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.
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.
This informative article focuses on the growing importance of tax challenges, with a focused role on tax risk and controversy.
Exchange of tax information among tax authorities, joint audits, reputational risk, tax governance, increased focus by the Board of Directors, importance of intellectual property, royalties, service fees, intercompany financing techniques and transfer pricing complexities are reasons why this role is expected to become more common in multinationals. The following ideas are provided for thought and comment:
- Does your company have a Tax Risk Officer / Head of tax controversy? If not, has this idea been discussed with the CFO, CEO and Board of Directors?
- How are the tax, treasury and legal functions integrated in a global approach to tax risk and controversy?
- Are resources in place to facilitate a “joint audit” across several jurisdictions?
- Are tools such as CAP in the US, horizontal monitoring in Netherlands, etc. being used to provide certainty and timeliness?
- Are APA’s being used as a tool; who is functioning as the champion for this initiative?
- Tax amnesty awareness; are you aware of these initiatives on a global basis?
- Who coordinates legal counsel, internal and external, on audits, appeals and court proceedings?
- Do you have a process for consideration of tax counsel at certain stages of an audit?
- What training is provided to finance and other functions to increase awareness of tax risk areas?
- New transfer pricing legislation; who is responsible for reviewing risks and transfer pricing governance / documentation.
The above thoughts may inspire conversations re: this role to match the increased focus by tax authorities and governments.