Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘tax risk framework’

Vietnam’s risk strategy outlined

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.

Click to access dtt-tax-worldtaxadvisor-160226.pdf

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.

 

 

Tax Strategies: The new norm

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.  

New age of transparency / reputational risks

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:

Click to access ey-managing-tax-transparency-and-reputation-risk.pdf

Key observations:

  • 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.

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.  

Audit committee agenda: Tax risk in focus

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.

Click to access audit-committee-agenda-2015.pdf

Highlights of future trends:

  • Transparency
  • 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.

Tax strategies: New entry in Dow Jones Sustainability Assessment

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.

Click to access CSA_2014_Annual_Scoring_Methodology_Review.pdf

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.

Australia’s tax risk framework

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:

https://www.ato.gov.au/Business/Large-business/In-detail/Risk-Differentiation-Framework/Risk-differentiation-framework-fact-sheet/

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.

Tax Policy statement: A foundation of the Tax Risk Framework

EY has put forth a compelling article addressing the necessity of a company tax policy, stating it is not an option to delay action and hope the debate over transparency and what represents a fair share of tax will stop.  The article is referenced by the following link:

http://taxinsights.ey.com/archive/archive-articles/the-future-of-tax.aspx

Key excerpts:

So how can companies adapt to this new landscape and best address the different concerns of these very engaged stakeholders? It starts with formally and carefully defining a company’s tax policy, which gives effective guidance from the board to the group tax function on what the company’s responsibilities and required behaviors are worldwide.

This policy needs to take account of the often conflicting interests of various constituencies, such as tax authorities, investors, employees, the media and the general public. In the future, a business model must adjust to recognize that, while commercial decisions must continue to take account of tax analysis, such analysis itself needs to include wider business risks.

A company’s tax policy will also help in determining how transparent a company wishes to be with stakeholders about its tax affairs. Companies are concerned that stakeholders could misinterpret the complex nature of their tax affairs.

Any effective tax policy needs to strike a balance between clearly communicating the risk appetite and approach of the company, while also managing all costs, including opportunity costs caused by its tax approach and its consequences regarding reputation and the risk of controversy.

 

Best Practice: One of the foundations, and a good starting point for the Tax Risk Framework, is a tax policy.  The policy should be drafted with the knowledge that it is a valuable tool which the tax authorities may request to better understand, and assess, the company’s global tax risk.

 

OECD Guidelines for MNE’s: A valuable tool in the Tax Risk Framework

The OECD published the OECD Guidelines for Multinational Enterprises (Guidelines) in 2011, this being the latest version of the Guidelines.

A unique feature of the Guidelines is the implementation of National Contact Points (NCPs), agencies established by adhering governments to promote and implement the Guidelines.  They also provide a mediation and conciliation platform for resolving practical issues that may arise. Chapter XI of the Guidelines, Taxation, that begins on page 60 outlines important concepts including timely tax compliance, cooperation with tax authorities, compliance with the letter and spirit of the tax laws and regulations of the relevant countries, and conforming transfer pricing principles to the arm’s length principle.

These principles should form an important foundation for a company’s Tax Policy and/or Tax Risk Framework, providing transparent objectives in the global tax risk profile.  The link to the Guidelines are provided for reference.

There is also a link to  the Annual Report on the OECD Guidelines for Multinational Enterprises 2013, which describes the activities undertaken to promote the observance of the Guidelines during the period June 2012 – June 2013.  The Annual Report outlines the role of the NCPs, and content of proposed violations (inclusive of Taxation), that have been submitted for review.  All OECD countries, and 11 non-OECD countries (Argentina, Brazil, Columbia, Costa Rica, Egypt, Latvia, Lithuania, Morocco, Peru, Romania and Tunisia) adhere to the Guidelines.

Click to access 48004323.pdf

http://www.keepeek.com/Digital-Asset-Management/oecd/governance/annual-report-on-the-oecd-guidelines-for-multinational-enterprises-2013_mne-2013-en#page175

The Guidelines should be a valuable Best Practice tool in a Tax Risk Framework, as well as the total risk framework of a multinational enterprise.

Corruption assessment: a component of Global (Tax) Risk Framework

The Eight Millennium Development Goals (MDGs) ...

The Eight Millennium Development Goals (MDGs) of UN. Target date: 2015 http://www.un.org/millenniumgoals/ (Photo credit: Wikipedia)

Today’s tax environment of increased transparency highlights the need to integrate an assessment of corruption into the Global Risk Assessment, including the Tax Risk Framework.  Proper governance includes monitoring perceptions, and actual cases, of corruption globally.  Brief summaries, with links, have been provided for Transparency International and the Global Portal on Anti-Corruption for Development, with additional references and recent articles, for reference.  The Corruption Perceptions Index by Transparency International is included in the first link.

Today the Transparency International movement includes more than 100 independent national chapters and partners around the world, which take action in support of our mission “to stop corruption and promote transparency, accountability and integrity at all levels and across all sectors of society”.

http://issuu.com/transparencyinternational/docs/cpi_2012_report/1?e=2496456/2010281

Transparency International calls on the United Nations to adopt a governance goal and governance targets for its post 2015 development priorities

http://www.transparency.org/news/pressrelease/transparency_international_calls_on_the_un_to_make_governance_a_priority_fo

The Global Portal on Anti-Corruption for Development is a one-stop-shop for information and knowledge specialized on anti-corruption for sustainable development. It aims to support the work of development/governance practitioners, anti-corruption bodies, researchers, civil society organizations and the donor community by facilitating easy access to information, cutting-edge knowledge and practical tools on anti-corruption at the global, regional and country level.

The Anti-Corruption for Development web portal is a unique and pioneering UN web platform that provides open access to information and knowledge related to the latest efforts to address corruption prevention against today’s development challenges: human rights, gender equality and empowerment, climate change and natural resource management, achievement of the Millennium Development Goals (MDGs) and Post-2015 Development Agenda, illicit financial flows and transitional contexts, among others.

http://www.anti-corruption.org/index.php/en/about

The Conference of Nigerian Political Parties (CNPP) has asked the Coordinating Minister for the Economy and Minister of Finance, Dr. Ngozi Okonjo-Iweala, to resign forthwith for misleading President Goodluck Jonathan on the damaging level of corruption in the country.

CNPP’s demand came as an aftermath of President Jonathan’s remarks in which he referred to a World Bank report from the minister placing corruption as third in the ranking of problems confronting the country.

http://allafrica.com/stories/201310010283.html

Industry’s leading third party management software provider advises oil and gas companies to fundamentally re-think supply chain compliance.

With the realization that corruption is undermining development and the achievement of the Millennium Development Goals (MDGs), experts are lobbying the UN to adopt goals and targets on good governance and transparency in the post-2015 development agenda.

A high-level anti-corruption panel, co-chaired by UNDP, Transparency International and UNODC, gathered at the UN in New York in late September to highlight the impact of corruption on development and find ways to ensure that anti-corruption is part of the new global development agenda.

Is internal corruption slowing progress in developing countries?

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.

Best Practice Correlation: Risk Governance & Tax Resources

Tax jurisdictions and authorities are increasing their global focus in all aspects of tax risk, most recently promoting Beneficial Ownership transparency rules and other initiatives at the G8 Conference.  Conversely, multinational tax teams should also be increasing their resources, and time spent, on addressing global tax risks, enhancing internal governance including a Tax Risk Framework / Policy, scenario planning, and informing the business.

We can view this correlation as the increased significance of tax risks, including reputational risk, compared to tax resource allocation for risk governance.  It may also be beneficial to distinguish internal and external tax resources used in the risk methodology.  The comparison may provide interesting results, from which the proper emphasis could be used to form additional Best Practices.  This comparison could also be viewed in contrast to tax compliance and other tax projects for additional perspective.

I invite your comments on this thought, and Best Practices that you can share.

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