Jurisdictions are legislating global tax disclosure statements as a separate filing requirement or included with the respective local corporate income tax return. Recent examples seem to highlight this new initiative, including France and Chile. Examples of information requested include entities with legal ownership of IP, entities that have no assets or substance (i.e. holding companies), etc., irrespective of intercompany transactions with the local entity.
These new disclosures have added additional risks for operational compliance, as well as a need to centralize such information. Some multinationals (MNEs) have placed this compliance responsibility with a local / regional team for efficiencies. However, this new reporting trend will require closer coordination of headquarters that has relevant knowledge of the global ownership of IP and legal structures.
Answers to these dislosure questions will pose new audit risks as tax administrations will make further inquiries and/or initiate an audit to assess potentially high risk transactions. This emphasis will include a vigorous challenge to treaty based positions with holding companies, including any general anti-avoidance or anti-abuse rules within the treaty or domestic legislation.
Additionally, audit queries based upon global disclosures will require seamless coordination with headquarters or the individuals possessing this information. Therefore, audit teams and ways of working will need to be strategized for information that is not generally retained by the local business team.
MNEs should monitor new disclosures and ensure there is an efficient governance process to accurately address the BEPS incentivized queries. This may involve a shift in responsibilities within the transfer pricing documentation process.
The post BEPS era signifies a new way of thinking, including the respective documentation responsibilities and structure of an internal transfer pricing team.
As tax disclosures, more specifically the country-by-country (CbC) report, approach probable reality, what is your company doing to prepare for such transformation?
- Is the CbC report being prepared with perceptive gap Q & A’s addressed?
- Who is the first / primary point of contact for a public query – How are contact details communicated for global awareness?
- Is tax aligned with corporate communications re: who is responsible for preparing, delivering, answering queries?
- Are shareholders aligned in the process, to disclose or not disclose?
- Will tax posture change, via public disclosures, as public disclosures become more common?
- What is the impact of your peer companies providing proactive disclosures?
- Is there a process to monitor tax disclosures of peer companies for review, not to be surprised.
- Is there a similar process for internal queries as a response to ever-growing tax investigations / allegations in the public?
These questions highlight the priority needed to focus upon this new trend and proactively address this new world! Tax authorities will be reviewing such disclosures, so multinational organisations should be also aware.
KPMG has engaged with several UK headquartered multinationals to address how to proceed with future, and dissimilar, demands for transparency. Although focused on UK based organisations, the framework promotes valuable Best Practices that can be used globally. A link to the insightful article is provided for reference:
Five themes for a tax disclosure framework:
- Strategy/policy and approach to tax
- Tax policy
- Tax planning and risk approach
- Engagement with tax authorities
- Tax risk governance
- Link between tax strategy and governance
- Tax compliance and tax risk monitoring
- Non-compliance governance tools
- Business model
- Overview, including tax attributes for effective tax rate and cash taxes
- Transfer pricing overview
- Operations in low tax jurisdictions
- Tax contribution
- Data/narrative re: sales, profits and taxes paid
- Types of taxes paid and use of a company’s profits
- Specific information related to material issues
- Tax losses/carryovers
- Tax incentives/holidays
- Material items, such as pension contributions
The above issues exemplify the difficulty in developing a comprehensive framework, or flexible tool, to meet the varying transparency demands resulting from OECD, EU and UN guidelines and unilateral legislation efforts around the world.
The most important point is that the timing for the thought processes for a tax disclosure framework is now; there are no signs of the demand for tax transparency diminishing.
The Brazilian government has announced two new programs:
- Use of tax losses to offset currently disputed Federal tax liabilities
- Disclosure of tax planning structures that avoid, reduce or postpone taxes; such measures are meant to improve relationships between tax authorities and taxpayers. This requirement is also meant to align with the OECD BEPS guidelines. For planning structures implemented in 2014, disclosure is due by 30 Sept. 2015.
Additional disclosures and initiatives, aligned with BEPS guidelines, will be introduced in legislation by other countries, resulting in additional diligence requirements to avoid penalties. Tax governance is becoming increasingly difficult and complex, underpinned by dissimilar compliance demands of each country.