S. Africa has introduced a change in its legislation for 2015 addressing “secondary adjustments.” The legislation aims to revert to a “deemed dividend” concept of classification from the current “constructive loan” methodology. A link explaining the legislation, in addition to the OECD definition of a “secondary adjustment” is provided for reference:
Prior to final settlement of any audit, the effect of a “secondary adjustment” as well as a “corresponding adjustment” in another jurisdiction should be known to preserve appeal rights for that audit while avoiding double taxation. This knowledge should be comprehended and utilized as an effective audit tool by internal tax and legal colleagues, in addition to external advisors ( who may not have multinational audit defense experience).
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.