Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘PE’

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:

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

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:

Transfer Pricing

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Tax risk & controversy: EY highlights

Ernst & Young (EY) have published their 10th issue of T Magazine, highlighting the topics of tax risk and controversy.  The link is attached for reference:

Click to access tmagazine10-2012-low.pdf

Key Highlights:

  • GAAR, Burden of proof: Taxpayer, Tax authority or Shared; summary of 24 countries.
  • Sustained government pressure on tax compliance means tax risk is now an issue for corporate boards, not just tax directors.
  • Clarity is now the key attribute in any message about tax that companies convey to the outside world.
  • As emerging markets become more confident and sophisticated, they are challenging commonly applied international tax standards.
  • The OECD’s “Tax Inspectors Without Borders” program (details in a prior post of 9 June 2013) seeks to match demand from countries wanting assistance with complex international tax audits with the supply of international tax experts.
  • Companies need to improve local knowledge of risk rating processes in each Asian country, including key focus areas and potential audit triggers.
  • Organizations need to show a willingness to engage with policymakers and administrators to improve policy proactively.
  • Tax authorities are increasingly adopting the OECD’s concept of the  “economic employer” to determine tax liabilities, rather than a treaty residence rule.
  • Creating a PE is the biggest tax risk companies face from sending employees on business or assignments overseas.
  • An increasing number of companies have appointed a head of tax controversy to manage tax risk and its implications.
  • Companies must be prepared to become more transparent.

Tax risk and transparency are the new challenges to be met by multinationals.  The T Magazine is a valuable resource in understanding today’s risks, and the manner in which these issues will transform current standards into leading Best Practices, tax risk policies and processes.

 

Category:

Tax Risk Management

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OECD BEPS Action Plan 1: Digital Economy – TEI’s comments

Tax Executives Institute, Inc. (TEI) has submitted comments in response to OECD’s discussion draft on BEPS Action 1: Address the Tax Challenges of the Digital Economy.  The link for the submission is provided for reference:

Click to access TEI%20Comments%20-%20OECD%20Action%20Item%201%20-%20Digital%20Economy%20-%20FINAL%20to%20OECD%2013%20April%202014.pdf

Some of the key comments include:

  • TEI agrees that ring-fencing the digital economy as a separate sector with unique tax rules would be neither appropriate nor feasible.
  • Technology companies face similar challenges as other businesses in moving assets and people, a view not assumed in the Discussion Draft.
  • TEI opposes options set forth in Section VII, including modifications to the PE exemptions, a new nexus standard based on significant digital presence, a virtual PE, and creation of a withholding tax regime on digital transactions.  These options are all generally unworkable.
  • The options set forth above are not aligned with G20’s statement that profits should be taxed where they are located.
  • Other measures noted in the Discussion Draft would aim to restore taxation in both the market country and the country of the ultimate multinational parent.  TEI notes that many of the issues that  these measures are designed to address are the result of deliberate tax policy of the OECD’s Member States.  It is these policies that create the low effective tax rates.

The comments provide thoughtful and practical business considerations that should be considered when formulating principles for international tax policy.  The digital economy issue is very complex, challenging and should be monitored to address proposals by the OECD, Member States and other countries for transformation.

 

 

Category:

OECD / UN

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PE Best Practices Risk Review: BEPS Action Plan, OECD & UN Model Conventions

A Permanent Establishment (PE) risk review is an integral component of a global Tax Risk Framework, increasing in importance with issuance of the OECD Base Erosion and Profit Shifting (BEPS) Action Plan.  The PE risk review should be monitored on a recurring basis against the backdrop of current and future developments.  The OECD and UN Model Conventions, with related Commentaries, provide insight into the development and current state of international PE guidelines.  The Conventions provide a useful framework to document specific PE criteria, and exceptions thereto, for risk analysis.

Action 6 (Prevent Treaty Abuse) of the BEPS Action Plan states that the definition of PE must be updated to prevent abuses.  Action 7 (Prevent the artificial avoidance of PE status) provides additional PE initiatives.  Actions 6 and 7 are designed to implemented by September 2014 and September 2015, respectively.  It will be paramount to note any changes in the “preparatory or auxiliary” exception.  A link to the BEPS Action Plan is hereby provided for reference:  http://www.oecd.org/ctp/BEPSActionPlan.pdf

Article 5 of the OECD Model Convention provides an outline for PE determination, including a “fixed place of business” standard, building site or installation project criteria, the “preparatory or auxiliary character” exception, dependent agent rules and further exceptions for activities of an independent agent and related entities.  The OECD Model Convention can be accessed at: http://www.oecd.org/tax/treaties/oecdmtcavailableproducts.htm

The OECD Commentaries are required reading to fully comprehend the history, and intended meaning, of Article 5.  Paragraph 2 of the Commentary provides an outline for determination of a “fixed place of business,” consisting of (i) the existence of a “place of business,” (ii) this place of business must be “fixed,” and (iii) the carrying on of the business through this fixed place of business.  Paragraph 24 of the Commentary states that , for application of the “fixed place of business” rule, “the decisive criterion is whether or not the activity of the fixed place of business in itself forms an essential and significant part of the activity of the enterprise as a whole.”  Paragraph 33 further provides that “the authority to conclude contracts must cover contracts relating to operations which constitute the business proper of the enterprise.”

The attached reference provides access to the UN Model Convention, Letter from India (13 Aug 2012), revised commentary on existing Article 5 and definition of PE for comprehensive understanding of the current PE Article.  The UN Model Convention contains an Introduction, Part One (including the Articles), and Part Two with Commentaries.  Paragraph 20 of the Commentaries states that the Commentaries on the Articles are regarded as part of the UN Model Convention, along with the Articles themselves.  Most importantly, Part Two cites differences of the UN and OECD Model Conventions, such as the UN inclusion of a services standard, exceeding 183 days in any 12-month period, that is not within the OECD guidelines.   http://www.un.org/esa/ffd/tax/unmodel.htm

Best Practice ideas for outlining PE risk include:

  • Documenting potential significant PE risks by legal entity, with specific reference to the PE attribute that attracts such risk, such as a fixed place of business or dependent agent.
  • Outlining availability of the preparatory or auxiliary character exception for potential risks.
  • Inclusion of objective and subjective evidence that provides defense for a potential PE determination, including wording from the applicable Convention and Commentaries.
  • Tools available to reduce double taxation upon determination of a PE, such as the Mutual Agreement Procedure (MAP).

The above Best Practices should be combined with Best Practice ideas in former posts:

  • 14 April PE Risks: Best Practices for Awareness & Planning
  • 14 July: PwC PE survey: Trends & Challenges

PE determination is increasing in importance in today’s changing tax world, thus a detailed risk matrix is essential to determine current potential risk areas, as well as provide valuable information to assess proposed changes by the OECD and/or UN.

Category:

OECD / UN, PE, Tax Risk Management, Transfer Pricing

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PwC PE survey: Trends & Challenges

http://www.pwc.com/gx/en/tax/publications/permanent-establishments.jhtml

PwC has published results from a survey of more than 200 multinationals in Europe and the U.S., focused on Permanent Establishment (PE) challenges and trends.

Survey results include the following:

  • 86% cite increased mobility as a significant trend in triggering PE risk.
  • Difficulty in monitoring business activities, after PE guidance is provided.
  • Do’s and Don’ts provisions are hard to manage.
  • Audit readiness checks should be conducted to reduce PE risk.
  • Tax authorities are exhibiting more aggressiveness in assertions of PE, primarily focused in Europe.
  • Site visits and employee interviews are techniques used more often by tax authorities to identify risks.

My prior posts encompassing PE trends and Best Practices should be reviewed, including 14 April PE Risks and Best Practices, 24 April Global Mobility Alignment, 11 May and 20 May Branch activity risks.

Examples of Best Practices:

  • Confirmation of PE awareness and controls annually by CFO’s / Business Leaders, including Branches and emerging markets
  • PE template to facilitate audit readiness checks
  • PE internal reference guide
  • PE workshops with Internal Audit, Global Mobility and Business Leaders discussing examples of PE and addressing adequacy of controls
  • Discussion of PE cases in the media with regional and global tax teams to accurately and timely inform business leaders

PE risk is still increasing, thus additional focus should be directed to minimize this risk and integrate controls into the Tax Risk Framework.

Category:

PE, Tax Risk Management

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Google UK: PE Risk – Do no evil

http://www.reuters.com/article/2013/05/16/us-google-britain-tax-idUSBRE94E0WL20130516

In continuing verbal encounters by Google UK before the Parliament’s Public Accounts Committee (PAC), it is interesting to note the following in the above article, supplemented by similar language in the related articles cited below:

  • The company evidently stated that “We are selling, but not closing.”
  • The article cites the fact that a review of LinkedIn profiles revealed sales activities were conducted by employees.
  • The article does not provide the reader a concise description of PE, or its safe harbors in Double Tax Treaties: re: “preparatory and auxiliary activities.”

This arduous lesson in reputational risk reinforces the need to ensure Best Practices are in place for PE, as posted in a prior blog.

It is a very interesting point that LinkedIn profiles were reviewed to further examine potential sales activities carried out in the UK.  A company cannot control the social network profiles of its employees, although it should be very clear in everyone’s job description what is, and is not, allowable for marketing or sales activities.  The Do’s and Don’ts List should be signed annually as a reminder to employees of their responsibilities and limitations in scope.

A company with significant Branch activities should be reviewing how written statements, including emails, are communicated in  discussions of sales, market support or promotional activities.

The statement “We are selling, but not closing” brings a substance vs. form argument into the subjective definition of PE, an argument that is not helpful in forming objective arguments by the company or tax authorities.  Therefore, a company should examine its Best Practices to increase its objective PE evidence, in substance and form, in preparation for controversy.

Does your Tax Risk Policy include any statements re: whistleblower activity, and how such activity should be addressed?

Finally, a company should conduct an annual audit of its significant Branch activities, in possible coordination with internal audit, to further minimize its PE (and reputational) risk on an annual basis.

Related articles

Category:

PE, Transfer Pricing

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Branch activity tax risk: Google UK controversy

http://news.yahoo.com/uk-lawmakers-set-date-google-ernst-young-tax-155316417.html

As this news has been widely reported, this controversy highlights the need to aggressively govern the activities of significant Branches worldwide.  This issue is a reminder in today’s tax environment of the necessity for diligence and governance for Branch operations.  The following ideas are presented for review and comment.

  • Review all material on your company’s website re: location of sales activity, associates and job postings.
  • Review job titles and descriptions for all personnel in Branches worldwide.
  • Compare Branch accounts and related disclosures with actual activities on an ongoing basis for consistency.
  • Have a Do’s and Don’ts list that is reviewed annually with individuals having market support activities.
  • Align with Global Mobility re: assignments/transfers of individuals to Branches with Sales titles and responsibilities.
  • Compare actual activities with the legal constraints of a Branch in the relevant jurisdiction.
  • Put a plan in place to regularly determine if a Branch is the best legal form of conducting business, vs. subsidiary, etc.
  • Conduct annual trainings at significant Branches to ensure the activities align with the legal form of doing business.
  • Ensure the concept of PE is well understood by individuals accountable for the Branch operations.
  • What job titles are individuals allowed to include on their business cards?
  • How do Branch personnel represent themselves to the external trade?
  • Is there an objective benchmark (i.e., number of personnel) for Branches that triggers an automatic review?
  • Review the relevant Double Tax Treaty safe-harbor PE provisions.
  • Reputational risk: Consider how Branch activities impact the Tax ERM framework, and monitoring controls in place.

It will be interesting to track the activities of this controversy and analyze how to further minimize risks for Branch activities.

Category:

PE, Tax Risk Management, Transfer Pricing

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Tax Newsletters: Proactive Tax Risk Awareness

Communication of emerging tax risks targeted at increasing awareness of Best Practices via a regional/global tax newsletter provides a timely and efficient vehicle for valuable discussions.  Examples of some benefits include:

  • Increased focus and awareness on important aspects of a Global Tax Policy and / or Tax Risk Policy.
  • Resource for regional / corporate tax team contact information inviting questions re: potential tax risks.
  • Communication vehicle for introducing emerging strategic tax risks, especially in developing markets.
  • Highlights lessons learned in forming new Best Practices.
  • Introduction of new Tax Team members around the world.
  • Provides updates on tax related benefits derived from collaboration on plant expansions, R&D credits, Patent Box and Innovation synergies achieving lower local effective tax rates, etc.
  • Forum for tax diligence procedures of new accounting policies.
  • Reference for upcoming tax training courses, webinars and related reference materials.
  • Tax topic focus, describing potential risks in non-technical language, such as PE – what it is, how to recognize it, its adverse impact on cash taxes, ETR, accounting / operational complexities, etc.
  • ETR overview, why it’s important.
  • Increased tax return disclosures and self-assessment determinations; local and global significance.
  • Country and Regional developments.
  • Tool for heightened awareness among Tax Team members, inviting newsletter contributions and ideas.

I invite your ideas.

 

Category:

Tax Risk Management

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Global Mobility & International Tax: Alignment for Best Practices

Attached for reference is an informative Global Mobility presentation, inclusive of tax risk components.

Apart from Permanent Establishment (PE) risk, among others, I want to focus on the integration of International Tax and Global Mobility, with the following thoughts:

  • Are the International Tax and Global Mobility functions aligned to address tax risks and opportunities?  Are there regular meetings, information sharing and discussions of strategies, risks and opportunities?
  • Are PE and related tax risks explained and discussed with Global Mobility in recurring training programs?
  • Are International Tax personnel familiar with legal vs. economic employer concepts and other related mobility risks?
  •  Should there be dotted line and/or direct reporting structures?
  • Are there red flags/alerts upon assignments/transfers of Regional/Global Sales personnel to ensure PE is not created?
  • Are the legal entities to which personnel are assigned in existence?
  • Should someone with international tax expertise be placed on the Global Mobility Team to minimize potential risks?
  • How is Global Mobility aware of new trends, risks and opportunities, especially re: international tax?
  • Is Secondment and utilization of Double Tax Treaty benefits aligned?
  • How are assignments to new markets executed?  Is International Tax involved in the beginning prior to execution?
  • Are there specific contacts in Legal, International Tax and Global Mobility to communicate potential issues?
  • Are there cross-functional training programs to highlight new issues, discuss risk gaps and Best Practices?

I welcome your ideas.

Category:

Tax Risk Management

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PE Risks: Best Practices for Awareness & Planning

Permanent Establishment (PE) risk is receiving increased visibility around the world, in established countries and emerging markets.  Therefore, have you increased your focus to strategize Best Practices to minimize this risk?  The following ideas are presented for consideration:

  • Coordination of employee transfers/assignments to understand new roles and responsibilities, legal entities, etc.
  • PE global training to increase awareness, collaborating with the Human Resource function.
  • Review tax treaties for all business changes to understand PE triggers and exceptions.
  • Utilizing special purpose entities to centralize, or isolate, potential risks.
  • Developing a Do’s and Don’ts list to discuss with the business; attach to Job Descriptions, as applicable.
  • Formal PE technical training, at least annually, for all employees having international tax responsibilities.
  • If consideration of PE risk is coordinated by external advisors, develop a collaboration plan to review regularly.
  • “Presence” test PE safe harbor, dependent on treaty: Who is counting the days and coordinating related steps of a project?
  • “Preparatory & Auxiliary” PE treaty exception: review Form vs. Substance on a recurring basis.
  • Develop PE expertise and clarify roles of internal staff and external advisors.
  • Proactive vs. reactive PE determinations, understand when a proactive PE determination may be beneficial.
  • Follow PE trends of aggressive jurisdictions with scenario planning.
  • Collaborate with the business to understand upcoming strategies that may introduce new PE risks.
  • Review “Branch” activities annually to determine if they exceed allowable actions in the respective countries.
  • Establish a collaborative process for entry into new countries to ensure tax coordination and risk identification.
  • Ensure a communication protocol is established for response to PE allegations that are made public.
  • Following current events for OECD and UN model conventions, as well as related commentaries
  • Identification, with mitigating controls, in tax risk  and ERM framework

Category:

PE

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