Strategizing International Tax Best Practices – by Keith Brockman

Archive for the ‘Transfer Pricing’ Category

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 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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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.

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Tax Risk Management, Transfer Pricing

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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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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.

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Tax Risk Management, Transfer Pricing

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OECD: (Revised) Safe Harbours, Chapter IV, Transfer Pricing Guidelines

Click to access Revised-Section-E-Safe-Harbours-TP-Guidelines.pdf

The OECD approved this revision on 16 May 2013 and discusses the benefits and concerns for safe harbour provisions.  It encourages appropriate bilateral or multilateral safe harbors for which the previous guidance was generally silent.  In an effort to facilitate negotiations between tax administrations, sample memoranda of understanding (MOUs)” are included for competent authorities to establish bilateral safe harbors for certain classes of transfer pricing cases.  Sample MOUs are provided for low risk activities of Manufacturing, Distribution, and Research and Development Services.

Benefits to be gained:

  • Compliance relief
  • Certainty
  • Administrative simplicity

Safe harbour concerns:

  • Divergence from the arm’s length principle
  • Risk of double taxation, double non-taxation, and mutual agreement concerns
  • Possibility of opening avenues for tax planning opportunities
  • Equity and uniformity issues

Sections 4.128 and 4.129 emphasize the fact that safe harbours can be negotiated on a bilateral or multilateral basis, providing significant relief from compliance burdens and administrative complexity.  Additionally, a safe harbour is not binding, or precedential, for countries which have not themselves adopted the safe harbour.

In an environment of increasing request for assistance from competent authorities, I am hopeful this tool is used proactively and efficiently by competent authorities to provide certainty for past, current, and future low risk activities.  Multinationals should be familiar with these new guidelines and the respective MOUs to aid negotiation efforts in bilateral or multilateral transactions.  Discussion of this principle in meetings with competent authorities will hopefully lead to enhanced mutuality, cooperation and resolution.

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OECD / UN, Transfer Pricing

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Google UK: PE Risk – Do no evil

http://www.reuters.com/article/2013/05/16/us-google-britain-tax-idUSBRE94E0WL20130516

In continuing verbal encounters by Google UK before the Parliament’s Public Accounts Committee (PAC), it is interesting to note the following in the above article, supplemented by similar language in the related articles cited below:

  • The company evidently stated that “We are selling, but not closing.”
  • The article cites the fact that a review of LinkedIn profiles revealed sales activities were conducted by employees.
  • The article does not provide the reader a concise description of PE, or its safe harbors in Double Tax Treaties: re: “preparatory and auxiliary activities.”

This arduous lesson in reputational risk reinforces the need to ensure Best Practices are in place for PE, as posted in a prior blog.

It is a very interesting point that LinkedIn profiles were reviewed to further examine potential sales activities carried out in the UK.  A company cannot control the social network profiles of its employees, although it should be very clear in everyone’s job description what is, and is not, allowable for marketing or sales activities.  The Do’s and Don’ts List should be signed annually as a reminder to employees of their responsibilities and limitations in scope.

A company with significant Branch activities should be reviewing how written statements, including emails, are communicated in  discussions of sales, market support or promotional activities.

The statement “We are selling, but not closing” brings a substance vs. form argument into the subjective definition of PE, an argument that is not helpful in forming objective arguments by the company or tax authorities.  Therefore, a company should examine its Best Practices to increase its objective PE evidence, in substance and form, in preparation for controversy.

Does your Tax Risk Policy include any statements re: whistleblower activity, and how such activity should be addressed?

Finally, a company should conduct an annual audit of its significant Branch activities, in possible coordination with internal audit, to further minimize its PE (and reputational) risk on an annual basis.

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PE, Transfer Pricing

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Africa Progress Report 2013: Global Tax & Transparency initiatives

http://www.africaprogresspanel.org/en/publications/africa-progress-report-2013/apr-documents

The Press Release and Progress Report 2013 are not restricted to activities within Africa, as they advocate tax and transparency initiatives for the upcoming G8 Summit and the international community.  Japan, Russia, Switzerland, the UK and the US are individually identified in the report.

The Africa Progress Panel (APP) consists of ten distinguished individuals from the public and private sector who advocate for shared responsibility between African leaders and their international partners to promote equitable and sustainable development for Africa.  Mr. Kofi Annan chairs the APP. The Panel functions in a unique policy space with the ability to target decision-making audiences.

The press release sets the stage for the debate with the following statement: “International tax avoidance and evasion, corruption, and weak governance represent major challenges.  The report therefore welcomes the commitment from the current G8 presidency, the UK, and other governments to put tax and transparency at the heart of this year’s dialogue.  International business should follow best practices on transparency.”

Part III of the Report has sub-captions beginning on page 63 entitled: “Aggressive tax planning” drains the public purse, followed on the subsequent page with “When companies evade tax responsibilities.”  This section includes the following statements: “Tax avoidance has emerged as a global concern.  In Europe and North America, public anger has been directed towards highly visible multi-billion dollar firms that minimize their tax liabilities through sophisticated but aggressive tax planning.”

Part IV, “Fair taxation-an international challenge, ” provides the commentaries: “Many resource-rich countries in Africa are losing out as a result of “aggressive tax planning”-a euphemism in some cases for tax evasion.  Transfer pricing is another endemic concern.  Tax evasion is a global problem that requires multilateral solutions.  At the heart of the problem is the unwillingness of the OECD countries and wider international community to strengthen disclosure standards.  Japan, Russia, Switzerland, the UK and the US all operate regimes that allow for aggressive tax planning and limited regulatory oversight.  All tax jurisdictions should be required to declare the beneficial ownership structure of registered companies.  Governments in Africa could also look beyond the OECD dialogue.”

The sub-section entitled “Recommendations for Immediate Action” includes a message for transparency by extractive companies stating: “All countries should embrace the project-by-project disclosure standards embodied in the US Dodd-Frank Act and comparable EU legislation, applying them to all extractive industry companies listed on their stock exchanges.”

A message to the G8 community states: “The G8 should establish the architecture for a multilateral regime that tackles unethical tax avoidance and closes down tax evasion.  Companies registered in G8 countries should be required to publish a full list of their subsidiaries and information on global revenues, profits and taxes paid across different jurisdictions.  Tax authorities, including tax authorities in Africa, should exchange information more readily.”

The message to the international community states: “The G8 should adopt at its 2013 summit in the UK a framework that commits each country to full disclosure through a national public registry of the beneficial ownership of registered companies, with a commitment to create such registries before the 2014 G8 summit.”

This report demonstrates the tone for increased tax and transparency within Africa, and more importantly its message to the G8 and the international community.  Unfortunately, the terms aggressive tax planning, avoidance and evasion are used interchangeably in the Report which is intended to provide a strong message for tax and transparency changes but also provide complexity in seeking solutions.  This message is being seen more often in the news from around the world, and the transparency topic is one that should be discussed with senior management and the Board to ensure alignment going forward.

Articles

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Transfer Pricing

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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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OECD Draft Handbook on Transfer Pricing Risk: Public information

Click to access Draft-Handbook-TP-Risk-Assessment-ENG.pdf

OECD published this draft handbook on April 30, with comments due by Sept. 13.  I highly recommend reviewing the entire handbook.  Section 4.5 of the Handbook outlines the use of publicly available information for identifying overall risk assessment.  We are all aware of this information, although I will share some thoughts on being proactive in forming Best Practices around this topic.

Company website:

  • Does tax review the web content on a regular basis to ensure there are no innocent misstatements to defend.
  • As the web content is updated for marketing, sales and other relevant information, does tax receive a copy of the updates prior to releasing them to the public.
  • Are any of the statements on your website in conflict with your stated transfer pricing or other tax methodologies.
  • Does the website contain information on legal presence in each country; if so, what is the alignment process with tax.

Statutory financial information:

  • Many countries provide this information to the public; are these financials reviewed to ensure consistency with transfer pricing methodologies either internally or an external advisor. 
  • Additional disclosures increase every year; how familiar are you with new disclosures on a global basis.  Is there a process that can be implemented to identify tax sensitive information.
  • An individual with tax training should review this information prior to finalization to ensure there are no PE, transfer pricing or other tax risk areas addressed.

Coordination of Publicly Available Information:

  • Is there a central index listing all publicly available company information on a global basis.
  • Is this a process for which someone can be a champion to ensure timely updates.
  • If tax disclosures are prepared for public use, are the disclosures of taxes paid by country, etc. consistent with the statutory financial information that is available.  Should there be a process to rationalize, or explain, any discrepancies.
  • Are press releases reviewed by tax to ensure consistency of tax methodologies and minimization of potential tax risks.
  • Is issuance of publicly available information centralized or decentralized, depending on the content.
  • If comments are issued on this draft, who ensures the content is internally consistent since it will be on the OECD website.

 

 

Category:

OECD / UN, Transfer Pricing

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