The Indonesian Ministry of Finance has issued updated MAP guidelines, evidencing focus by the Indonesian Tax Office (ITO) on multilateral dispute resolution. This regulation is the third MAP related guidance, with the inclusion of additional restrictions. A link to KPMG’s Tax News Flash is provided for reference:
- The MAP process will be terminated when the Indonesian tax court “deems” that it has conducted sufficient hearings.
- A tax audit for the MAP years may be conducted, without clarity if such audit is restricted to the MAP issues.
- A concurrent Indonesian MAP request is required for a MAP request by another country’s tax authority.
- MAP does not postpone the obligation to pay the tax, unlike domestic legislation.
Indonesia is uniquely interpreting the tax treaty to limit the opportunity for MAP appeals, while introducing additional subjectivity in the rules via vagaries of the Indonesian tax court’s hearing process. Most importantly, it will be important to consider the MAP process upon the commencement of an Indonesian audit due to ongoing uncertainties.
Notably, this guidance is being issued prior to the finalization of the OECD dispute resolution guidelines that will most likely result in inconsistent guidelines for MAP.
The OECD’s Task Force on Tax and Development will use this concept to assist developing countries by providing international auditing expertise and advice to better address tax base erosion, including tax evasion and avoidance. This initiative is led by the Commissioner General of the South Africa Revenue Service, South Africa’s Deputy Finance Minister and Director of the OECD’s Centre for Tax Policy and Administration.
The Tax Inspectors Without Borders program will match demand from countries requesting international tax audit assistance with a supply of international experts, primarily consisting of tax inspectors in other tax administrations. Accordingly, the experts will now be made available to developing countries.
The initiative is being launched this year, thus communication with the auditors in developing countries should include a discussion on the use of this concept, a listing of the respective experts and the communications that could be shared with the corporation.
It will be interesting to see the development of this initiative, the sharing of information, memorandums of understanding with the corporation or, absent an explicit statement that the country is using this initiative, any impact on the appeal process resulting from assessments of this sharing program. Additionally, it would be interesting to compare the developing countries that use this program versus, or along with, tax training from the United Nations, posted in the blog dated 2 June 2013.
This post is a complement to my 5 April Pre-Audit Strategies blog. Pre-audit strategies are addressed, the audit is conducted, ultimate settlement is achieved and workpapers are returned to the files. Post-audit tax strategies can be utilized to address learnings for future audits, critique the pre-audit strategy approach, and form Best Practices to minimize global risks.
The following ideas should be beneficial in a post-audit tax strategy review:
- List all items in the pre-audit strategy checklist, using my prior blog as a reference along with your ideas. Based on hindsight, provide a rating of 1 to 5 for each strategy with comments.
- Revise the global checklist, if applicable, for future audits.
- Cross-reference the pre-audit checklist against the top risks encountered / not initially settled in the audit for correlation. Are there items that should have been performed before commencement of the audit that were not foreseen at the time?
- Review utilization of tax counsel in the audit to address significant risks; were they involved, should they have been involved earlier, was counsel appropriate for the risks being contested, what learnings can be gained?
- Were audit meetings negotiated efficiently using the appropriate individuals? Should there have been additional training to address significant tax risks, educate the auditor in the company’s transfer pricing methodology, etc.?
- Should a company overview have been provided, if applicable, to provide context for the auditor prior to requests for data?
- Conduct a 360 feedback with everyone involved in the audit to gain efficiencies in the ways of working.
- Were there basic misunderstandings between the auditor and the company that could have been addressed differently?
- Assess the consistency of audit responses with other audits being conducted globally; are they globally consistent to form a uniform basis for discussions between tax authorities sharing information?
- Are there new risks identified that should be included in the global Tax Risk Framework?
- Were audit defense mechanisms reviewed timely to plan effectively?
- For US multinational companies, were memorandums prepared for foreign audits to obtain additional assurance for receiving the benefit of a Foreign Tax Credit? Foreign counsel should be proactive in this effort from the beginning of the audit, outlining cost/benefit relationships, practical appeal opportunities, probability of success for alternative appeals, etc. This memorandum should be discussed early in the audit to align expectations.
- Review precedents established for future years, and applicability for post-audit years.
- Review tax reserves established for the audit years, and all open years.
- Provide a brief memoranda to the audit participants and senior management, summarizing the audit and successful interaction of internal and external resources.
- Were Double Tax Treaty, bilateral and/ or multilateral defenses used? Review their effectiveness, or choice not to use.
- Review the interaction of internal and external resources; who was in control of the strategy?
- In today’s environment of increased collaboration between the tax authorities and multinational companies, should an enhanced collaborative tax return / audit strategy be considered to provide timely certainty?
- Develop a post-audit tax checklist as a learning tool for individuals engaged in tax audits.
The above points should form a foundation to engage in this beneficial exercise, highlighting learnings and opportunities, while adopting a Best Practices approach.
I look forward to your valuable comments.
Some examples of Best Practice strategies to strategize for audits, before they begin.
- Audit defense file for significant transactions and potential risks
- Transfer pricing documentation; contemporaneous, available within the audit request period, without significant penalties
- Inter-company Agreements: signed, readily available; does substance of transactions match the form
- Tax reserves on statutory financials: review, know how to respond to auditor’s queries
- Loan agreements, review for arms-length documentation, rationalize different loans with different interest rates
- Audit notice/telephone call: is there a global communication process for prompt notification and pre-audit planning
- Change of finance personnel, ensure a seamless transition for audit defense files and documentation
- Identify the first point of contact for an audit “raid”
- Who will meet with auditors regularly, company personnel/outside advisors
- Company information, organization charts, etc.; identify what should and should not be provided
- Information for other entities/years not under audit; be prepared to react to such queries quickly and consistently
- Consistency of global methodologies, ensure there is a governance process as tax authorities do exchange information
- Amnesty provisions; how are you made aware of them, process for review if applicable
- Annual review of pre-audit Best Practice strategies for awareness and governance
Hope this is helpful, I look forward to your valuable ideas.