Strategizing International Tax Best Practices – by Keith Brockman

UK’s Large Business Compliance Consultation: TEI’s comments

October 17, 2015

Tax Executives Institute (TEI) has provided practical and insightful comments in response to UK’s Large Business Compliance Consultation by HMRC, which is far-reaching.  A link to TEI’s comments is provided for reference:

Click to access TEI-Comments-UK-Public-Consultation-Improving-Large%20Business-Tax-Compliance-FINAL-to-HMRC-14-October-2015.pdf

Key points:

  • The Consultation is focused on UK HQ companies, although the proposals also apply to non-UK based multinationals (MNE’s).
  • The underlying principle is unclear, especially for non-UK based MNE’s, and should be amended accordingly.
  • A separate UK tax strategy is an unrealistic expectation for most MNE’s, and will provide little relevance if enacted.
  • A UK Code of Practice is also unrealistic for MNE’s.
  • UK taxes, paid or accrued, generally bears little relevance to the global effective tax rate and is not relevant.
  • UK’s current tools of general anti-avoidance rules (GAAR), Senior Accounting Officer (SAO) tax framework, newly enacted Diverted Profits Tax, a Customer Relationship Manager (CRM) and other anti-abuse rules are already in place and would seem to remedy HMRC’s concerns.
  • Special measures are subjective and not subject to a formal independent panel for review prior to execution.
  • Board-level accountability may not be practical, while the SAO framework may accommodate this proposal.
  • Signing, or not signing, the Code of Practice should not be a trigger for public disclosure or risk assessment.
  • The Code of Practice includes determinations that transactions meet the intent of Parliament, an inherently subjective test that may be applied at will regardless of the law.

The tax transparency see-saw has now tilted to a dangerous level, in that transparency objectives no longer seem to meet the needs of tax authorities.

Information is being requested to satisfy presumed needs of the public and tax administrations, although similar efforts are not being made to have discussions with taxpayers to better understand tax risk and the relevant functions, assets and risks for which transfer pricing should be based in the relevant jurisdiction.

The UK proposal, and similar initiatives, may indeed erode the trust for which the tax authorities are seeking.  It would be a novel concept to include the business community in discussions around these proposals prior to drafting, a welcome initiative that would better represent a win-win opportunity.  Additionally, all audits should begin with a formal understanding of the transfer pricing practices of the MNE in that jurisdiction to focus tax queries accordingly and efficiently.      

As the UK Diverted Profits Tax model has strayed from the OECD’s intent re: the BEPS Action Items, it has nonetheless been followed by other countries.  This proposal may have a similar result, magnifying the concern of MNE’s and merits a detailed review by all MNE’s irrespective of UK business presence.

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Tax Risk Management

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CTO Best Practices

October 10, 2015

KPMG’s Chief Tax Officer (CTO) Insights provides Best Practices for improving relations with key stakeholders, including sample metrics that are a valuable working tool.

Click to access CTO_%20Insights_Issue%20Spotlight_Oct15.pdf

Key points:

  • Regularly scheduled meetings should be scheduled.
  • Individualized dashboards should be presented for different stakeholders.
  • A Tax Value Report should be presented once or twice a year, including important metrics as cash tax savings, cash flow processes and people initiatives.
  • An on-boarding program for new stakeholders should be developed.
  • Sample metrics may include
    • Number of audits
    • Tax rates/effective tax rates/cash tax rates– Benchmarks relative to peers

      – Country-specific for global operations

    • Various internal measures regarding risk management
    • Provision-to-return changes
    • Tax exposures and tax opportunities
    • Partnering with the business

    Similar to a tax risk framework that is shared with the larger business and finance leaders, a CTO’s Best Practice tools provide win-win opportunities to interact with key stakeholders and provide assurance for the importance, and recognition, of the tax function in a multinational organizaiton.

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Tax Risk Management

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BEPS: Indirect tax impact

October 9, 2015

EY’s Global Tax Alert highlights the indirect tax consequences resulting from final guidance of the BEPS Action Items:

Click to access 2015G_CM5836_Indirect_OECDs%20recommendations%20on%20BEPS%20project%20has%20wider%20indirect%20tax%20implications.pdf

Key observations:

  • Interaction of Article 1 (Digital Economy) and Article 7 (PE) may create a wider gap for findings of a indirect tax “fixed establishment” and a direct tax “permanent establishment” (PE), although some countries do not respect such distinction.  Thus , business models merit a review for such changes.
  • Article 8 (Intangibles) set forth changes in allocation and valuation that may affect customs valuations.
  • Actons 8-10 (transfer pricing) may invite additional focus by tax authorities on VAT/GST and customs.
  •  Action 13 (country-by-country reporting) may invite scrutiny of indirect taxes.

The focus of BEPS has been on direct taxes, while its impact will now be measured for purposes of indirect taxes.  Thus, a BEPS review should encompass direct and indirect tax effects, including VAT/GST and customs.  

Category:

OECD, Tax Risk Management

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OECD BEPS Action Items

October 7, 2015

Attached is the link to access the OECD webcast and all of the BEPS Action Items released on 5 Oct. 2015.

http://www.oecd.org/ctp/beps-2015-final-reports.htm

Needless to say, the process of reading, and reviewing, the Action Items has commenced by many.

Importantly, multinationals now have the final rules by which the impact on their organization can be assessed, and action plans developed accordingly.  However, there will be timing differences as to when such guidance is implemented into law by countries, as well as “soft law” conformity.

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OECD

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EU transparency: New Ruling Directive re: tax ruling exchange moves forward

The new EU Directive for the automatic exchange of tax rulings now moves forward for approval, with an effective date of 1/1/2017.  A copy of the press release is provided:

Click to access 40802203260_en_635797403400000000.pdf

Key observations:

  • Cross-border tax rulings and advance pricing agreements (APAs) will be automatically exchanged between EU Member States.
  • The rulings will be stored in a EU central repository, with access available to the Member States.
  • Rulings issued from 2012 will generally be included in the exchange of information, subject to de minimis thresholds.

This development is now moving forward with a transparency focus, although what information will practically be exchanged may be different dependent on the respective Member State.

Multinationals should review prior rulings subject to this exchange to avoid potential surprises.

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Transfer Pricing

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UK’s CbC Draft Regulations: accuracy check by HMRC

October 6, 2015

HMRC has provided a technical consultation and explanatory memorandum for new regulations of UK’s country-by-country (CbC) reporting.  Comments are due by 16 Nov. 2015.  A link is provided for reference:

https://www.gov.uk/government/publications/technical-consultation-country-by-country-reporting

An interesting, and debatable, provision is Section 9 of the technical consultation, Provision for information, which is copied herein.  To the extent that a company is considered a “reporting entity,” the provision provides for a request of information, that may reasonably be required, (within 14 days in a form specified by HMRC) to substantiate the accuracy of the CbC report.  

On the heels of the OECD release of the Action Items, including Action 13 CbC reporting, HMRC has released this documentation for consultation.  However, Section 9 may be far-reaching in that there is no transparency into the intent of HMRC or purpose of such potential request.

For example, does this exercise include the accuracy of all entities included in the CbC report?  What type of documentation would be requested, and in what form?  Should the request be limited to UK entities only?  If there are potential inaccuracies in countries other than the UK, what happens then?  What transparency is provided for this process?  Will this request be reviewed prior to informing the taxpayer?  Will such review be shared with other countries?

This provision seems to be far-reaching, and could be followed by other countries.  Therefore, it is paramount that all multinationals monitor such developments, as this will significantly increase complexity.

Provision of information

9.—(1) An officer of Revenue and Customs may, by notice in writing, require a reporting entity to provide the officer with such information (including copies of any relevant books, documents or other records) as the officer may reasonably require for the purposes of determining whether information contained in a country-by-country report filed by that entity is accurate.

(2) A notice under paragraph (1) may specify or describe the information to be provided.

(3) Where a person is required to provide information under paragraph (1), the person must do so—

  1. (a)  within such period, being no less than 14 days; and
  2. (b)  at such time, by such means and in such form (if any),

as is reasonably specified or described by Revenue and Customs.

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OECD, Tax Risk Management, Transfer Pricing

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EU Customs Code changes: time to act

October 4, 2015

EY’s Global Tax Alert highlights important changes to be introduced by the EU Customs Code.

Click to access 2015G_CM5815_Indirect_Implementation%20of%20EU%20Customs%20Code%20to%20bring%20substantial%20changes%20to%20customs%20valuation.pdf

Key points:

  • First Sale for Export rule abolished, although some planning opportunities exist in the short-term.
  • Bonded warehouse transactions are somewhat unclear.
  • Royalties, license fees and trademark intangible transactions are undergoing major changes.

As the OECD is preparing to issue final Guidelines for the BEPS Actions tomorrow, it is a critical time to ensure that tax and customs practices for multinationals are integrated in their operations while sharing Best Practices and learning how the international tax world is being transformed.  

The EU Customs Code changes merit immediate review for planning opportunities, as well as time to change systems accordingly for the new rules.

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Tax Risk Management, Transfer Pricing

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Spain’s tax law changes

October 2, 2015

Spain’s tax law changes have been published, effective as of October 2015.

Click to access 2015G_CM5807_Spain%20amends%20its%20General%20Tax%20Law.pdf

Key observations:

  • The Law introduces a new penalty for a specific anti-abuse provision in cases for application of GAAR.
  • The statute of limitations period of CIT years in which an entity has generated losses and tax credits has been extended from 4 years to 10 years. The Law now extends this provision to all other taxes.
  • Duration of an audit has been extended from 12 to 18, or 27, months.
  • A Statute of Limitations period of 10 years has been established for EU State Aid cases.

As new penalties are being legislated, in Spain and elsewhere, for subjective provisions in the tax law it is becoming mandatory to assess such provisions in the tax planning stages for significant transactions.  This is especially true when the subjective interpretations of GAAR, and the tax authorities, are inherently uncertain and potentially leading to double taxation.

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Tax Risk Management, Transfer Pricing

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BEPS update

September 29, 2015

Apart from the expectations surrounding the 5th October release of the OECD BEPS Action Items, the referenced EY Global Tax Alert provides relevant details for the following BEPS related activities:

  • Australia: Multinational anti avoidance law (MAAL), transfer pricing documentation
  • Belgium: Payments to “tax haven” jurisdictions
  • Bulgaria: Consultation draft re: the EU Parent Subsidiary Directive; although the broader local GAAR would be retained
  • China’s recent developments (refer to my 26 Sept. post)
  • Denmark: Transfer pricing documentation
  • Japan: Court case re: PE and “preparatory or auxiliary” exception
  • Kuwait: Virtual Service PE interpretation (refer to my 23 Sept. post)
  • NL: Transfer pricing doucmentation

Click to access 2015G_CM5800_The%20Latest%20on%20BEPS%20-%2028%20September%202015.pdf

The latest developments, along with future unilateral actions that follow the intent of the new OECD Action Items, should be monitored closely.  Additionally, such concepts should be reviewed for domestic legislative compliance, vs. intent.

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OECD

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China’s proposed TP documentation; Non-transparent

September 26, 2015

China’s State Administration of Taxation (SAT) has issued a consultation draft encompassing transfer pricing documentation; comments are due by 16 October 2015.  The draft includes OECD BEPS Action concepts, such as the form of transfer pricing documentation, although retaining arguable local concepts and introducing intangible definitions prior to the final OECD Guidelines.

Click to access 2015G_CM5783_TP_Chinas%20TAs%20issue%20groundbreaking%20consultation%20draft%20to%20update%20TP%20rules%20in%20a%20Post-BEPS%20environment.pdf

Key observations:

  • The three tier TP documentation concept of Master File, Local File and Country-by-Country report (for Chinese based multinationals) is introduced.
  • A “Special File” is also required for intercompany services, providing copies of agreements, allocation keys and evidence supporting the “benefit test.”
  • “Intangibles” is broader than the OECD proposals, including marketing channels and customer lists.
  • Advance Pricing Agreement (APA) procedures are clarified.
  • The use of transfer pricing comparables is broad and runs counter to the transparency or consistency test.  The use of secret comparables, one comparable, one or multiple year results are allowed.
  • Anti-shifting provisions are to be used for transactions with entities of little substance, thereby increasing Chinese profits.
  • Profitability monitoring will be used to establish a tax risk hierarchy system.

Although the Consultation report includes consistent BEPS measures, there are also concepts included that do not provide consistency with other countries, increasing the risks of double taxation.  Thereby, China is inwardly focusing on its fisc while representing a “rogue” player on the OECD playing field.

All multinationals with operations in China should determine their course of action for these proposals, including a review of holding companies for intercompany transactions with Chinese entities.  

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Transfer Pricing

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Denmark’s CbC proposals

September 25, 2015

Denmark has published its requirements for country-by-country reporting (CbCR), effective for the 2016 tax year by ultimate Danish parent companies.  The content of the report aligns with OECD BEPS Action 13, including the reporting date by the end of 2017.

There are notification requirements re: a “surrogate parent entity” for which the parent jurisdiction will be entering into exchange information agreements for CbCR.

Details are provided in EY’s Global Tax Alert:

Click to access 2015G_CM5788_Denmark%20publishes%20proposal%20to%20introduce%20Country%20by%20Country%20Reporting.pdf

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OECD, Transfer Pricing

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Kuwait: Virtual Service PE

September 23, 2015

Kuwait’s Department of Inspections and Tax Claims (DIT) has introduced its interpretation of a Virtual Service PE, notwithstanding its nonconformity with the physical presence standard and its double tax treaties in accordance with OECD’s Model Convention.

Unfortunately, this concept is not new in the Middle East and it is hoped that other countries will not follow this breakaway interpretation.

EY’s Global Tax Alert provides additional details into this development:

Click to access 2015G_CM5779_Kuwait%20Tax%20Authorities%20adopt%20Virtual%20Service%20PE%20concept.pdf

Key observations:

  • The Virtual Service PE concept takes into account only the duration of the contract itself.
  • Work extending beyond the tax treaty threshold of 183 days will be presumed to have created a Service PE.
  • The DIT takes the position that a nonresident is deemed to have a PE in Kuwait, particularly, if the following conditions are met:
    • A nonresident furnishes services to an entity in connection with the latter’s activity in Kuwait.
    •  The period during which such services are rendered according to the contract, exceeds the threshold period under the applicable tax treaty.

The immediate implication of the DIT’s current approach to a “Virtual Service PE” is that the applicability of tax treaty-based income tax exemptions with respect to cross-border services has become highly uncertain.

Accordingly, all legal agreements and provision for services to Kuwait (disregarding the physical standard) should be reviewed for potential disputes based on a Virtual Services PE argument.  Practically, it may also be difficult to obtain tax treaty relief from double taxation.

 

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PE

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TFEU: Tool for EU Directives

September 21, 2015

The European Commission (EC) and European Parliament (EP), including the TAXE Committee on Rulings established by the EP, have recently endorsed many provisions that would normally require the unanimity of approval by the Member States.  Knowing this has not resulted in success with prior initiatives, a renewed focus may be taking place re: Article 116 of the Treaty on the Functioning of the European Union (TFEU) which empowers the EC/EP to issue a Directive accordingly.

Article 116 TFEU:

Where the Commission finds that a difference between the provisions laid down by law, regulation or administrative action in Member Sates  is distorting the conditions of competition in the internal market and that the resultant distortion needs to be eliminated, it shall consult the Member States concerned.

If such consultation does not result in an agreement eliminating the distortion in question, the EP and the EC, acting in accordance with the ordinary legislative procedure, shall issue the necessary directives.  Any other appropriate measures provided for in the Treaties may be adopted.

 

The TFEU is the same legal mechanism used to address State Aid, and may also be the choice of implementation to establish Directives for one or more of the following initiatives:

  • EU Common Corporate Tax Base (CCTB)
  • Country-by-Country (CbC) reporting, public disclosure
  • Tax rulings, (redacted) public disclosure
  • Permanent Establishment (PE) definition
  • Anti-BEPS Directive, transforming OECD “soft law” into an EU legislative framework
  • Interest & Royalty Directive requiring confirmation of EU tax being paid elsewhere
  • EU Dispute Resolution approach

Everyone should monitor the EC, EP and TAXE for continuing developments, as they may form the basis for new global standards to enact the intent of BEPS initiatives.

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OECD

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Dutch draft TP & CbC law

September 18, 2015

The Dutch State Secretary of Finance has released a draft law that correlates to BEPS Action 13 for transfer pricing documentation and country-by-country (CbC) report.

The CbC report will not be required to be filed in the Netherlands if such report is filed with a jurisdiction that has an information exchange agreement with the Netherlands on such reports.

Click to access 2015G_CM5764_TP_NL%20releases%20draft%20law%20implementing%20new%20TP%20doc%20requirements%20in%20line%20with%20BEPS%20Action%2013.pdf

  • The draft law states that a transfer pricing adjustment may not be based on the CbC report.
  • The CbC report aligns with the BEPS Action 13 requirements.
  • The Master and Local file re: transfer pricing documentation will be required contemporaneously with the filing of the tax return, with such information to be provided upon request.
  • A criminal offense will take place, for the most serious cases, if the CbC reporting requirements are not satisfied.

The draft law should be reviewed by organisations with operations in the Netherlands, noting it follows the BEPS Action 13 proposal.

The contemporaneous requirement for the Master file and Local file should be met to avoid potential fines/penalties.

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OECD

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New age of transparency / reputational risks

September 14, 2015

The latest EY tax risk and controversy survey series, entitled A new mountain to climb, provides some insights re: preparing for and proactively management tax / reputational risks.  A link to the report is provided for reference:

Click to access ey-managing-tax-transparency-and-reputation-risk.pdf

Key observations:

  • Media coverage of how much companies pay in tax / low effective tax rates is extensive, although engaging with the media is seen by many companies as a “no-win” situation.
  • Leading companies have transformed  the process of communication for tax risks and controversy to internal and external stakeholders.
  • Transparency is providing information to tax authorities re: how much tax is being paid in other jurisdictions as a tool to decide if the company is paying enough tax in their jurisdiction.
  • Global disclosure and transparency requirements will continue to grow in the next two years.
  • Transparency readiness of companies is a significant and underestimated need.
  • Direct ERP access by tax authorities represents a next phase of risk assessment.
  • Transparency readiness can help mitigate reputation risk.
  • Reputation risk strategy elements:
    • Actively monitor the changing landscape.
    • Assess readiness/desire to respond.
    • Enhance communication with internal and external stakeholders.
    • Gain insight into the total tax picture through the lens of public perception.
    • Decide with whom the company wishes to communicate.
    • Embed reputation risk thinking into core business strategy.
  • Transparency is the new norm, and (media) reputation risk may be a permanent risk.

Transparency demands have created a new toolbox required by all multinational organisations.

A tax policy and reputation risk strategy should be essential tools in a comprehensive tax risk framework.  The EY report is required reading for all parties interested in learning more about tax risk trends and Best Practice ideas to proactively address the new world of transparency.

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Tax Risk Management

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