Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘Best practice’

Transparency & Disclosure: zooming in

EY’s recent publication takes a close-up view of transparency and disclosure trends, including a detailed analysis of several countries’ latest trends.  A link to the report is provided for reference:
http://www.ey.com/Publication/vwLUAssets/EY-are-you-ready-for-your-close-up/$FILE/EY-are-you-ready-for-your-close-up.pdf

Key Points:

  • Transparency issues of the future:
    • Country-by-Country (CbC) implementation and inconsistency of approaches
    • New transfer pricing documentation requirements
    • Public access for CbC reports and tax rulings
    • Growing trend to disclose a company’s planning, strategy, risk appetites and effective tax rates
    • Tax codes of conduct, formal and informal
    • Increased disclosure of aggressive tax positions
    • Electronic data gathering
    • Use of third-party data
    • Direct ERP access
    • Matching of data and watching for transactional trends
  • EU transparency update, including proposed Directives
  • Country transparency updates: Argentina, Australia, Brazil, China, Denmark, Ecuador, France, Germany, Greece, Mexico, Netherlands, Poland, Singapore, South Africa, South Korea, Spain, UK, US

The level of future transparency will continue to increase, with new and dissimilar demands by countries around the world.  This report unveils the global trends and issues, with comprehensive analyses of various transparency trends of major countries.  Accordingly, it is a publication that should be reviewed to better understand where the current trends are requiring future demands for transparency in a new world of international taxation.

BEPS global update

EY’s Global Tax Alert provides a succinct summary of the latest BEPS (incentivized) developments around the world.  A link to the Alert is provided for reference:

http://www.ey.com/Publication/vwLUAssets/The_Latest_on_BEPS_-_17_August_2015/$FILE/2015G_CM5699_The%20Latest%20on%20BEPS%20-%2017%20August%202015.pdf

Overview of the Alert:

  • OECD: Documents re: initiative for automatic exchange of financial account information
  • Africa: Best Practice regional meeting to develop measures for countering BEPS
  • Australia: Exposure draft law re: transfer pricing documentation to be effective 1/1/2016
  • Brazil: Report to eliminate interest on net equity (INE) regime
  • Chile: Foreign residents are to provide a sworn statement to receive treaty benefits
  • Europe: TAXE Committee’s interim report re: tax rulings and BEPS related topics
  • Ireland: Knowledge development box
  • Italy: Patent box regime
  • Japan: Interest limitations
  • Korea: VAT re: electronic services
  • Luxembourg: EU Parent-Subsidiary Directive inclusions (anti-hybrid and anti-abuse clauses)
  • Saudi Arabia: Virtual Service PE
  • Spain: Patent box regime

The Alert highlights the continuous and frenzied pace of the BEPS measures, as well as the unilateral efforts that are mirroring the intent of BEPS, although not necessarily in a consistent and cohesive framework.

 

Audit Diary = Tax Risk Best Practice

With the increasing complexity of audits, OECD BEPS incentivized unilateral legislation, General Anti-Avoidance Rules (GAAR), and cases proceeding to arbitration, appeals and Mutual Agreement Procedure (MAP), a comprehensive tax audit diary will prove to be of valuable reference during the audit, from commencement to final determination and thereafter.

Ideally, this diary could be signed/initialed contemporaneously by the company and tax authorities signifying agreement of the summary.

A tax audit diary may include the following components:

  • Summary of discussions at each audit meeting, including attendees, conclusions, future actions and promised timelines.
  • Paper/electronic copies of all written audit inquiries received, including a date stamp upon receipt.
  • Paper/electronic copies of all written audit inquiries provided, including the date provided to tax authorities.
  • Copies of all reports, including transfer pricing studies, provided.
  • Agreement as to what documents are not to be provided, with mutual consent of the company and tax authorities.
  • Documentation of BEPS related discussions / assessments not yet legislated into domestic law.
  • Summary of discussions re: jeopardy assessments / threats of additional assessments re: Competent Authority filings.
  • References to adequate / inadequate transfer pricing documentation, as a finding of “inadequate documentation” may provide a basis for additional interest, penalties and possible disallowance of treaty benefits, such as MAP.

The diary should be included in corporate governance documentation that will provide consistency upon changes in personnel during the course of an audit, including relevant appeals.

Additionally, this diary will be instrumental in providing information to Competent Authority personnel and advisors for clarity of the audit negotiations and discussions, as well as serving as one source of valuable reference for the audit, including similar audits of other legal entities in that jurisdiction, joint audits, etc.

A discussion of a joint audit discussion as a component of the Tax Risk Framework is included in an earlier post dated 25 October 2014 for related reference.

OECD Guidelines for MNE’s: A valuable tool in the Tax Risk Framework

The OECD published the OECD Guidelines for Multinational Enterprises (Guidelines) in 2011, this being the latest version of the Guidelines.

A unique feature of the Guidelines is the implementation of National Contact Points (NCPs), agencies established by adhering governments to promote and implement the Guidelines.  They also provide a mediation and conciliation platform for resolving practical issues that may arise. Chapter XI of the Guidelines, Taxation, that begins on page 60 outlines important concepts including timely tax compliance, cooperation with tax authorities, compliance with the letter and spirit of the tax laws and regulations of the relevant countries, and conforming transfer pricing principles to the arm’s length principle.

These principles should form an important foundation for a company’s Tax Policy and/or Tax Risk Framework, providing transparent objectives in the global tax risk profile.  The link to the Guidelines are provided for reference.

There is also a link to  the Annual Report on the OECD Guidelines for Multinational Enterprises 2013, which describes the activities undertaken to promote the observance of the Guidelines during the period June 2012 – June 2013.  The Annual Report outlines the role of the NCPs, and content of proposed violations (inclusive of Taxation), that have been submitted for review.  All OECD countries, and 11 non-OECD countries (Argentina, Brazil, Columbia, Costa Rica, Egypt, Latvia, Lithuania, Morocco, Peru, Romania and Tunisia) adhere to the Guidelines.

http://www.oecd.org/daf/inv/mne/48004323.pdf

http://www.keepeek.com/Digital-Asset-Management/oecd/governance/annual-report-on-the-oecd-guidelines-for-multinational-enterprises-2013_mne-2013-en#page175

The Guidelines should be a valuable Best Practice tool in a Tax Risk Framework, as well as the total risk framework of a multinational enterprise.

Tax Dispute Resolutions: Best Practices / Update

KPMG provides a timely and relevant update of tax dispute resolution issues, coupled with Best Practice ideas.  The publication can be accessed from this link:

http://www.kpmginstitutes.com/taxwatch/insights/2013/pdf/tdr-quarterly-magazine-winter-2013.pdf

A summary is provided for quick reference:

  • US: New IDR process: Required (new) IDR process for all large-case exams: IDR Collaboration (carrot) & delinquency notice/summons procedures (stick)
  • Risk from whistleblowers: Current climate and Best Practices, including avoidance of retaliation, ethics hotline, procedural awareness, tax dept. procedures, and what to do if you suspect whistle blowing
  • IRS practices, various items of interest
  • Global tax disputes, including a focus on UK GAAR (also refer to a prior blog post)

This publication provides insight into today’s tax challenges and risks, to be mitigated by Best Practice ideas that should be an integral part of all multinationals tax framework.

It will be interesting to note developments into the new procedure by IRS as demonstrated by the agents performing the exam, as the summons procedure process is mandatory and has no exceptions.  Additional time should be spent understanding the issue raised by IRS, as well as collaborating on the draft inquiry, to benefit from undue data collection and audit inefficiencies.

Additionally, the whistleblower comments should be used to test, modifying as necessary, current internal governance procedures.  Such procedures should be reviewed, tested, and modified on an annual / recurring basis.

OECD G20 Report & Best Practice Analogies

OECD’s report to the G20 leaders in St. Petersburg, Russia is attached for reference, consisting of a Progress Report to the G20 in Part I, and details of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan and offshore tax evasion efforts in Part II.  This posting will capture some highlights from the report, and pose analogies for Best Practices in alignment with the OECD’s initiatives.  The report may be accessed at:

http://www.oecd.org/tax/SG-report-G20-Leaders-StPetersburg.pdf

The Introduction provides commentary on “legal tax avoidance,” renewed demands for greater transparency, calling for all taxpayers to pay their fair share, and completion of a global model for automatic exchange of information by 2014.

Initiatives of the Global Forum on Transparency and Exchange of Information (the Global Forum) have resulted in 119  jurisdictions committed to standards of transparency and exchange of information.  Best Practices includes communicating  results of the Global Forum to global and regional tax teams, and business leaders, to ensure that global consistency of information is being provided to tax authorities.  

The Global Forum promotes exchange of information via a monitoring and peer review process.  The process includes Phase 1 reviews, examining a jurisdiction’s legal framework for exchange of information, and Phase 2 reviews that examine information exchange in practice.  How well does the exchange of information process work for Multinational Enterprises (MNEs)?  Is this report, with a schedule of subsequent discussions on its impact, automatically sent to all tax team members, or is each individual personally responsible for accessing, reading and comprehending the report, including Phase 1 and Phase 2 reviews?

Peer reviews result in recommendations for improvement, with all jurisdictions required to provide follow-up reports describing actions taken. Re: global audits, are recommendations for improvement provided during, and after, the audit, with action steps documented?

The Global Forum has organized four training seminars in 2012, and five training seminars this year, in addition to implementation toolkits.  Appendix 4 of Part 1 provides a listing of members and observers, inherently resulting in potential impacts for these proposals beyond the OECD member countries.  How many training forums and business tools have been provided by MNEs in the last two years to review the ongoing trend of global tax proposals?

Part 2 lists the 15 activities of the BEPS Action Plan to be addressed by all relevant stakeholders.  For analogy, has the MNE also listed those same activities, addressing potential impacts, risk quantifications and expected actions for each of the proposals, including a relevant timeline and accountability?  Are all international tax team members and business leaders aware of the BEPS Action Plan?

Automatic exchange of information is becoming the norm, versus the exception, for tax authorities around the world.  How are tax changes, audit queries, changes in tax laws, etc., communicated within the MNE enterprise quickly and efficiently?  Is  a tax newsletter communicated to the global business, addressing areas of focus and learning?

Annex 2 of the Progress Report outlines a model of multilateral automatic exchange of information designed to implement a step change in transparency.    This section is useful in addressing future legislative changes, draft model competent authority agreements, legal / confidentiality concerns, and legal bases for the exchange of information.  MNEs should track public comments and future changes of OECD member countries and observers to address these initiatives.

The highlights of the OECD G20 Report, and suggested comments for Best Practices, are meant to promote creative thought and reflection to effectively plan for the rapid evolution of change in the international tax arena.

OECD Multilateral Convention: Automatic information sharing among G20 countries

With China’s commitment on 27 August 2013, all G20 countries have signed the Multilateral Convention on Mutual Administrative Assistance in Tax Matters (Convention), resulting in automatic exchange of information as the new global standard.

Tax authorities are cooperating multilaterally and automatically, as the Convention provides for spontaneous exchange of information, simultaneous tax examinations and tax assistance.  The accompanying press release, including a list of the 56 signatories, is available at:

http://www.oecd.org/tax/china-joins-international-efforts-to-end-tax-evasion.htm

What are the implications on Best Practices for these continuing developments?  Ideas for consideration include the following:

  • Providing taxpayer information to one authority should be viewed as being provided to many countries worldwide, thus maintaining consistency is essential.  A formal methodology will ensure Best Practices are being followed.
  • Tax assistance, simultaneous examinations and joint audits should be envisioned for reviewing the global Tax Risk Framework.
  • Best Practices for implementation of Mutual Agreement Procedure (MAP) are a topic of frequent discussion by tax authorities worldwide; thus Best Practices for Multinationals should also be focused on risk identification, measurement and application of MAP.
  • Related posts for reference:
  1. 23 July, OECD exchange of information: Multilateral Convention review
  2. 27 June, OECD FTA MAP forum to develop Best Practices
  3. 25 June, OECD report to the G20: Status, training, effectiveness
  4. 20 June, OECD Global Forum on Transparency and Exchange of Information: Activities
  5. 18 June, OECD: Tax Transparency report.
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