Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘tax risk’

Tax Dispute Resolutions: Best Practices / Update

KPMG provides a timely and relevant update of tax dispute resolution issues, coupled with Best Practice ideas.  The publication can be accessed from this link:

Click to access tdr-quarterly-magazine-winter-2013.pdf

A summary is provided for quick reference:

  • US: New IDR process: Required (new) IDR process for all large-case exams: IDR Collaboration (carrot) & delinquency notice/summons procedures (stick)
  • Risk from whistleblowers: Current climate and Best Practices, including avoidance of retaliation, ethics hotline, procedural awareness, tax dept. procedures, and what to do if you suspect whistle blowing
  • IRS practices, various items of interest
  • Global tax disputes, including a focus on UK GAAR (also refer to a prior blog post)

This publication provides insight into today’s tax challenges and risks, to be mitigated by Best Practice ideas that should be an integral part of all multinationals tax framework.

It will be interesting to note developments into the new procedure by IRS as demonstrated by the agents performing the exam, as the summons procedure process is mandatory and has no exceptions.  Additional time should be spent understanding the issue raised by IRS, as well as collaborating on the draft inquiry, to benefit from undue data collection and audit inefficiencies.

Additionally, the whistleblower comments should be used to test, modifying as necessary, current internal governance procedures.  Such procedures should be reviewed, tested, and modified on an annual / recurring basis.

BIAC Tax Principles/Best Practices/comments re: OECD TP risk assessment

Three new publications have been issued by the Business and Industry Advisory Committee (BIAC) to the OECD.  The publications encompass Best Practices and Tax Principles for Multinational Enterprises (MNEs), as well as comments on the OECD Draft Handbook on Transfer Pricing Risk Assessment.  These reports are worthy to note in an effort to better understand the continuing trend of transfer pricing scrutiny.

http://www.biac.org/policygrp/stmts-tax.htm

BIAC Statement of Tax Best Practices for Engaging with Tax Authorities in Developing Countries.  This statement is designed to enhance cooperation, trust and confidence between tax authorities and international business.  Key observations include:

  • Each of the 10 Best Practices directs that “Business should” or “Business may.”  Accordingly, it is written from the perspective of business directives.  There are no views or statements addressing Best Practice methodologies to be conducted by tax administrations.
  • The last Best Practice states: “Business should consider how best to explain more fully to the public their economic contribution and taxes paid in the jurisdictions in which they operate, where they determine that such explanation would be helpful in building trust in the tax system.”  This statement integrates the concepts of economic contribution and taxes paid with public trust.  Additionally, there are no references to arms-length principles or analysis of functions, assets, or risks.  It is important to note that taxes paid in different jurisdictions arise from very complex laws and regulations that are different in every jurisdiction, thus making it difficult for the public to draw insightful and relevant conclusions.

BIAC Statement of Tax Principles for International Business.  Noted statements include:

  • As a tax training principle, international business should only engage in tax planning that is aligned with commercial and economic activity and does not lead to an abusive result.  There is an explicit reference to economic activity, but a lack of terminology referencing arms-length principle or transfer pricing functions, assets or risks.
  • A Transparency and reporting principle states: “Where they determine such explanations would be helpful in building public trust in the tax system, they should consider how best to explain to the public their economic contribution and taxes paid in the jurisdictions in which they operate.”  This statement mirrors that from the Statement of Tax Best Practices noted above.

BIAC Comments on the OECD Draft Handbook on Transfer Pricing Risk Assessment, published on 30 April 2013.  This is a very informative document that outlines many of the issues being considered by the OECD, and provides a thoughtful reference for discussions going forward.  Some key  statements include:

  • The risk assessment should not exceed 6 months.
  • A “low risk” status can bring tangible benefits in terms of a reduced documentation requirement as well as efficiencies in the overall audit process.
  • A “deep dive” audit is not always required.
  • The first step in transfer pricing risk assessment should consider how the business generates profit, its approach to tax planning, its supply chain and the legal environment in which it operates.
  • “From a Transfer Pricing Risk Assessment perspective, we are very keen to see the cooperative compliance approach endorsed early in the Handbook, as a precursor to narrower assessment of transfer pricing risk.”
  • “We are concerned that the overall tone and focus of the Handbook could result in a negative and sceptical view of taxpayers.”
  • We would be particularly concerned if the use of such subjective language (i.e. large, small and material payments, high-tax and low-tax jurisdictions) led to tax administrations ignoring the arm’s-length principle.
  • “Indications of profitability, effective tax rate and comparative profits of related parties are concerning as the implication may be that the transactions are inappropriate.”
  • Any risk assessment report should be shared with the taxpayer.

The Appendix provides specific comments to the related paragraphs within the Handbook.  Two examples from Chapter 1, par. 9 are cited for reference:

  • Shifting income into jurisdictions where it will be lightly taxed or engaging in related party transactions designed to erode the local country tax base-shifting income is an unhelpful phrase.
  • We would welcome clarification that income should be taxed where the functions/assets/risks are performed.

The BIAC comments should be read to better understand the context of the current transfer pricing environment, and how proposals will affect MNEs and tax administrations in the future.

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.

Post-Audit Strategies: Best Practices

This post is a complement to my 5 April Pre-Audit Strategies blog.  Pre-audit strategies are addressed, the audit is conducted, ultimate settlement is achieved and workpapers are returned to the files.  Post-audit tax strategies can be utilized to address learnings for future audits, critique the pre-audit strategy approach, and form Best Practices to minimize global risks.

The following ideas should be beneficial in a post-audit tax strategy review:

  •  List all items in the pre-audit strategy checklist, using my prior blog as a reference along with your ideas.  Based on hindsight, provide a rating of 1 to 5 for each strategy with comments.
  • Revise the global checklist, if applicable, for future audits.
  • Cross-reference the pre-audit checklist against the top risks encountered / not initially settled in the audit for correlation.  Are there items that should have been performed before commencement of the audit that were not foreseen at the time?
  • Review utilization of tax counsel in the audit to address significant risks; were they involved, should they have been involved earlier, was counsel appropriate for the risks being contested, what learnings can be gained?
  • Were audit meetings negotiated efficiently using the appropriate individuals?  Should there have been additional training to address significant tax risks, educate the auditor in the company’s transfer pricing methodology, etc.?
  • Should a company overview have been provided, if applicable, to provide context for the auditor prior to requests for data?
  • Conduct a 360 feedback with everyone involved in the audit to gain efficiencies in the ways of working.
  • Were there basic misunderstandings between the auditor and the company that could have been addressed differently?
  • Assess the consistency of audit responses with other audits being conducted globally; are they globally consistent to form a uniform basis for discussions between tax authorities sharing information?
  • Are there new risks identified that should be included in the global Tax Risk Framework?
  • Were audit defense mechanisms reviewed timely to plan effectively?
  • For US multinational companies, were memorandums prepared for foreign audits to obtain additional assurance for receiving the benefit of a Foreign Tax Credit?  Foreign counsel should be proactive in this effort from the beginning of the audit, outlining cost/benefit relationships, practical appeal opportunities, probability of success for alternative appeals, etc.  This memorandum should be discussed early in the audit to align expectations.
  • Review precedents established for future years, and applicability for post-audit years.
  • Review tax reserves established for the audit years, and all open years.
  • Provide a brief memoranda to the audit participants and senior management, summarizing the audit and successful interaction of internal and external resources.
  • Were Double Tax Treaty, bilateral and/ or multilateral defenses used?  Review their effectiveness, or choice not to use.
  • Review the interaction of internal and external resources; who was in control of the strategy?
  • In today’s environment of increased collaboration between the tax authorities and multinational companies, should an enhanced collaborative tax return / audit strategy be considered to provide timely certainty?
  • Develop a post-audit tax checklist as a learning tool for individuals engaged in tax audits.

The above points should form a foundation to engage in this beneficial exercise, highlighting learnings and opportunities, while adopting a Best Practices approach.

I look forward to your valuable comments.

Branch activity tax risk: Google UK controversy

http://news.yahoo.com/uk-lawmakers-set-date-google-ernst-young-tax-155316417.html

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.

Tax Counsel: Proactive Risk Management

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.

Tax Newsletters: Proactive Tax Risk Awareness

Communication of emerging tax risks targeted at increasing awareness of Best Practices via a regional/global tax newsletter provides a timely and efficient vehicle for valuable discussions.  Examples of some benefits include:

  • Increased focus and awareness on important aspects of a Global Tax Policy and / or Tax Risk Policy.
  • Resource for regional / corporate tax team contact information inviting questions re: potential tax risks.
  • Communication vehicle for introducing emerging strategic tax risks, especially in developing markets.
  • Highlights lessons learned in forming new Best Practices.
  • Introduction of new Tax Team members around the world.
  • Provides updates on tax related benefits derived from collaboration on plant expansions, R&D credits, Patent Box and Innovation synergies achieving lower local effective tax rates, etc.
  • Forum for tax diligence procedures of new accounting policies.
  • Reference for upcoming tax training courses, webinars and related reference materials.
  • Tax topic focus, describing potential risks in non-technical language, such as PE – what it is, how to recognize it, its adverse impact on cash taxes, ETR, accounting / operational complexities, etc.
  • ETR overview, why it’s important.
  • Increased tax return disclosures and self-assessment determinations; local and global significance.
  • Country and Regional developments.
  • Tool for heightened awareness among Tax Team members, inviting newsletter contributions and ideas.

I invite your ideas.

 

OECD Draft Handbook on Transfer Pricing Risk: Public information

Click to access Draft-Handbook-TP-Risk-Assessment-ENG.pdf

OECD published this draft handbook on April 30, with comments due by Sept. 13.  I highly recommend reviewing the entire handbook.  Section 4.5 of the Handbook outlines the use of publicly available information for identifying overall risk assessment.  We are all aware of this information, although I will share some thoughts on being proactive in forming Best Practices around this topic.

Company website:

  • Does tax review the web content on a regular basis to ensure there are no innocent misstatements to defend.
  • As the web content is updated for marketing, sales and other relevant information, does tax receive a copy of the updates prior to releasing them to the public.
  • Are any of the statements on your website in conflict with your stated transfer pricing or other tax methodologies.
  • Does the website contain information on legal presence in each country; if so, what is the alignment process with tax.

Statutory financial information:

  • Many countries provide this information to the public; are these financials reviewed to ensure consistency with transfer pricing methodologies either internally or an external advisor. 
  • Additional disclosures increase every year; how familiar are you with new disclosures on a global basis.  Is there a process that can be implemented to identify tax sensitive information.
  • An individual with tax training should review this information prior to finalization to ensure there are no PE, transfer pricing or other tax risk areas addressed.

Coordination of Publicly Available Information:

  • Is there a central index listing all publicly available company information on a global basis.
  • Is this a process for which someone can be a champion to ensure timely updates.
  • If tax disclosures are prepared for public use, are the disclosures of taxes paid by country, etc. consistent with the statutory financial information that is available.  Should there be a process to rationalize, or explain, any discrepancies.
  • Are press releases reviewed by tax to ensure consistency of tax methodologies and minimization of potential tax risks.
  • Is issuance of publicly available information centralized or decentralized, depending on the content.
  • If comments are issued on this draft, who ensures the content is internally consistent since it will be on the OECD website.

 

 

CEO survey: Tax strategy and corporate reputation

PwC has published their 16th Annual Global CEO Survey: Tax strategy and corporate reputation: a business issue.

http://www.pwc.com/taxceosurvey

In addition to interesting observations in the survey, the following ideas are presented for consideration:

  • Have you had a discussion with your CEO about tax risks & strategies, including reputational risk?  S/he could also share with you their perceptions and information exchanged with their peers.
  • The upcoming G8 meeting will be discussing tax avoidance: do you plan to update your CFO & senior management?
  • Are Board of Director presentations planned for strategic and reputational tax risk?  (Don’t wait for them to ask)
  • Do you have a Tax Planning Policy?  If so, has it been discussed with the Board?
  • Is senior management aligned internally, and with the Board, on a position for tax transparency?
  • Is global tax planning a CEO priority, as focus on this topic is increasing among governments?
  • How are you avoiding tax strategy surprises?

I look forward to your comments.

PE Risks: Best Practices for Awareness & Planning

Permanent Establishment (PE) risk is receiving increased visibility around the world, in established countries and emerging markets.  Therefore, have you increased your focus to strategize Best Practices to minimize this risk?  The following ideas are presented for consideration:

  • Coordination of employee transfers/assignments to understand new roles and responsibilities, legal entities, etc.
  • PE global training to increase awareness, collaborating with the Human Resource function.
  • Review tax treaties for all business changes to understand PE triggers and exceptions.
  • Utilizing special purpose entities to centralize, or isolate, potential risks.
  • Developing a Do’s and Don’ts list to discuss with the business; attach to Job Descriptions, as applicable.
  • Formal PE technical training, at least annually, for all employees having international tax responsibilities.
  • If consideration of PE risk is coordinated by external advisors, develop a collaboration plan to review regularly.
  • “Presence” test PE safe harbor, dependent on treaty: Who is counting the days and coordinating related steps of a project?
  • “Preparatory & Auxiliary” PE treaty exception: review Form vs. Substance on a recurring basis.
  • Develop PE expertise and clarify roles of internal staff and external advisors.
  • Proactive vs. reactive PE determinations, understand when a proactive PE determination may be beneficial.
  • Follow PE trends of aggressive jurisdictions with scenario planning.
  • Collaborate with the business to understand upcoming strategies that may introduce new PE risks.
  • Review “Branch” activities annually to determine if they exceed allowable actions in the respective countries.
  • Establish a collaborative process for entry into new countries to ensure tax coordination and risk identification.
  • Ensure a communication protocol is established for response to PE allegations that are made public.
  • Following current events for OECD and UN model conventions, as well as related commentaries
  • Identification, with mitigating controls, in tax risk  and ERM framework

Global risk, a new era: 2011-12 EY survey

Great read with interesting ideas; enjoy!

EY 2011-2012_Tax_risk_and_controversy_survey

 

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