 21 May, 2013 entitled “Are Multinational Companies Dodging Their Taxes?” the Foundation found that U.S. multinational corporations paid more than $100 billion – an average effective rate of 25 percent – in foreign income taxes in 2009.  This information is especially relevant as the issue of international tax payments was addressed on Capitol Hill when Apple executives testified before a Senate subcommittee.

A paragraph at the bottom of the article focuses on the complexity of international taxation for U.S. multinational corporations that is often overlooked in today’s tax environment, stating that “People who criticize U.S. companies for ‘avoiding’ taxes on their foreign earnings need to be more careful with their language and acknowledge that our worldwide tax system requires U.S. firms to pay taxes twice on their foreign profits, before they can reinvest those profits back home.”

Another Tax Foundation publication entitled “U.S. Multinationals Paid More Than $100 Billion in Foreign Income Taxes” is also interesting, as it includes a table that lists 2009 country data in order of Taxable income, Foreign taxes paid/accrued/deemed paid, and Average Effective Tax Rate.  For example, the average effective tax rate is 62.7% for Nigeria, approx. 45% for Indonesia and Italy, while the effective tax rates for Norway and South Korea exceed 60%.

This resource is useful for U.S. multinational corporations, and other multinationals, as an information resource in today’s complex tax environment.

The statement that people need to be more careful with their language can also be correlated to the observation that terms used interchangeably by tax authorities and governments include: tax planning, aggressive tax planning, tax avoidance, evasion and fraud.  The absence of publicly stating important differences of such terms may lead to misleading statements and inappropriate conclusions.

I would encourage everyone to be familiar with this valuable resource.

Related articles

http://www.wired.co.uk/news/archive/2013-05/22/eric-schmidt-tax

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Tax Risk Management

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Tax Risks & Your Tax Organization: Best Practice Alignment

A proliferation of complex and significant tax risks are at the forefront of global news.  Aggressive tax planning, tax avoidance, tax evasion and fraud are terms used interchangeably to describe actions by multinationals.  Tax authorities, governments, G8, G20, among others, are discussing new ways to combat these perceived risks in the form of additional tax transparency, audit resources, new legislation, etc.  Similarly, tax organization structures should also be reviewed based on a tax risk management approach.  Ideas for developing Best Practices in tax risk management include the following:

  • List the top 5 tax risks; then align these risks with the tax personnel whose primary function it is to focus on such risks.
  • Are the top 5 risks being managed efficiently internally and / or externally?
  • Is each risk the top priority of one or more members of the tax team?
  • Is the strength of each tax member aligned with the respective risk?
  • Are you currently able to shift resources away from geographical / functional responsibilities to address current risks?
  • Are the tax members adding focus on these risks in addition to their other responsibilities?
  • Have specific strategies been developed to address the top tax risks, and champions assignable for each risk?
  • Are specific training courses being developed to better inform the tax team and the business of developing risks?
  • Are proactive discussions being held with senior management and the Board to ensure efficient tax risk management?
  • Is there a quarterly tax risk review to assess status and future actions?
  • Have internal procedures been reviewed, as well as mitigating controls, to address potential risk gaps?
  • Is the business aware of such risks on an ongoing basis?
  • Is this an opportunity to review tax resources to achieve the proper focus on the top tax risks?
  • Compare the current tax organizational structure with the tax risks; is it fit for purpose?
  • Review Best Practices for obtaining APA’s, entering mutual audit procedures such as CAP, horizontal monitoring, enhanced cooperation in today’s increased emphasis on mutuality and and tax transparency with tax authorities.
  • Who conducts audit meetings with tax authorities around the world?  Is this an opportunity to minimize risks at an early stage?  Are these individuals knowledgeable of the top tax risks?  Do you conduct training for audit meetings, including negotiation skills?
  • Is internal audit aligned to identify tax risk gaps in their routine audit reviews?
  • Is Global Mobility trained to identify potential PE risks?  Consider a review of their internal processes for assignments.
  • Who reviews Branch activities to ensure such activities do not inadvertently lead to a PE?
  • Review the Transfer Pricing documentation framework to address transfer pricing issues early.
  • Ensure Treasury is aligned with the tax risks and processes are in place for intercompany loan arrangements.
  • Align cross-functionally to ensure new strategies, or a change in current strategies, are reviewed for tax risk exposure.

In summary, I would encourage a review of the tax organization structure based upon a creative tax risk approach, as compared to the present organization to highlight opportunities and Best Practices.

Category:

Audits, Tax Risk Management

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A European Taxpayers’ Code

http://ec.europa.eu/taxation_customs/common/consultations/tax/2013_tpcode_en.htm

The Commission adopted on 27th June 2012 a Communication on the fight against tax fraud and tax evasion. An Action Plan which details concrete proposals to strengthen the fight against tax fraud and tax evasion was adopted on 6th December 2012.

One of the 34 measures contained in the Action Plan is the development of a European Taxpayer’s Code which is described as follows (action 17):

“In order to improve tax compliance, the Commission will compile good administrative practices in Member States to develop a taxpayer’s code setting out best practices for enhancing cooperation, trust and confidence between tax administrations and taxpayers, for ensuring greater transparency on the rights and obligations of taxpayers and encouraging a service-oriented approach.

The Commission will launch a public consultation on this at the beginning of 2013. By improving relations between taxpayers and tax administrations, enhancing transparency of tax rules, reducing the risk of mistakes with potentially severe consequences for taxpayers and encouraging tax compliance, encouraging Member States’ administrations to apply a taxpayer’s code will help to contribute to more effective tax collection.”

In anticipation of this initiative, some points worthy of consideration are:

  • Does your company have a Taxpayers’ Code or Best Practices within a Tax Policy or Tax Risk Policy?
  • Should the concept of a Taxpayers’ Code be discussed at the beginning of an audit to enhance trust and confidence?
  • Will this initiative be helpful in a simultaneous or joint audit?
  • Should a discussion be initiated with the auditor to establish a mutual Taxpayers’ Code?

I look forward to your thoughts on this interesting topic.

Related articles

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Audits, Tax Risk Management

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Branch activity tax risk: Google UK controversy

http://news.yahoo.com/uk-lawmakers-set-date-google-ernst-young-tax-155316417.html

As this news has been widely reported, this controversy highlights the need to aggressively govern the activities of significant Branches worldwide.  This issue is a reminder in today’s tax environment of the necessity for diligence and governance for Branch operations.  The following ideas are presented for review and comment.

  • Review all material on your company’s website re: location of sales activity, associates and job postings.
  • Review job titles and descriptions for all personnel in Branches worldwide.
  • Compare Branch accounts and related disclosures with actual activities on an ongoing basis for consistency.
  • Have a Do’s and Don’ts list that is reviewed annually with individuals having market support activities.
  • Align with Global Mobility re: assignments/transfers of individuals to Branches with Sales titles and responsibilities.
  • Compare actual activities with the legal constraints of a Branch in the relevant jurisdiction.
  • Put a plan in place to regularly determine if a Branch is the best legal form of conducting business, vs. subsidiary, etc.
  • Conduct annual trainings at significant Branches to ensure the activities align with the legal form of doing business.
  • Ensure the concept of PE is well understood by individuals accountable for the Branch operations.
  • What job titles are individuals allowed to include on their business cards?
  • How do Branch personnel represent themselves to the external trade?
  • Is there an objective benchmark (i.e., number of personnel) for Branches that triggers an automatic review?
  • Review the relevant Double Tax Treaty safe-harbor PE provisions.
  • Reputational risk: Consider how Branch activities impact the Tax ERM framework, and monitoring controls in place.

It will be interesting to track the activities of this controversy and analyze how to further minimize risks for Branch activities.

Category:

PE, Tax Risk Management, Transfer Pricing

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Tax Counsel: Proactive Risk Management

As governments and tax authorities are increasing their focus on transfer pricing issues, aggressive audit approaches and appeal techniques, multinationals should also ensure their integration with internal and external counsel is aligned.  This alignment should be in place prior to having to submit a reactionary response that is time constrained, complex and material in amount.  The following considerations are provided to promote discussion of this important topic among your teams and senior management.

  • What is the reporting structure for tax and legal?
  • Are dedicated tax counsel on the tax and/or legal team?
  • Does tax meet quarterly with internal/external counsel for status updates?
  • Have you quantified the benefit for justification of full-time internal tax counsel?
  • Where should internal tax counsel be located, contrasted with the tax team structure?
  • Should tax counsel have a full-time presence in aggressive jurisdictions for which appeals and trials are significant?
  • Who interviews tax counsel candidates?
  • Do you have a documented audit defense process that outlines when tax counsel are engaged?
  • How does tax counsel interact with the relevant advisors in appeal proceedings?
  • Who monitors the interaction of tax counsel, internal tax, business personnel and external advisors?
  • Does tax counsel review draft audit responses for transfer pricing issues and/or significant local taxes?
  • Who chooses local tax counsel for worldwide audits and tax proceedings?
  • Do you meet with local internal/external counsel when you visit the Business Units?
  • Should tax counsel be included in some, or all, meetings with tax authorities?  If so, should this start from the first meeting or when it becomes evident that tax counsel is required for current and future negotiations?
  • Who should negotiate issues and outline alternative options on an ongoing basis?
  • Does tax have a 360 feedback mechanism with internal and external counsel that is openly shared?
  • Does tax counsel participate in regular tax team meetings?

The above points highlight some ideas for consideration and discussions with senior management.  I look forward to your ideas and Best Practices for tax and legal collaboration.

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Tax Risk Management

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Tax Newsletters: Proactive Tax Risk Awareness

Communication of emerging tax risks targeted at increasing awareness of Best Practices via a regional/global tax newsletter provides a timely and efficient vehicle for valuable discussions.  Examples of some benefits include:

  • Increased focus and awareness on important aspects of a Global Tax Policy and / or Tax Risk Policy.
  • Resource for regional / corporate tax team contact information inviting questions re: potential tax risks.
  • Communication vehicle for introducing emerging strategic tax risks, especially in developing markets.
  • Highlights lessons learned in forming new Best Practices.
  • Introduction of new Tax Team members around the world.
  • Provides updates on tax related benefits derived from collaboration on plant expansions, R&D credits, Patent Box and Innovation synergies achieving lower local effective tax rates, etc.
  • Forum for tax diligence procedures of new accounting policies.
  • Reference for upcoming tax training courses, webinars and related reference materials.
  • Tax topic focus, describing potential risks in non-technical language, such as PE – what it is, how to recognize it, its adverse impact on cash taxes, ETR, accounting / operational complexities, etc.
  • ETR overview, why it’s important.
  • Increased tax return disclosures and self-assessment determinations; local and global significance.
  • Country and Regional developments.
  • Tool for heightened awareness among Tax Team members, inviting newsletter contributions and ideas.

I invite your ideas.

 

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Tax Risk Management

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A new role: Head of tax controversy

http://tmagazine.ey.com/insights/the-rise-new-role-head-tax-controversy/

This informative article focuses on the growing importance of tax challenges, with a focused role on tax risk and controversy.

Exchange of tax information among tax authorities, joint audits, reputational risk, tax governance, increased focus by the Board of Directors, importance of intellectual property, royalties, service fees, intercompany financing techniques and transfer pricing complexities are reasons why this role is expected to become more common in multinationals.  The following ideas are provided for thought and comment:

  • Does your company have a Tax Risk Officer / Head of tax controversy?  If not, has this idea been discussed with the CFO, CEO and Board of Directors?
  • How are the tax, treasury and legal functions integrated in a global approach to tax risk and controversy?
  • Are resources in place to facilitate a “joint audit” across several jurisdictions?
  • Are tools such as CAP in the US, horizontal monitoring in Netherlands, etc. being used to provide certainty and timeliness?
  • Are APA’s being used as a tool; who is functioning as the champion for this initiative?
  • Tax amnesty awareness; are you aware of these initiatives on a global basis?
  • Who coordinates legal counsel, internal and external, on audits, appeals and court proceedings?
  • Do you have a process for consideration of tax counsel at certain stages of an audit?
  • What training is provided to finance and other functions to increase awareness of tax risk areas?
  • New transfer pricing legislation; who is responsible for reviewing risks and transfer pricing governance / documentation.

The above thoughts may inspire conversations re: this role to match the increased focus by tax authorities and governments.

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Tax Risk Management

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Global Mobility & International Tax: Alignment for Best Practices

Attached for reference is an informative Global Mobility presentation, inclusive of tax risk components.

Apart from Permanent Establishment (PE) risk, among others, I want to focus on the integration of International Tax and Global Mobility, with the following thoughts:

  • Are the International Tax and Global Mobility functions aligned to address tax risks and opportunities?  Are there regular meetings, information sharing and discussions of strategies, risks and opportunities?
  • Are PE and related tax risks explained and discussed with Global Mobility in recurring training programs?
  • Are International Tax personnel familiar with legal vs. economic employer concepts and other related mobility risks?
  •  Should there be dotted line and/or direct reporting structures?
  • Are there red flags/alerts upon assignments/transfers of Regional/Global Sales personnel to ensure PE is not created?
  • Are the legal entities to which personnel are assigned in existence?
  • Should someone with international tax expertise be placed on the Global Mobility Team to minimize potential risks?
  • How is Global Mobility aware of new trends, risks and opportunities, especially re: international tax?
  • Is Secondment and utilization of Double Tax Treaty benefits aligned?
  • How are assignments to new markets executed?  Is International Tax involved in the beginning prior to execution?
  • Are there specific contacts in Legal, International Tax and Global Mobility to communicate potential issues?
  • Are there cross-functional training programs to highlight new issues, discuss risk gaps and Best Practices?

I welcome your ideas.

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Tax Risk Management

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OECD: Countering tax avoidance, evasion & aggressive tax planning

http://www.oecd.org/ctp/aggressive/atp.htm

As you may know, the OECD has an Aggressive Tax Planning (ATP) Steering Group, whose objectives include:

  • Identify current trends
  • Share experiences
  • Focus on timely information sharing in understanding new schemes
  • Provide information enabling countries to adapt their tax risk management strategies

Additionally, the work of the ATP Steering Group is supported by the OECD Aggressive Tax Planning Directory.  The ATP Directory is an online resource for governments to depict types of schemes discovered and fact patterns thereto, and details of their detection.

  • While “tax avoidance” and “tax planning” are frequently used terms, in direct contrast to “tax evasion,” it would be worthwhile to review Global Tax Policies and Tax Risk Management Strategies and verify if additional clarification is needed due to today’s tax environment.
  • Centralization of information by OECD: is your company also centralizing its issues, tax risks and strategies for synergy?
  • Are current trends being analyzed to adjust “tax planning” strategies and relevant tax risks?
  •  Are you ready to explain the difference between tax planning, aggressive tax planning, tax avoidance and tax evasion?

Category:

OECD / UN, Tax Risk Management

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CEO survey: Tax strategy and corporate reputation

PwC has published their 16th Annual Global CEO Survey: Tax strategy and corporate reputation: a business issue.

http://www.pwc.com/taxceosurvey

In addition to interesting observations in the survey, the following ideas are presented for consideration:

  • Have you had a discussion with your CEO about tax risks & strategies, including reputational risk?  S/he could also share with you their perceptions and information exchanged with their peers.
  • The upcoming G8 meeting will be discussing tax avoidance: do you plan to update your CFO & senior management?
  • Are Board of Director presentations planned for strategic and reputational tax risk?  (Don’t wait for them to ask)
  • Do you have a Tax Planning Policy?  If so, has it been discussed with the Board?
  • Is senior management aligned internally, and with the Board, on a position for tax transparency?
  • Is global tax planning a CEO priority, as focus on this topic is increasing among governments?
  • How are you avoiding tax strategy surprises?

I look forward to your comments.

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Tax Risk Management

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Global risk, a new era: 2011-12 EY survey

Great read with interesting ideas; enjoy!

EY 2011-2012_Tax_risk_and_controversy_survey

 

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Tax Risk Management

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