US and international accounting standards have introduced the CAM process into the audit process, some of which include income tax accounts as a selected disclosure due to their materiality and the nature of being especially complex, challenging, subjective or complex auditor judgment (which is increasingly the norm for international tax rules)
For each CAM communicated in the auditor’s report, the auditor must:
Identify the CAM, describe the principal considerations that led the auditor to determine that the matter is a CAM,
Describe how the CAM was addressed in the audit, and
Refer to the relevant financial accounts/disclosures that relate to the CAM
As income taxes become more complex and subjective, including the effect of the Tax Cuts and Jobs Act (TCJA), MLI amendments to double tax treaties including permanent establishment (PE), OECD guidance and tax audit issues, a tax CAM may become more significant going forward, as it is an annual determination.
To the extent income tax is a CAM, there will be specific disclosures, preceded by more diligent review of the tax accounts, subjective determinations, etc. as part of the normal tax provision process.
PCAOB summary guidance and the relevant guidance links are referenced.
India’s Central Board of Direct Taxes has published a report for comments, due by May 18th.
The Committee has recommended a mixed or balanced approach (“fractional apportionment”) that allocates profits between the jurisdiction where sales take place and the jurisdiction where supply is undertaken. India’s position is that such approach is acceptable in other tax treaties. However, the risk of double taxation is present if this approach is not adopted by other countries. Additionally, the approach differs from the OECD approach, which then introduces more complexity for all multinationals with Indian operations.
India is known for its long appeals, and different approaches to its fisc. Accordingly this report should be reviewed, with a possibility to comment, prior to further actions. This report, and methodologies, will also be closely followed by other countries in this complex and subjective area of PE profit allocations.
EY’s Global Tax Alert provides additional details, for reference.
As countries become creative re: permanent establishment (PE) taxation, this scenario presented by the EY Global Tax Alert reminds all tax practitioners to be cognizant of what intercompany provisions are provided.
The Danish Tax Board referred to the contract between the Austrian company and the Danish company, according to which the Danish company would make offices and storage facilities available to the Austrian company. The Danish Tax Board was informed that the premises would be used by the subcontractor only. The Danish Tax Board ruled that according to the wording of the contract between the Austrian company and the Danish company, the Austrian company would have a place of business in Denmark at its disposal regardless of the fact that the services would be outsourced to a subcontractor.
Thus, providing for a storage closet (in literal terms) may impose PE liability, with the ensuing compliance and fees a significant factor for what was probably an inadvertent error by the drafters of the intercompany agreement.
The treaty had the same PE provisions as OECD’s Article 5 language, although noting that the OECD’s recommendations were looked to by the tax administration.
As a Best Practice, all intercompany agreements (anywhere in the world) need to be reviewed by an international tax practitioner prior to execution, whether in-house personnel or outside advisors.
EY’s Alert provides additional details that should be reviewed to indicate the pervasiveness of the new PE rules, and the aggressiveness of tax administrations to literally interpret intercompany agreements.
New Zealand’s government has announced the introduction of new BEPS compliant rules that will be effective mid-2018. Additionally, the government has taken this opportunity to expand upon the OECD’s rules, in an attempt to ensure that a “fair share of tax” is paid by multinationals doing business in the country.
Acknowledging the OECD’s intent to provide flexibility with its BEPS Actions and subjective language therein, New Zealand is looking for this legislation to impose rules above and beyond the BEPS Actions. For example, anti-PE rules will be introduced that look to Australia’s provisions, which were initially introduced by the UK as diverted profit tax schemes to collect additional tax.
International tax practitioners should review these provisions and plan their tax strategies accordingly, knowing that New Zealand will introduce double taxation sooner vs. later in the global concept.
EY’s Global Tax Alert provides relevant details of New Zealand’s proposals.
EY’s Global Tax Alert provides a succinct summary of the latest OECD and BEPS developments, including:
- G20 and exchange of information upon request standard
- Multilateral instrument, 68 countries moving forward
- Peer reviews on BEPS 4 minimum standards:
- Action 5, harmful tax practices
- Action 6, treaty abuse
- Action 13, country-by-country reporting (CbCR)
- Action 14, dispute resolution
- Action 5 peer reviews of preferential tax regimes
- Action 13, CbCR exchange relationships; important for US MNE’s and similar jurisdictions without obligatory 2016 reporting
- MAP peer reviews
- Discussion drafts on profit splits and attribution of profits re: PE’s; comment period to Sept. 15, 2017
- Branch mismatch forthcoming revisions
- Common reporting standard
- Digital taxation
OECD is still very busy, with a plethora of BEPS follow-up and other activities, although there seems to be continuing flexibility to gain collaboration that will also lead to added complexity and disputes.