With the introduction of BEPS Action Items, recently followed by the subjective assent procedures of the Multilateral Instrument, it seems that the aggressiveness of tax administrations to apply current tax laws, and BEPS Actions yet to be enacted, is on the increase. One result of such actions is the continuation, in certain jurisdictions, of tax raids which are unannounced, intense and producing immediate distrust between the parties.
For tax administrations, the question is “Does the necessity of such raids still exist?” and if so, they should be delegated to those that are egregious and potentially criminal in nature after the refusal of the taxpayer to legally comply with prior requests and inquiries.
For MNE’s, a tax raid causes immediate panic at the Business Unit, thus at least one legal or tax contact regionally and globally should be available at any time to address a phone call on necessary action steps that day and going forward. This communication protocol should be common knowledge throughout the global organization to ensure alignment and appropriate steps are immediately taken if a tax raid were to occur.
It is hopeful these circumstances will become less frequent around the world, although learnings can be taken from past experiences to form Best Practices for the future.
Principles for Responsible Investment (PRI), a UN sponsored initiative, published a report entitled “Engagement Guidance on Corporate Tax Responsibility.” The guidance is investor oriented addressing the conduct of corporate tax responsibility, disclosure, transparency and good tax risk governance. Therefore, this report is a valuable reference to understand today’s trend of tax disclosure and transparency from an investor’s perspective, and how multinationals may be queried in the new world of international tax transparency.
A link is attached for reference:
Click to access PRI_Tax-Guidance-2015.pdf
- Earnings that rely on tax planning vs. economic activity are vulnerable to tax regulatory changes, earnings risk via strategies are increasing, and some Boards may be unaware of the effect that incentives have on tax planning.
- Corporate sustainability officers should understand tax decisions and their impact on financial results and stakeholders, with alignment between tax strategies and sustainability commitments.
- ” Companies should be able to defend how they allocate profit to each country both to tax authorities and the general public to avoid reputational risk and investor backlash.”
- Before engaging with companies on tax practices, investors should understand various strategies, including IP transfers, financing, marketing service arrangements, principal structures, tax havens, shell companies and tax incentives, that are summarily explained.
- A step plan to engage companies:
- Identify red flags, including a formula to measure tax gap
- Questions for Senior Management/Board re: tax policy, tax governance, managing tax-related risk, effective tax rate, tax planning strategies including structure and IP rights, and country-by-country (CbC) reporting.
Appendices are provided for additional reference of the OECD BEPS project, examples of good tax practices re: disclosures, summary of findings from discussions with Heads of Tax in eight multinational organisations, and a Glossary / Resources.
The report, in providing formulas and explanations, includes educational material for the investor community re: tax strategies and governance, while also providing examples of tax queries and good tax governance by many multinationals.
The report should be used as a metric to assess readiness and alignment for these important topics that may be raised by stakeholders, both internal and external. To the extent such questions have not been a primary focus, this report is an impetus to raise the priority threshold in addressing tax policies, strategies and governance in a very transparent world. Additionally, it is also worthy to review the names of multinationals cited in the report for awareness and recognition.
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
- 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
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.
KPMG has engaged with several UK headquartered multinationals to address how to proceed with future, and dissimilar, demands for transparency. Although focused on UK based organisations, the framework promotes valuable Best Practices that can be used globally. A link to the insightful article is provided for reference:
Click to access developing-a-common-frameword-for-disclosing-tax-information.pdf
Five themes for a tax disclosure framework:
- Strategy/policy and approach to tax
- Tax policy
- Tax planning and risk approach
- Engagement with tax authorities
- Tax risk governance
- Link between tax strategy and governance
- Tax compliance and tax risk monitoring
- Non-compliance governance tools
- Business model
- Overview, including tax attributes for effective tax rate and cash taxes
- Transfer pricing overview
- Operations in low tax jurisdictions
- Tax contribution
- Data/narrative re: sales, profits and taxes paid
- Types of taxes paid and use of a company’s profits
- Specific information related to material issues
- Tax losses/carryovers
- Tax incentives/holidays
- Material items, such as pension contributions
The above issues exemplify the difficulty in developing a comprehensive framework, or flexible tool, to meet the varying transparency demands resulting from OECD, EU and UN guidelines and unilateral legislation efforts around the world.
The most important point is that the timing for the thought processes for a tax disclosure framework is now; there are no signs of the demand for tax transparency diminishing.
EY’s article highlights the importance of planning a proactive risk strategy re: reputation risk. A link to the article is provided for reference:
- Six distinct actions
- Actively monitor the changing landscape
- Assess readiness/desire to respond
- Enhance communication with stakeholders
- Drill into the details to prepare the total tax picture
- Decide on whom communication is to be established
- Embed reputation risk into daily business strategy
- Questions for self-assessment, gleaned from this topic:
- Who monitors media coverage of the company
- Who monitors social media channels re: the tax function
- Who monitors new tax disclosures to assess trends and new compliance requirements
- Is the tax structure transparent re: taxes paid by country
- Do profits and taxes paid align? If not, rationalize the gap
- Who follows tax litigation in each jurisdiction
- Is the (tax) risk officer aligned with tax strategies
- Are Board members aware of new documentation requirements to assess tax strategy around the world
- Has the legal team been educated on BEPS actions and related company strategies
- Is there a metric to measure reputation risk
- What new disclosures are taking place
- Will the company address questions from the public
- Should more tax information be disclosed to mitigate reputation risk
- What information is shared with investors; does the current process need to be reviewed
- Is tax risk an element of every new business initiative/strategy
- What functions are aware of BEPS and the changing landscape
This article is a snapshot for an increasingly important risk: a company’s reputation. As new tax disclosures emerge around the world, interrelated with Board awareness and acknowledgment, it is imperative that the subject of reputation risk is addressed as an immediate priority by all companies. As soon as there is damaging press, truthful or not, it may be too late to respond.
This subject is also of importance for tax administrations: tax information is confidential and technical areas may be unclear, thus a company’s rights should be protected while an issue is raised, investigated and ultimately resolved. The tax administration’s reputation risk is also of paramount importance, as it looks to increase trust and establish an understanding of a company’s functions, assets and risks within the relevant jurisdiction.
Deloitte’s Audit Committee Brief includes a summary and questions outlining Risk oversight and Tax considerations for audit committees. A link to the publication is provided for reference:
Click to access ACBrief_NovemberDecember2014.pdf
- Audit committees may have a risk committee (Will this be a continuing trend?)
- Tone at the top is imperative for effective risk oversight
- Insightful questions for consideration:
- What internal controls are in place to address significant tax risks?
- Is there a clear approach and justification for where risk issues are placed?
- Is there a widely communicated process to quickly bring risk-related issues to the Board?
- What issues should the audit (risk) committee be aware of when evaluating potential risks?
Risk governance is rapidly becoming the new norm, both by tax administrations to understand and rate risks of a taxpayer as well as an effective tax risk policy and framework for a multinational to identify and mitigate risks. This trend will require additional resources to fulfill such commitments, immediately and ongoing.
The Angolan transfer pricing documentation submission deadline was 30 June 2015 re: tax year 2014 for large taxpayers. EY’s publication provides details on the recent enforcement penalties, including business limitations and reputational risk considerations notwithstanding the insignificant penalty amount for late filing.
Click to access 2015G_CM5706_TP_Angolan%20TAs%20apply%20penalties%20for%20failure%20to%20file%20TP%20documentation.pdf
Key observations / lessons learned:
- Insignificant monetary penalties due to non-filing or incomplete transfer pricing documentation may be a consideration in modifying a standard OECD documentation template based on cost/benefit. However, other factors that may be ignored in this analysis may have more inherent risks for consideration.
- Business and reputational risks should be an essential input for filing complete, and accurate, transfer pricing documentation. As countries seek to individualize such documentation, this task is more timely and costly, although ignoring such nuances may prove to be damaging.
- In Angola, the list of non-compliant taxpayers are provided to the National Bank of Angola (via requirements of a Presidential Decree). Accordingly, inclusion on this list may limit foreign exchange transactions ongoing.
The Australian Tax Office (ATO) has issued comprehensive and detailed rules addressing requirements for a formal tax risk framework, from which a taxpayer’s risk will be measured. The guidance includes a tax risk management and governance review guide, in addition to appendices for control testing and directorship responsibilities. The risk guide is focused upon Board and Managerial level responsibilities. EY’s Global Alert and ATO’s tax risk guide and appendices are provided for reference:
Click to access 2015G_CM5625_AU%20TO%20issues%20new%20guidelines%20on%20tax%20corporate%20governance.pdf
- Express requirements for Directors
- Mandatory self-assurance processes for tax governance for which the ATO may rely in assessing risk
- A lack of requisite tax controls will affect the risk rating
- Board controls:
- Formalized tax control framework (Tax strategy document and policies endorsed by Board of Directors)
- Formalises company director roles / responsibilities for tax risk management
- Formal evidence of tax risk review and familiarity with tax risk matters
- Periodic internal control testing, including senior management’s attestation / formal board review of the testing results
- Managerial level responsibilities:
- Clearly defined and documented tax compliance and risk management roles / responsibilities
- Senior management’s active role and governance with objective criteria to demonstrate Best Practices
- Identification of significant transactions via a policy, process, risk rating
- Ensuring data controls are in place
- Record-keeping policies, including a formal tax record-retention policy
- Documented internal control framework
- Documented procedures explaining significant differences between accounting disclosures, financial statements and the tax return
- Complete and accurate tax disclosures, including compliance risk review and tax return review
- Tax governance policies addressing legal and administrative changes
- A: Testing of controls to test control design effectiveness, with a (comprehensive) example of a walk-through scenario
- B: Directorship responsibilities, including a penalty regime, and an appointed public officer
The ATO has set forth new expectations and Best Practices for multinational organisations. The Board of Directors for all MNE’s, not only those operating in Australia, should review the new guidelines, as they set the standard for the future to regulate tax risk management.
Astute Boards will be acting proactively to ensure all controls are in place to effectively manage global tax risk in this brave new world of post-BEPS introspection.
Other countries will surely follow, limited only by current resources.
Accordingly, the concept of a Tax Risk Officer and additional focus on tax risk management / governance policies (supported by objective testing) are becoming the new norm for which all MNE’s should embrace.
The World Bank and the IMF have released a new initiative to support tax systems in developing countries; a link to the press release is provided for reference.
- World Bank Group President Jim Yong Kim’s statement: “If everyone pays their fair share – developing countries can close their financing gaps and promote inclusive growth.”
- The IMF and World Bank will continue to collaborate with the OECD and other development partners in expanding tax assistance and expertise.
- Two pillars of development:
- International tax dialogue to increase their collective voice
- Developing diagnostic tools to evaluate and strengthen tax policies
These developments will be a key metric to monitor, in view of the increased complexity and documentation demands in a post-BEPS era.
Multinationals may also view these developments as added impetus to be more proactive in engaging with tax authorities in developing countries to better understand their business, as well as provide expertise in the complex transfer pricing arena.
PwC’s publication, referenced herein, provides revealing predictions and insights into the tax function of the future.
Click to access pwc-tax-function-of-the-future.pdf
- Reputation is being impacted by external perceptions, therefore companies need to respond clearly and succinctly to a wider stakeholder base.
- A course must be charged for continual transformation.
- Many jurisdictions will legislatively require adoption of a tax control framework, which will be shared with tax authorities.
- Dedicated tax data hubs will become mainstream; data is the new business currency.
- Most global tax compliance and reporting activities will be performed via shared service centers and/or third parties.
- Tax professionals will require strategic risk management skills.
As post-BEPS time nears, with inherent complexities and global disparities, the time to examine current and ideal states of the tax function should be an immediate priority to avoid recurring reactive responses.
The World Customs Organization (WCO) has published a new Guide to Customs Valuation and Transfer Pricing.
The Guide will:
- Provide a policy/audit/control tool for Customs officials
- Cross reference transfer pricing documentation that may be relevant for customs purposes
- Address transfer pricing misconceptions
- Reconfirm “transaction value” as the starting point for customs valuation
- Encourage consideration of transfer pricing studies
- Encourage consistency of transfer pricing adjustments
- Encourage the provision of advance customs valuation rulings
- Provide Best Practices for business, integrating customs and transfer pricing documentation/discussions
A succinct summary by DLA Piper, and the Guide, are provided for reference:
The Guide should also be used as a proactive tool to review reporting structures of transfer pricing and customs employees/advisors, functional integration, etc. to address the new changes in transfer pricing and the possible effect on customs valuations and documentation going forward.
The referenced article provides additional evidence that tax transparency is growing more universal and attracting the interest of many interested parties. A quote from the first portion of the article addresses interest in a taxpayer’s tax risk framework and governance procedures.
“In an exclusive interview with FTFM Local Authority Pension Fund Forum Chair Kieran Quinn has confirmed that the Forum has launched the Corporate Tax Transparency Initiative (CTTI), writing to every FTSE 100 company in late March seeking technical information via ten detailed taxation questions around tax related governance and accounting practices, taxation risk.”
management and minimisation strategies.http://www.lapfforum.org/news/lapff-seeks-tax-transparency-from-ftse-100
This article raises the question of what public tax posture, if any, companies want to exhibit to address tax authorities, individuals/companies having access to company data, individual / institutional investors, pension funds, etc. This topic relates directly to reputational risk, and should be aligned with the Board and senior management.
The Indonesian Minister of Finance has released recent Regulations addressing the methodical approach for which taxpayers and the tax administration are to be aligned in seeking an APA. Most importantly, the approach outlines the advance timing and necessary information by which tax authorities will utilize in considering APA requests.
A link to KPMG’s Tax News Flash is provided for reference:
Click to access TNF%20APA.pdf
As countries continue to enact unilateral legislation, with or without BEPS Actions, it may be prudent to consider a proactive transfer pricing approach to enter into APA’s for significant intercompany transactions. As the Mutual Agreement Procedure (MAP) procedures are still being refreshed, the transition period would be an excellent time to prepare for additional certainty via APA’s. The Indonesian approach provides an excellent example to better appreciate the timing, information and exchanges that will become part of this process.
Armed with the foresight that such APA’s may be included in transfer pricing documentation and exchanged between tax authorities around the world, it may be a worthwhile roadmap demonstrating consistency for significant transactions.
The French Ministry of Finance has released welcome initiatives comprising a list of aggressive tax structures, ten commitments for ways of working upon commencement of an audit, appointment of a national committee of experts in complex cases, and creating a R&D tax credit advisory board to provide consultation services to the taxpayer.
A link to PwC’s Tax Insights summary is provided for reference:
Click to access pwc-france-mof-transparency-measures.pdf
10 Audit commitments:
- Initial meeting to inform taxpayer of documents to be requested
- Ways of working in the tax audit
- First meeting devoted to understanding the business
- Milestone meetings
- Indicating the main audit objectives
- Taking consistent positions of similar issues in the same industry
- Meeting deadlines
- Providing a recourse process with access to auditor’s superior
- Maintaining confidentiality and tax secrecy as imposed by the law
- Identifying an individual within FTA for post-audit support procedures
This is a very welcome initiative that will provide win-win opportunities for audits and information requested. Additionally, this process serves as a Best Practices memorandum of understanding that should be discussed with auditors from other jurisdictions.
As May 2016, the effective date for the EU’s Union Customs Code, approaches several questions remain. One significant question is whether the long-recognized “first sale” rule will be transformed into.. the sale occurring immediately before the goods are brought into the customs territory of the Union.
The links to Deloitte and PwC guidance highlight this change, among others, for which all MNE’s and organisations affected by EU customs duties should closely review and assess current operations to quantify impacts of such changes.
Click to access deloitte-nl-tax-in-2016-the-european-union-will-have-a-new-customs-code.pdf
Click to access pwc-new-eu-definition-transaction-value-1st-sale.pdf
Tax/Customs oversight observations for MNE’s:
- Are these separate functions?
- Is there in-house customs expertise?
- Are transfer pricing and customs integrated re: risks, opportunities and planning?
- What supply chain changes are contemplated, and is customs a major consideration?
- What reporting lines are in place for each function?
- Should tax, treasury and customs be integrated functions for risk oversight and review?
As the OECD BEPS Actions approach conclusion the end of this year, it may be timely to review anticipated transfer pricing changes and upcoming customs considerations for effective long-term planning.