Effective as of 4 February 2016, Vietnam’s circular outlines how it determines levels of tax risk for a taxpayer, thereby having a direct impact upon the likelihood of an audit.
- Tax risk methodologies will apply for all levels of tax administration activities.
- Internal and external sources of risk will be evaluated.
- Six different levels of risk will be used to rate taxpayers.
- A low compliance rating can result from accumulated losses exceeding 50% of equity, or its VAT amounts are above the average of similar sector based companies.
A detailed summary of the new rules commences on page 15 of the referenced Deloitte’s World Tax Advisor.
A tax risk framework policy is essential for every MNE, as additional countries employ a risk-based approach to compliance and audits. The country-by-country reports to be provided via the OECD’s BEPS Action 13 guidelines will also become a risk tool used by many countries around the world.
Accordingly, all tax departments should be thinking of the post-BEPS world with risk-focused lenses that will yield insights previously not envisioned.
As a Tax Policy is recognized as a basic tool for the foundations of a Tax Risk Framework, documented tax strategies are becoming the new norm.
The UK had previously published requests for comments re: publishing a UK tax strategy by UK and non-UK multinationals (MNEs), followed by the EU Anti Tax Avoidance Package with a communique on the subject.
Highlights of EU Communication to the European Parliament:
- A coordinated EU external strategy on tax good governance is essential for Member States’ to tackle tax avoidance, ensure effective taxation and create a stable business environment.
- In 2012, the Commission issued a Recommendation encouraging Member States to use transparency, information exchange and fair tax competition to assess third countries’ tax regimes and to possibly apply common counter-measures. However, this attempt is now recognized as a failed measure.
- Annex 1 of the Communication sets forth new good governance criteria, which it invites the Council to endorse, as well as provide a basis for all EU external policies on tax matters and promotion of good governance.
- Annex 2 provide elements forming the basis for negotiating future tax good governance clauses that are recommended for endorsement.
- A tax good governance standard responds to the EU’s future development commitments and prevents international tax weaknesses that create opportunities for base erosion and profit shifting.
- The EU seeks to lead by example re: tax good governance.
- A pan-EU list to identify outliers of tax transparency and tax good governance will be an interim solution until a common EU system is developed. “Once a jurisdiction has been added to the EU list, all Member States should apply common counter-measures against it.” The defensive measures should be a top-up to other EU Directives, including withholding taxes and non-deductibility of costs for company transactions.
The Communication and Annexes are required reading, as it sets the tone for ensuing battles between the EU Member States’ and other jurisdictions. Unilateral actions by other countries will probably closely follow, as each country seeks to assert their rights while avoiding the possibility to lose a piece of the tax pie for which everyone is seeking.
It is becoming very clear that MNEs will face a documentation and tax risk framework action to document country/regional/global strategies that will form an element of the post-BEPS transparency world that many are seeking.
The latest EY tax risk and controversy survey series, entitled A new mountain to climb, provides some insights re: preparing for and proactively management tax / reputational risks. A link to the report is provided for reference:
- Media coverage of how much companies pay in tax / low effective tax rates is extensive, although engaging with the media is seen by many companies as a “no-win” situation.
- Leading companies have transformed the process of communication for tax risks and controversy to internal and external stakeholders.
- Transparency is providing information to tax authorities re: how much tax is being paid in other jurisdictions as a tool to decide if the company is paying enough tax in their jurisdiction.
- Global disclosure and transparency requirements will continue to grow in the next two years.
- Transparency readiness of companies is a significant and underestimated need.
- Direct ERP access by tax authorities represents a next phase of risk assessment.
- Transparency readiness can help mitigate reputation risk.
- Reputation risk strategy elements:
- Actively monitor the changing landscape.
- Assess readiness/desire to respond.
- Enhance communication with internal and external stakeholders.
- Gain insight into the total tax picture through the lens of public perception.
- Decide with whom the company wishes to communicate.
- Embed reputation risk thinking into core business strategy.
- Transparency is the new norm, and (media) reputation risk may be a permanent risk.
Transparency demands have created a new toolbox required by all multinational organisations.
A tax policy and reputation risk strategy should be essential tools in a comprehensive tax risk framework. The EY report is required reading for all parties interested in learning more about tax risk trends and Best Practice ideas to proactively address the new world of transparency.
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:
- 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
- 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.
KPMG has provided a valuable reference re: 2015 audit committee topics, providing insight into company risks and the importance of governance.
The following extract, from the report provided as reference, addresses tax risks in the following manner:
Pay particular attention to the global “tax transparency and morality” debate being driven by notions of “fairness”and “morality,” and consider the impact of tax risk on the company’s reputation.Tax is no longer simply an expense to be managed; it now involves fundamental changes in attitudes and approaches to tax globally. Ensure that tax decisions take into account reputational risks and not simply whether the company has technically complied with tax laws. Monitor OECD and governmental efforts globally to address perceived transfer pricing abuses. Help shape the company’s tax risk appetite, and establish a clear communications protocol for the chief tax officer to update the audit committee regularly. Help ensure the adequacy of the company’s tax resources and expertise globally.
Highlights of future trends:
- Reputation risk
- OECD monitoring
- Transfer pricing abuse
- Tax risk appetite
To the extent the Audit Committee has not inquired into BEPS, tax risk frameworks, OECD Actions and transfer pricing governance, a proactive effort should immediately begin to align the Board with the MNE’s tax risk posture and ongoing governance. It is imperative a robust tax risk framework is established and communicated effectively.
The RobecoSAM 2014 Corporate Sustainability Assessment, referenced herein, introduced tax strategy criteria in their scoring to address critiques of MNE’s tax structures, tax reporting transparency and tax risks.
The publication discusses reputational risk in its new survey questions and is very informative re: companies not yet having a tax policy, as well as asking relevant questions addressing the license to operate in a country, relationship risks with host country and economic development risks in regions where the company is operating.
Tax strategies, policies and the perception gap are increasing in importance worldwide, with a kindly reminder for the necessity of developing a comprehensive tax framework that is flexible with today’s challenging international tax environment.
The enterprise risk management analyses for a MNE should have an integrated tax risk framework, coupled with functional interface between common risks that are multi-faceted.
The Australian Tax Office (ATO) has provided a concise summary of its framework by which four broad risk categories are categorized for each type of tax (income tax, GST, excise). This classification framework will be used to provide their service focus.
The framework distinguishes key taxpayers and taxpayers with high, low and medium risk classifications. Higher risk taxpayers will merit a continuous tax review, key taxpayer relationships will be developed focused on the MNE’s risk management and governance framework, medium risk taxpayers will fact reviews/audits, and lower risk taxpayers will be monitored to confirm its ongoing risk characterization.
A link to the ATO Fact sheet is provided for reference:
This initiative is valuable in providing insight into a taxpayer’s risk characterization, although the review frequency and transparency details leading up to a relevant classification are not provided. All taxpayers with Australian operations should be knowledgeable about the risk classification assigned to them for purposes of efficiently engaging with the ATO in a collaborative relationship.
This exercise is also helpful in identifying potential trends in other countries as the OECD’s country-by-country template guidelines are finalized and legislative actions are taken to formally assess risk using relevant data.