Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘tax best practices’

ATO Tax Risk Guide: Board is an integral player

The Australian Tax Office (ATO) has issued comprehensive and detailed rules addressing requirements for a formal tax risk framework, from which a taxpayer’s risk will be measured.  The guidance includes a tax risk management and governance review guide, in addition to appendices for control testing and directorship responsibilities. The risk guide is focused upon Board and Managerial level responsibilities. EY’s Global Alert and ATO’s tax risk guide and appendices are provided for reference:

Click to access 2015G_CM5625_AU%20TO%20issues%20new%20guidelines%20on%20tax%20corporate%20governance.pdf

https://www.ato.gov.au/business/large-business/in-detail/key-products-and-resources/tax-risk-management-and-governance-review-guide/#Boardlevelresponsibilities

https://www.ato.gov.au/business/large-business/in-detail/key-products-and-resources/tax-risk-management-and-governance-review-guide/?anchor=Directorshipresponsibilities#Directorshipresponsibilities

Key actions:

  • Express requirements for Directors
  • Mandatory self-assurance processes for tax governance for which the ATO may rely in assessing risk
  • A lack of requisite tax controls will affect the risk rating
  • Board controls:
    • Formalized tax control framework (Tax strategy document and policies endorsed by Board of Directors)
    • Formalises company director roles / responsibilities for tax risk management
    • Formal evidence of tax risk review and familiarity with tax risk matters
    • Periodic internal control testing, including senior management’s attestation / formal board review of the testing results
  • Managerial level responsibilities:
    • Clearly defined and documented tax compliance and risk management roles / responsibilities
    • Senior management’s active role and governance with objective criteria  to demonstrate Best Practices
    • Identification of significant transactions via a policy, process, risk rating
    • Ensuring data controls are in place
    • Record-keeping policies, including a formal tax record-retention policy
    • Documented internal control framework
    • Documented procedures explaining significant differences between accounting disclosures, financial statements and the tax return
    • Complete and accurate tax disclosures, including compliance risk review and tax return review
    • Tax governance policies addressing legal and administrative changes
  • Appendices
    • A: Testing of controls to test control design effectiveness, with a (comprehensive) example of a walk-through scenario
    • B: Directorship responsibilities, including a penalty regime, and an appointed public officer

The ATO has set forth new expectations and Best Practices for multinational organisations. The Board of Directors for all MNE’s, not only those operating in Australia, should review the new guidelines, as they set the standard for the future to regulate tax risk management.  

Astute Boards will be acting proactively to ensure all controls are in place to effectively manage global tax risk in this brave new world of post-BEPS introspection.

Other countries will surely follow, limited only by current resources.  

Accordingly, the concept of a Tax Risk Officer and additional focus on tax risk management / governance policies (supported by objective testing) are becoming the new norm for which all MNE’s should embrace.  

Legal Entity governance: Best Practice ideas

Maintaining an up-to-date legal entity organization process / document is an important requirement for accurate and timely tax compliance and planning.  Best Practice ideas for consideration include the following:

Governance sign-off process for all changes of a legal entity, including:

  • Stated capital
  • Share premium (Additional paid-in capital)
  • Authorized capital
  • Officers / Directors
  • Tax elections re: tax characterization
  • Change in name or form of entity
  • Trade names / DBA
  • Restructurings / Mergers / Liquidations
  • Articles of Incorporation or Association

Documentation backup supporting all changes during the life of a legal entity, including formation and dissolution

Assigned Legal Entity champion in the organization

Governance process re: authorized users (view/print/edit)

List of authorized users

Guidelines re: providing legal entity data to third parties, including audit requests

Providing updates with distribution on a real-time (electronic) basis

Master Legal Entity Chart, archiving prior versions as permanent files

Permanent file retention of relevant supporting documentation

Listing of nominee shareholders

Legal and tax characterization, if different

Developing legal entity approval and sign-off in a business recommendation, rather than a separate subsequent process

Most organizations have a process to govern legal entity changes and provide contemporaneous information, although all processes merit a creative review to gain additional efficiencies and Best Practices.

Nigeria: New TP Division & Disclosure forms

In concert with the global emphasis on transfer pricing, Nigeria’s Federal Inland Revenue Service (FIRS) has issued new transfer pricing  (TP) forms to be filed with the annual corporate income tax returns for 2013.  Additionally, a new Transfer Pricing Division has been implemented following Best Practices by other tax administrations.

A Transfer Pricing Declaration form and Transfer Pricing Disclosure form are released to implement the TP regulations issued in 2012. The Transfer Pricing Declaration form includes information on the company’s directors and parent company, whereas the Transfer Pricing Disclosure form requests information about the company’s performance in relation to the group, in addition to disclosure of zero consideration goods, services, or intercompany loans.

The new disclosures highlight the trend for increased disclosures, for which there should be Best Practices implemented to ensure timely compliance and global consistency of tax reporting positions.

A KPMG summary is included as an insightful reference.

http://www.kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/taxnewsflash/Pages/nigeria-new-transfer-pricing-forms-dedicated-tax-office.aspx

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.

China APA Report 2012: More APAs

http://www.chinatax.gov.cn/n8136506/n8136608/n9947993/n9948014/n12360820.files/n12360827.pdf?goback=%2Enmp_*1_*1_*1_*1_*1_*1_*1_*1_*1_*1#%21

THe 2012 Annual Report outlines China’s Advance Pricing Agreement (APA) process, in addition to statistics for 2005 – 2012.  The agenda of the report includes:

  • APA Program definition and advantages
  • Legislation and Development of APA program
  • APA Procedures
  • Taxpayers’ Rights
  • Statistics and Contacts
  • Appendices, including formal meetings and applications

A Best Practices methodology addressing APA’s should be outlined in the global Tax Risk Framework for every multinational corporation.  This methodology will summarize some of the following points:

  • A description of the decision matrix for an APA and its implementation
  • Preference for unilateral or bilateral APAs
  • Implementation of global/regional/country proactive and/or reactive risk management tools
  • Outline of significant jurisdictions, timelines, work plan, and accountability for implementation
  • Integral coordination with tax counsel, and other functional business units
  • Review plan for an APA methodology in today’s rapidly changing tax environment (evidenced recently by the change in administrative leadership for the India APA program)
  • Review of applicable gaps that may exist to retrieve information readily for proactive, or reactive, APAs

Tax jurisdictions, and MNEs, are increasing their focus on APAs amidst a trend of growing uncertainty and complexity in international transfer pricing principles.  The China APA Report provides good preparation for a better understanding of the complex, and lengthy, preparation needed by all parties to obtain an APA.

The Art of Negotiation: Improve your leadership skills

Negotiation is an art and acquired skill; as such it should be a continuous journey for every tax executive.  Negotiation is used by everyone every day, personally and professionally.  For example, it can be used to develop a win-win result in cross-functional issues with a geographically diverse team or equally in discussions with tax authorities to concisely explain transfer pricing concepts.

In today’s world of tax subjectivity and controversy, negotiation is a requisite (and often neglected) skill for local, regional and global tax teams, as well as other leaders in the business.  Conveying technical tax terms and complicated transactions simply, succinctly and convincingly is a leadership skill that becomes more important as one’s career progresses.  Notwithstanding this necessity, negotiation is a skill that is not an integral part of everyone’s development program.

Books, presentations and conferences are focused on negotiation, and I will pass along some tremendous resources I have used that are easy to read and implement daily.  It is also fun to see  the results!  Gerry Spence, a U.S. renowned trial lawyer, has written the following two books for your consideration:

  • How to Argue and Win Every Time – At Home, at Work, in Court, Everywhere, Every Day
  • Win Every Case: How to Present, Persuade and Prevail – Every Place, Every Time

I highly recommend the above resources, related articles posted herein, and look forward to your ideas on this important leadership topic.

Cover of "How to Argue and Win Every Time...

Cover of How to Argue and Win Every Time

Please ensure you, and your teams, have a negotiation goal for 2013!

GAAR: Poland’s reintroduction

Click to access com_2012_722_en.pdf

Poland’s Minister of Finance plans to reintroduce a general anti-abuse rule (GAAR).  GAAR was in brief existence from 2003-2004, however the vague principles led to its removal.

The GAAR reintroduction follows the European Commission’s recommendation in December 2012, with a link attached for reference.  The European Commission Initiatives, Section 8, Recommendation on aggressive tax planning, states “The Commission also recommends a common GAAR.  This would help to ensure coherence and effectiveness in an area where Member State practice varies considerably.”

The GAAR proposal would apply to all types of taxes, with a 30% penalty of avoided tax via a “tax avoidance” transaction.  Appeal provisions are envisioned, in addition to advance rulings, although the time and expense for advance certainty may prove to be impractical.  A GAAR Council would provide an “expert” GAAR opinion that is not binding on the tax authorities.

Poland’s GAAR proposal should be analyzed for Best Practices, coupled with insights from prior posts: EY GAAR survey (7 August) and UK Finance Act 2013: GAAR has arrived (21 July).

It is hopeful that Poland will focus on learnings from the original GAAR introduction, as well as gain insight for Best Practices from other countries that have adopted a fair, and effective, GAAR.  It will be important to observe how the new GAAR legislation will correspond, or override, its double tax treaty provisions, and if the burden of proof will reside with the taxpayer and/or the tax authorities.

Most importantly, Best Practices should be continually reviewed, and revised,  for inclusion of new GAAR proposals and principles that are an integral part of the global Tax Risk Framework.  As stated in the European Commission report, each country’s practice is , and will continue to be, significantly different.  Robust documentation, in proactive tax risk management and planning memorandums, will provide directly relevant evidence to defend the subjective principles and guidelines of GAAR.

PwC transfer pricing survey: Intercompany loans, pooling, guarantees

http://www.pwc.com/gx/en/tax/transfer-pricing/navigating-the-complexity/download.jhtml

PwC has conducted a survey, as referenced in the attached link, of transfer pricing aspects for financial transactions in over 40 countries in the Americas, Asia Pacific and Europe.  The insightful information, current as of 1/1/2013, initially provides a comprehensive overview of intercompany loans, cash pooling and guarantees followed by transfer pricing details for each country.

Each country included in the survey provided responses to the following topics:

  • Transfer pricing rules and regulations, domestic / OECD guidelines
  • Thin capitalisation
  • Intercompany loans (arms-length nature, transfer pricing methodologies, etc.)
  • Cash pooling; transfer pricing methodologies
  • Intercompany guarantees
  • Documentation requirements
  • Advance certainty via APA, etc.

Transfer pricing questions and issues re: intercompany loans and various aspects of financial transactions are becoming more common and complex as businesses are continuing global expansion.  Accordingly, multinational tax and treasury departments need to be mutually aware of transfer pricing rules for arms-length principles, contemporaneous documentation requirements, and inherent risks / opportunities for intercompany financial transactions.

Evolving rules in this area dictate continual training, awareness and strategizing risks from a global tax and treasury perspective.  Transfer pricing training should be provided at regional / global treasury conferences;  conversely treasury should ensure tax is aware of new financing tools that arise in different markets to ensure alignment.

OECD exchange of information: Multilateral Convention review

http://www.oecd.org/ctp/exchange-of-tax-information/conventiononmutualadministrativeassistanceintaxmatters.htm

This link provides access to the Multilateral Convention on Mutual Administrative Assistance in Tax Matters prescribing procedures for the exchange of information between tax authorities, in addition to press releases and related documents.

The Convention, and its provisions, are becoming more important with increased tax transparency and sharing of Best Practices among tax jurisdictions.  The Multilateral Convention, as well as factors leading to its current and future importance provide valuable context in understanding the current state of affairs, and intentions to increase the exchange of information worldwide.

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.

Italy: New Co-operative Compliance Program

http://www.agenziaentrate.gov.it/wps/content/nsilib/nsi/documentazione/regime+di+adempimento+collaborativo+-+grandi+contribuenti/pilot+project+-+english+version

The Italian tax administration will be accepting applications until 31 July 2013 for their new Co-operative Compliance program.  The OECD Framework for Co-operative Compliance, as summarized in my posting of 13 June 2013, is intended to bring certainty into the tax filing and controversy process while  developing a win-win relationship.

Mutual cooperation and transparency are the keys to success for this new initiative.

Mandatory requirements

  • being qualified as a “Large Taxpayer” (under the section 27, paragraph 10, of decree-law no. 185/2008, as converted by section 1 of law no. 2/2009), i.e. taxpayers with total turnover or operating revenues not less than 100 million/€, with reference to the tax year 2011;
  • having implemented an organizational model pursuant to section 6 of legislative Decree no. 231/2001 or having adopted a “Tax Control Framework” to manage tax risks

Optional requirements

  • belonging to a multinational group of companies, or to carry out its business activity in Italy or abroad through permanent establishments;
  • having adopted similar cooperative compliance programmes in foreign jurisdictions or having subscribed a code of conduct with other tax administrations;
  • having already entered into initiatives falling within the concept of cooperative compliance in Italy, such as the International Tax Ruling (provided for by section 8 of decree-law no. 269 of 30 September 2003, converted with amendments into law no. 326 of 24 November 2003 and implemented with Regulation of the Director of the Revenue Agency of 23 July 2004) or having adopted the transfer pricing documentation requirements regime.

Note the importance of having established a Tax Control Framework to manage tax risks, a mandatory requirement for this program.

EY survey: Tax risk awareness gaps

Click to access 2012-13-Canadian-tax-governance-survey.pdf

This insightful survey, published by Ernst & Young, polled Canadian executives from 120 companies to review the tax level awareness in organizations.  The findings include the following observations:

  • 56% of non-tax business unit leaders are unfamiliar with risk management policies.
  • 7% of time spent by the tax function is devoted to tax risk management reporting.
  • 15% of tax risks and opportunities are identified timely.
  • Over 50% of the respondents are planning to improve existing tax risk policies and procedures.
  • Significant areas of tax risk requiring improvement include transfer pricing processes and controversy, foreign tax planning, and legal entity accounting.

The findings should be compared to current Best Practices within every organization.  Some ideas for consideration include:

  1. Develop / review the Tax Risk Management Policy.
  2. Communicate all significant tax risks, and corresponding Tax Risk Management Policy, to business leaders globally.
  3. Prioritize tax risk awareness, including reputation risk, in business reviews and training.
  4. Measure the time spent by the tax function on tax risk awareness and internal controls.  (Refer to 23 June blog posting)
  5. Develop a system to measure tax risks on a quarterly basis to address potential issues timely.
  6. Conduct tax risk workshops with the business leaders.
  7. Review significant risks, noting areas for improvement, and establish a timeline to address such risks.
  8. Address tax risk management as a priority agenda item for the global tax function.
  9. Develop an efficient process to address tax controversies around the world.

Tax risk awareness is a critical issue that should be prioritized within an organization, ensuring alignment with the CFO and Board of Directors.

Board Oversight and Responsibilities for Tax Risk Management

Click to access item74308.pdf

Click to access Erle.pdf

Two excellent articles are linked to review Best Practices for tax risk management from a Board perspective.  The first article is by the Canadian Chartered Professional Accountants and poses various questions and concepts for Directors to ask.  The second article, approached from a practitioners point of view, was written by a KPMG partner.  A related article is also attached as reference at the end of this posting.

The first article reviews various tax risks, including risks of tax planning and subsequent implementation, financial disclosures, tax compliance and audits.  Examples of interesting insights and questions include the following:

  • Are outside consultants an integral part of tax planning?
  • Are direct, and indirect, tax risks addressed?
  • What are the capabilities of internal resources?
  • Are post implementation monitoring processes in place?
  • What are the trends of tax authorities in major jurisdictions?
  • How does the company keep up with change?
  • Is reputational risk considered in tax appeals or court filings?
  • What is the mindset of internal management in foreign jurisdictions re: alignment of overall strategies?
  • What are the source of tax planning ideas?
  • Have tax saving opportunities been missed?

The second article entitled “Tax Risk Management and Board Responsibility” defines a  tax philosophy and establishment of a Tax Risk Framework.  A tax philosophy pyramid is presented that correlates to tax risk.  In addition, the following components of a Tax Risk Management Strategy are discussed:

  • Strategy
  • Risk management
  • Tax profile, relationships and communication
  • Processes and technology
  • Internal qualifications of tax staff

Both articles are excellent reading, and should form a basis for Best Practices to ensure alignment with Board responsibilities and expectations.

EU VAT forum / VAT Rulings test case

http://ec.europa.eu/taxation_customs/taxation/vat/key_documents/eu_vat_forum/index_en.htm

Click to access vat-forum-note-information_en.pdf

The EU VAT forum is a collaboration between tax authorities and business representatives to work on common interests.  The first link provides additional information, including a list of the member organizations that were appointed for a three year mandate starting on 1 October 2012.

Thirteen EU Member States have also agreed to participate in a test case for cross-border VAT rulings.  This program commenced on 1 June 2013 and is scheduled to last until 31 December 2013.  The link provides procedural rules for submission of a private ruling request.  The following Member States participate in this project:

  • Belgium
  • Estonia
  • Spain
  • France
  • Cyprus
  • Lithuania
  • Latvia
  • Hungary
  • Malta
  • Netherlands
  • Portugal
  • Slovenia
  • United Kingdom

It would be beneficial to follow developments of the EU VAT forum, including the test case for cross-border rulings, to build upon Best Practices developed globally and integrated into the tax risk framework.  Additionally, it would be an ideal time to form peer relationships, if not already developed, with business members of the EU VAT forum.

OECD: A Framework for Co-operative Compliance

http://www.oecd.org/tax/administration/co-operative-compliance.htm

This insightful report focuses on practical experiences of 24 countries, with a chart summarizing each country’s status for this initiative.  Additional features are identified leading to successful “co-operative compliance” strategies.

A framework is developed, based on a business case approach, for revenue authorities to measure results, and success.  The report adopts a systematic approach to tax risk and discusses the five pillars established in 2008 based on understandings for:

  • Commercial awareness
  • Impartiality
  • Proportionality
  • Openness through disclosure and transparency
  • Responsiveness

Evolving concepts include:

  • Future direction of initiatives
  • Multilateral co-operative compliance
  • Approaches by tax authorities to measure results and success.

The report provides useful links in Appendix A for country specific information and is an excellent reference to develop further understanding into this rapidly growing initiative, while providing a foundation for Best Practices including:

  1. Documentation of the current enhanced relationship / co-operative compliance methods in use.
  2. Reviewing available co-operative compliance programs for the 24 countries in the report.
  3. Developing a process determining if, when and how the voluntary programs are to be adopted.
  4. Developing a measurement for success based on current initiatives, as well as benchmarking results and experiences with your peers.
  5. Reviewing this evolving initiative annually.
  6. Developing Memorandum of Understanding learnings, as programs are both formal and informal in approach.
  7. Advising regional teams of country developments for continual awareness and future opportunities.
  8. Comparing resource limitations with potential benefits for future co-operative compliance initiatives.
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