KPMG has published their 2018 tax dispute benchmarking survey, interviewing 159 senior tax professionals of US based multinationals.
- State tax disputes have accelerated, more than IRS or foreign tax audits
- State authorities are not developing risk assessment proficiencies
- All audits are taking longer to resolve
- Canada, India, China, Germany and Italy rank as the most difficult to resolve
- Transfer pricing remains as the top issue of examination
- 58% of respondents did not have a dispute resolution budget
- Tax disputes are not monitored by technology, with ⅓ Excel tracking
- External law firms are being engaged at the start of the proposed assessment
As tax disputes, and the difficulty of resolving them, are escalating, it is revealing that most companies in the survey do not have a process in place for audits before they commence. This survey should be reviewed, with Best Practices and learnings, in mind for the future.
The subject of international tax risk for multinationals is growing exponentially every day, although there does not seem to be a significant focus on the commitment in personal development plans for the identification, assessment and / or monitoring of such risks.
Tax risk management is an integral part of all tax professionals focus, although this objective may not be identified to measure accurately and consistently.
For example, if the tax professional is communicating in an audit or appeals process, does the individual have the relevant training for interpersonal skills and understanding the negotiation process to develop a win-win opportunity for efficient resolution?
The timing for next year’s development plan has arrived, thus it might be the right time to consider tax risk with a new focus.
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.
As governments and tax authorities are increasing their focus on transfer pricing issues, aggressive audit approaches and appeal techniques, multinationals should also ensure their integration with internal and external counsel is aligned. This alignment should be in place prior to having to submit a reactionary response that is time constrained, complex and material in amount. The following considerations are provided to promote discussion of this important topic among your teams and senior management.
- What is the reporting structure for tax and legal?
- Are dedicated tax counsel on the tax and/or legal team?
- Does tax meet quarterly with internal/external counsel for status updates?
- Have you quantified the benefit for justification of full-time internal tax counsel?
- Where should internal tax counsel be located, contrasted with the tax team structure?
- Should tax counsel have a full-time presence in aggressive jurisdictions for which appeals and trials are significant?
- Who interviews tax counsel candidates?
- Do you have a documented audit defense process that outlines when tax counsel are engaged?
- How does tax counsel interact with the relevant advisors in appeal proceedings?
- Who monitors the interaction of tax counsel, internal tax, business personnel and external advisors?
- Does tax counsel review draft audit responses for transfer pricing issues and/or significant local taxes?
- Who chooses local tax counsel for worldwide audits and tax proceedings?
- Do you meet with local internal/external counsel when you visit the Business Units?
- Should tax counsel be included in some, or all, meetings with tax authorities? If so, should this start from the first meeting or when it becomes evident that tax counsel is required for current and future negotiations?
- Who should negotiate issues and outline alternative options on an ongoing basis?
- Does tax have a 360 feedback mechanism with internal and external counsel that is openly shared?
- Does tax counsel participate in regular tax team meetings?
The above points highlight some ideas for consideration and discussions with senior management. I look forward to your ideas and Best Practices for tax and legal collaboration.