Strategizing Multinational Tax Risks

Click to access fta-2014-communique.pdf

Tagged with:

MAP Vision: Forum on Tax Administration

The Forum on Tax Administration (FTA), representing heads of tax administrations from 38 countries, concluded their 9th meeting on 24 October, 2014. The meeting represented attendance by over 130 delegations, including representatives from the African Tax Administration Forum (ATAF), Inter-American Center of Tax Administrations (CIAR), Centre de Rencontre des Administrations Fiscales (CREDAF), International Monetary Fund (IMF) and the Intra-European Organisation of Tax Administrations (IOTA). The meeting included strategic visions for the Mutual Agreement Procedure (MAP) and Co-operative Compliance programs.

Links to the meeting summary and MAP vision are included for reference:

Click to access map-strategic-plan.pdf

The following actions were agreed:

Enhanced cooperation strategy, based on existing legal instruments.
Created a new international tax platform, Joint International Tax Shelter Information and Collaboration (JITSIC Network) to focus on tax avoidance.
Implement the new standard on automatic exchange of information while protecting taxpayer confidentiality.
Improve practical operation of Mutual Agreement Procedure (MAP) to address double tax issues more quickly and efficiently, integrated with the OECD BEPS action item. Competent authorities of all member countries are “encouraged” to actively participate in this initiative.
Promote a voluntary compliance structure.
Develop principles on Co-operative Compliance arrangements that form an integral part of effective tax control frameworks.

MAP Strategic Plan summary – “Statement of Vision and Commitment”

Collaboration of the FTA MAP Forum with other multilateral bodies, including OECD’s Working Party 1’s Focus Group, to further its goals.
Participating Competent Authorities (CAs) commit to the stated goals and be accountable thereto.
Allocation of adequate staffing levels and resources to meet CAs working demands.
Adequate training programs and personnel practices.
FTA MAP Forum’s engagement to address resource challenges.
Empowerment of CAs to effect agreements in accordance with principles in the respective tax conventions.
Absence of undue influence by administrative policies, practices or goals.
Support resolution of MAP cases in accordance with multilateral principles, avoiding efforts such as maximizing revenue collection.
Adoption of principle based and mutual trust principles.
Adopt Best Practices in the pursuit of new initiatives to streamline and enhance processes to expedite MAP resolution.
Sharing MAP Best Practices among FTA MAP participants.
New MAP processes to elevate difficult cases.
Enhance taxpayer’s involvement in case resolution, including bilateral/multilateral meetings and sharing case developments.
Seek ways to avoid MAP cases, including APAs, joint audits, “roll-forward” adjustments and other techniques.
Use multilateral MAP procedures.
Adopt agreements for issue consistency.
Avoidance of MAP manipulation by auditors.
Deliver training on double taxation and CA processes via a “Global Awareness Training Module.”

The above meeting commitments and objectives are welcome as tax controversies increase and MAP procedures have seeming lost the elements of timeliness, cost-effective resolution, avoidance of double taxation, transparency and efficiency.

It is hopeful that most tax administrations endorse, and commit to, the above MAP framework in an effort to achieve Best Practices for a win–win opportunity.

Category:

Click to access pwc-eu-fiscal-state-aid.pdf

Tagged with:

EU State Aid: A primer

PwC has provided an outline of EU State Aid requirements. This comprehensive and succinct summary provides context for the OECD BEPS provisions, tax arrangements that are considered illegal State Aid, and a valuable reference for potential EU State Aid cases in the foreseeable future. A link to the outline is provided for reference:

This information provides a valuable context against which the recent inquiries have been focused, as well as potential areas (including OECD BEPS Actions) that may constitute illegal State Aid in the future. All MNE’s with European operations should be familiar with these legal provisions and the continuing importance that they have in today’s rapidly changing international tax environment.

Category:

Tagged with:

Internal (tax) audit: Risk governance tool

Most MNE’s have an internal audit department, although the extent to which this audit team minimizes tax risks and enhances tax governance is generally not identified.

New out of the box ideas may be necessary for the internal audit function to address the evolution of transfer pricing and new challenges that will surely bring additional appeals and risks of double taxation.

With the advent of the OECD’s BEPS Action Plans, parallel UN actions, increased tax audits and tax risks re: transfer pricing documentation, there has not been a significant increase in the role of internal audit teams to monitor and minimize potential tax risks, including double taxation. There is also a resource limitation on tax professionals, thus internal audit may provide a win-win opportunity. The near future may include the addition of an internal tax audit team and/or adding tax professionals to the team.

Best Practice ideas for internal audit collaboration:

Tax topic training, including OECD’s BEPS actions
Tax risk awareness training, including Permanent Establishment (PE) and transfer pricing methodologies
Rotation of tax professionals in the internal audit team
Knowledge of tax policies, including intercompany service agreements and internal governance
Issues / trends in tax audits and hot topics
Treasury / financing issues subject to internal governance

The ideas are meant to promote thought and consideration for Best Practices.

Category:

Click to access TEI%20Comments%20-%20Action%2011%20Data%20Collection%20-%20FINAL%20to%20OECD%2017%20September%202014.pdf

Tagged with:

TEI comments: BEPS Action Plan 11

Tax Executives Institute, Inc. (TEI) has provided comments to OECD BEPS Action Plan 11, data collection and BEPS actions.

The comments highlight the wariness of measuring BEPS actions and reacting thereto. TEI discusses three key deficiencies of trying to measure such data and assess its effectiveness; (1) a lack of understanding of the current state of affairs, lack of a defined goal to the OECD’s BEPS project, and lack of definition of BEPS behaviors. The comments are referenced at:

Some key TEI comments:

Taxing authorities may use a subjective “we know it when we see it” approach rather than objective, evidenced-based measures.
The focus on a disconnect of taxable income from activity and value creation also raises concerns that tax authorities may use the measures developed by BEPS Action 11 to advance formulary apportionment approaches to transfer pricing.
TEI urges the adoption of a clear definition of BEPS and BEPS behaviors before attempting to develop mechanisms to differentiate inappropriate (if legal) tax results from “regular” corporate tax planning that may take advantage of government enacted tax incentives.
A central tracking mechanism for assessing an increase in mutual agreement procedure cases and tax controversy and litigation raising double taxation concerns should be developed.

As the BEPS Action Plans are reviewed and implemented by countries worldwide, it is helpful to review TEI’s comments to ensure there is a comprehensive understanding of the perceived abuses and risks that BEPS Action Plans have addressed.

Category:

https://www.accountancylive.com/transfer-pricing-documentation-time-strategy-refresh

Tagged with:

Best Practice TP article: TP documentation: time for a strategy refresh

I have attached for reference my first published article, addressing transfer pricing documentation: time for a strategy refresh.

The article was published by Accountancy Magazine. A reference to the article is included for reference:

The article addresses the OECD BEPS proposals, including country-by-country reporting, with Best Practice ideas included for Action Plan items.

Additionally, insights into processes for developing a comprehensive plan for revised TP documentation are discussed.

Finally, the hot topics of General Anti-Avoidance Rules (GAAR), local tax disclosures and tax policy statements are addressed for further insight.

Category:

http://www.kpmg.com/AU/en/IssuesAndInsights/ArticlesPublications/tax-insights/Pages/a-new-obligation-for-public-officers-28-august-2014.aspx

Tagged with:

Australia TP: Self-assessment regime

Australia’s new transfer pricing rules require that officers signing the corporate tax return must sign off for transfer pricing arrangements on a self-assessment basis. The self-assessment process would affirm that the transfer pricing is pursuant to arm’s length consideration that would be transacted between unrelated parties. Details of the new self-assessment regime are referenced at the attached link:

Additional review of transfer pricing documentation may be required for self-assessment consideration. The OECD BEPS proposals may also impact such reporting in the future.

Category:

http://www.revenue.ie/en/practitioner/ebrief/2014/no-682014.html

Tagged with:

Ireland Code of Practice: Audit Best Practices

Irish Tax and Customs has published a comprehensive report of Best Practices to be followed by the tax authorities and taxpayers in audit inquiries. The report includes definitions, types of audits conducted, bases of risk assessment and analytics used by the tax authorities. The following excerpt provides a brief overview of the content, which is referenced at the link provided.

1.1 Purpose of this Code of Practice
The purpose of this Code of Practice is to set out a clear, fair and equitable set of guidelines to be followed by Revenue, taxpayers and tax practitioners, in the carrying out of all Revenue Compliance Interventions, having regard to best practice and legislation.

The provisions of this Code of Practice are not to be used unnecessarily to delay or obstruct the due process of the application of tax legislation by Revenue carrying out duties on behalf of the State. Taxpayers or tax practitioners acting on their behalf cannot abuse the rights recognised in this Code of Practice to avoid or delay payment of tax, interest or penalties which are correctly owed. The Code of Practice does not restrict the taxpayer’s statutory rights.

This Code of Practice will be reviewed on an on-going basis and may be modified to reflect changes in legislation and emerging practices.
1.2 Taxes and Duties Covered by this Code of Practice
This Code of Practice applies to Income Tax, Corporation Tax, Capital Gains Tax, Local Property Tax, Exit Taxes, VAT, Capital Acquisitions Tax, Excise Duties and Licences, Carbon Taxes, Vehicle Registration Tax, Stamp Duties, Customs Duties, Universal Social Charge, Income Levy, Domicile Levy, PRSI (both employers and employees), Health Contributions, Environmental Levy, Training Levy and includes all forms of withholding (e.g. RCT, PSWT, DWT) that apply to any of these taxes, interest in respect of such taxes and penalties.

The publication is informative and an invaluable reference for any type of audit inquiry that is conducted.

Category:

http://www.kpmg.com/ZA/en/IssuesAndInsights/ArticlesPublications/Tax-and-Legal-Publications/Pages/Additional-changes-made-to-transfer-pricing-legislation.aspx

Tagged with:

Secondary TP adjustments: Legislation for S. Africa 2015

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).

Category:

http://www.oecd.org/tax/part-1-of-report-to-g20-dwg-on-the-impact-of-beps-in-low-income-countries.pdf

Tagged with:

OECD report to G20: Issues re: Developing countries

The OECD has published a report (Part 1) addressing base erosion and profit shifting (BEPS) in developing countries and how these relate to the OECD/G20 BEPS Action Plan. A ranking of low, medium or high is assigned to each of the 15 Actions in Annex A re: the impact on developing countries. Section 5 of the report highlights the primary issues to be addressed, including base-eroding payments, treaty issues, new business models and transfer pricing documentation.

Part 2 of the report, to be presented in September 2014, will (1) confirm which of the Actions are of most relevance to developing countries, (2) discuss other BEPS-related issues not in the Action Plan, and (3) address actions needed to ensure that developing countries can fully benefit from the Action Plan items and how specific BEPS actions may need to be adapted/simplified or supplemented to ensure they are effective for developing countries.

An interesting comment in the Executive Summary states: “The international nature of tax planning means that unilateral and uncoordinated actions by countries will not suffice and may actually make things worse.” Note that recent unilateral actions by developed countries to advance BEPS initiatives would further corroborate this statement.

Additionally, it is stated that approx. 3,000 bilateral tax treaties operate worldwide, with about 1,000 of these involving developing countries. This is a significant fact, as the OECD seeks to ultimately develop tools for countries to enact such legislation, notwithstanding the fact that it may take years to achieve global implementation.

A link to the report is provided for reference:

The report is invaluable as it provides significant trends and challenges faced by developing countries, coupled with potential solutions under consideration to address such challenges.

Category:

http://www.kpmg.com/CN/en/IssuesAndInsights/ArticlesPublications/Newsletters/ChinaAlerts/Documents/China-tax-alert-1407-19-Guidance-on-Chinese-General-Anti-Avoidance-Rule.pdf

Tagged with:

Chinese GAAR: Review of a draft “Administrative measure”

The Chinese State Administration of Taxation (SAT) has released draft General Anti-Avoidance Rules (GAAR) to supplement its current GAAR legislation and Circular 2. The draft rules, when final, will be effective for all arrangements executed after 1/1/2008, the effective date of the Corporate Income Tax Law and the Detailed Implementation Rules. The KPMG tax alert provides relevant information for this draft guidance, which can be referenced at the following link:

Observations of “clarifications” to the law:

Shift from a “primary purpose” test to include “one of its main purposes” to obtain tax benefits.
Ordering rules are set forth: Domestic SAARs, Treaty SAARs, and domestic GAAR.
It is noted that in most recent Chinese tax treaties, there is a “Miscellaneous Rule” article reserving the right to use GAAR irrespective of treaty commitments.
There is not a GAAR review committee.
Documentation to be provided by taxpayers includes communications between the taxpayer and its tax advisors, and other parties to the transaction.
Documentation may also be requested directly from the tax advisors to the taxpayer.
GAAR adjustments include re-characterization of the arrangements, or income, deductions, tax incentives and related foreign tax credits, denial of the existence of a party to the transaction, and any other reasonable method.

This draft emphasizes the use of GAAR by tax authorities to counter perceived tax abuse and treaty shopping techniques. There is a complex interplay between the treaty provisions, by which treaty relief may be sought, and domestic legislation whereby there is a higher possibility of double taxation. Prior posts re: GAAR may also be searched in this blog, detailing a non-uniform burden of proof standard, high subjectively threshold and the continuing development of this anti-abuse provision by tax authorities around the world.

It is noted that the draft rules also extend documentation requests directly to tax advisors, including communications to or from the taxpayer. This explicit provision emphasizes the importance of coordinating relevant communications between the taxpayer and all outside parties to ensure that form and substance requirements are aligned.

GAAR documentation should be considered for all transactional planning, including prior transactions for which current developments are evolving.

Category:

http://www.pwc.com/en_GX/gx/audit-services/corporate-treasury-solutions/assets/pwc-building-the-case-for-asia-corporate-treasury-fa.pdf

Tagged with:

Asia Corporate Treasury risks: Tax & Treasury collaboration

PwC has published the inaugural Asia Corporate Treasury Survey 2014, based on responses from 117 organisations across 7 countries in Asia. The Report includes risk management approaches, treasury structures and various other treasury topics that revealed significant opportunities for Asian treasury centres to deliver strategic business benefits. The Report highlights the necessity of tax and treasury collaboration in developing Best Practices due to the mutuality of objectives and complementary issues for which one function should not operate independent from the other. A link to the Report is included for reference:

The Contents include the following topics:

Deployment of treasury staff
Core treasury activities in Asia
Treasury function in Asia
Key financial risks
Risk approach
Hedge accounting
Bank relationships
Type of debt used
Funding management strategies
Investment of excess cash
Key cash management activities in Asia
Cash centralisation
Treasury technology
Future changes to think about

The Report provides valuable insight into the rapidly growing Asian region and the complexities encountered in addressing Best Practice methodologies,

Every organization should periodically review the structure of tax and treasury due to their interwoven functions, as well as compare the risk drivers for each function.

Relevant Best Practice questions include the following examples:

Are the tax risk framework and treasury risk framework integrated processes, or are such frameworks developed independently?
Does tax and treasury share updates re: new debt instruments, OECD BEPS action plan, hybrid instruments, triggering foreign exchange risk proactively, etc.?
Are training workshops / opportunities provided for the integrated functions, leading to a Best in Class methodology for both treasury and tax processes?
What is the future vision for tax and treasury?
Is the transfer pricing documentation for loans, pooling structures, etc., consistent with current treasury practices globally?
What is the withholding tax certification process from a tax and treasury perspective?

The Report, and Best Practice observations, are valuable topics for internal discussion and benchmarking the combined processes with peer organizations.

Category:

http://www.oecd.org/tax/treaties/2014-update-model-tax-concention.pdf

Tagged with:

2014 Update to the OECD Model Tax Convention

The 2014 Update, as adopted by the OECD Council on 15 July 2014, includes changes that were previously released for comments, including the meaning of “beneficial owner.” Numerous additions and deletions to Commentaries on various Articles, including positions of non-member countries, are also included. A link to the Update is provided for reference:

Interesting changes:

Article 5 Commentary: new views by Germany, Estonia, and Israel.
Article 9 Commentary: Hungary (newly added) and Slovenia reserve the right to specify that a correlative (i.e., offsetting) adjustment will be made only if they consider that the primary adjustment is satisfied.
The term “beneficial owner” does not have reference to any technical meaning under domestic law, thus it should not be used in a narrow technical sense, rather, it should be understood in its context and in light of the object and purposes of the Convention including avoiding double taxation and the prevention of fiscal evasion and avoidance.
The term “beneficial owner” does not deal with other cases of treaty shopping, which can be addressed in specific anti-abuse treaty provisions, general anti-abuse rules (GAAR), substance-over-form or economic substance approaches.
Article 13 Commentary: With respect to paragraph 3.1, Austria and Germany hold the view that when a new tax treaty enters into force, these countries cannot be deprived of the right to tax the capital appreciation which was generated in these countries before the date when the new treaty became applicable.
Article 26 Commentary: The Commentary was expanded to develop the interpretation of the standard of “foreseeable relevance” and the term “fishing expeditions,” i.e. speculative requests that have no apparent nexus to an open inquiry or investigation. The Commentary further provides for an optional default standard of time limits within which the information is required to be provided unless a different agreement has been made by the competent authorities. The examples provided are to demonstrate the overarching purpose of Article 26 not to restrict the scope of exchange of information but to allow information exchange “to the widest possible extent.”

The Update requires a comprehensive review to determine potential implications, including beneficial ownership restrictions and ways of working by competent authorities. Such review should distinguish changes to the Articles versus additions or deletions to the Commentary interpreting such Articles. Note that the OECD BEPS changes will be an addition to this Update.

Category:

Click to access KPMG-Financial-Update-2014-07-Special-Issue.pdf

Tagged with:

Treasury related transfer pricing disclosures: Czech Republic

The Czech Republic has published new tax return disclosure requirements for the 2014 year, including 2013 data for selected taxpayers. A link to the requested information is provided for reference:

The Czech Republic disclosures include the amount of short-term and long-term intercompany receivables and payables at the end of the current and prior years for comparison.

Best Practice: Treasury training for BEPS – As more countries implement transfer pricing disclosure legislation, with increased emphasis on intercompany loans and financing transactions, it is imperative that Tax Team members provide BEPS training for international treasury centers. This training should raise awareness of the OECD BEPS initiatives resulting in increased disclosures and inquiries from Business Units, as well as provide internal transparency and governance for significant treasury transactions.

Category:

http://www.un.org/esa/ffd/tax/Beps/index.htm

Tagged with:

UN BEPS Questionnaire: Contrasting comments re: Arm’s length principle

The UN Subcommittee on Base Erosion and Profit Shifting (BEPS) Issues for Developing Countries has reiterated its request for comments to its BEPS Questionnaire, copied herein for reference. Additional time is available for comments submitted by 8 August 2014.

The Subcommittee is mandated to draw upon its own experience and engage with other relevant bodies, particularly the OECD, with a view to monitoring developments on base erosion and profit shifting issues and communicating on such issues with officials in developing countries directly and through regional and inter-regional organizations.

Links to the Questionnaire and responses are provided. Comments from Brazil, Mexico, Singapore, Christian Aid & Action Aid, and the Economic Justice Network and Oxfam South Africa are posted for review.

Click to access BepsIssues.pdf

The wide divide in the role (and perception) of the arm’s length principle for transfer pricing is very apparent in the responses from Singapore and Christian Aid & Action Aid.

Actions 6 & 7: Singapore’s comments:
“The continued correct application of the arm’s length principle to allocate profits based on function, assets and risks will help to ensure that profits are allocated based on where value is created.”

“We would like to highlight that the focus on countering BEPS should be to grow the economic pie for every country, and not let the work be sidetracked by protectionism and development of rules for political expedience.”

Actions 8-10: Christian Aid & Action Aid’s comments:
“Transfer (mis-)pricing is a significant challenge to developing countries, and improvements to current rules need to take place to ensure developing countries can seek appropriate tax contributions from Transnational Corporations (TNCs). The best solution may be outside of the arm’s length principle however, something that the OECD appears to not want to consider. We believe that there should be more comprehensive research done into alternatives to the arm’s length principle and how effective they may be for developing countries.”

Questionnaire:

Countries’ experiences regarding base erosion and profit shifting issues.

Developing countries are invited to provide feedback by answering the following questions. Feedback (and any questions about the feedback requested) should be sent to taxffdoffice@un.org. The deadline for responses is 8 August 2014.

1. How does base erosion and profit shifting affect your country?

2. If you are affected by base erosion and profit shifting, what are the most common practices or structures used in your country or region, and the responses to them?

3. When you consider an MNE’s activity in your country, how do you judge whether the MNE has reported an appropriate amount of profit in your jurisdiction?

4. What main obstacles have you encountered in assessing whether the appropriate amount of profit is reported in your jurisdiction and in ensuring that tax is paid on such profit?

The Subcommittee have identified a number of actions in the Action Plan that impact on taxation in the country where the income is earned (the source country), as opposed to taxation in the country in which the MNE is headquartered (the residence country), or seek to improve transparency between MNEs and revenue authorities as being particularly important to many developing countries (while recognising that there will be particular differences between such countries). These are:  Action 4 – Limit base erosion via interest deductions and other financial payments  Action 6 – Prevent Treaty Abuse  Action 8 – Assure that transfer pricing outcomes are in line with value creation: intangibles  Action 9 – Assure that transfer pricing outcomes are in line with value creation: risks and capital  Action 10 – Assure that transfer pricing outcomes are in line with value creation with reference to other high risk transactions (in particular management fees)  Action 11 – Establish methodologies to collect and analyse data on BEPS and the actions to address it  Action 12 – Require taxpayers to disclose their aggressive tax planning arrangements  Action 13 – Re-examine transfer pricing documentation

5. Do you agree that these are particularly important priorities for developing countries?

6. Which of these OECD’s Action Points do you see as being most important for your country, and do you see that priority changing over time?

7. Are there other Action Points currently in the Action Plan but not listed above that you would include as being most important for developing countries?

8. Having considered the issues outlined in the Action Plan and the proposed approaches to addressing them (including domestic legislation, bilateral treaties and a possible multilateral treaty) do you believe there are other approaches to addressing that practices that might be more effective at the policy or practical levels instead of, or alongside such actions, for your country?

9. Having considered the issues outlined in the Action Plan, are there are other base erosion and profit shifting issues in the broad sense that you consider may deserve consideration by international organisations such as the UN and OECD?

10.Do you want to be kept informed by email on the Subcommittee’s work on base erosion and profit shifting issues for developing countries and related work of the UN Committee of Experts on International Cooperation in Tax Matters?

Do you have any other comments you wish to share with the Subcommittee about base erosion and profit shifting, including your experience of obstacles to assessing and then addressing the issues, as well as lessons learned that may be of wider benefit?

The insightful Questionnaire, as well as commentaries received, reflect the continuing conflict re: transfer pricing principles to be applied by developed and developing countries. Additionally, unilateral requests for BEPS comments by countries also reflect the tendency to adopt OECD principles as adapted to local needs.

As a result, transfer pricing documentation will be inherently more complex and non-standardized, while controversies between tax authorities and multinational corporations will multiply significantly in magnitude and scope.

Category: