Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘Tax’

OECD Exchange of tax information portal

As a follow up to the OECD G20 Report post on 8 September, information about the Exchange of Tax Information Portal is provided for further reference.  The respective jurisdiction can be selected, with agreements available via PDF files.  This site will be even more useful as countries complete the relevant Peer 1 and Peer 2 reviews.

The Exchange of Tax Information Portal is an initiative of the Global Forum on Transparency and Exchange of Information for Tax Purposes.  The Global Forum conducts peer reviews of its member jurisdictions’ ability to co-operate with other tax administrations in accordance with the internationally agreed standard. The standard provides for exchange of information on request where it is foreseeably relevant to the administration and enforcement of the domestic tax laws of the requesting jurisdiction. Effective exchange of information requires that jurisdictions ensure information is available, that it can be obtained by the tax authorities and that there are mechanisms in place allowing for the exchange of that information. The Global Forum’s peer review process examines both the legal and regulatory aspects of exchange (Phase 1 reviews) and the exchange of information in practice (Phase 2). The EOI Portal will track the development of these peer reviews, including changes that jurisdiction’s make in response to the Global Forum’s recommendations.  The Portal can be accessed from the following link:

http://www.eoi-tax.org/jurisdictions/AR

The Exchange of Tax Information Portal site should be used, and shared, for valuable reference on this important and current initiative.

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OECD / UN, Tax Risk Management

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OECD: White Paper on Transfer Pricing Documentation

http://www.oecd.org/tax/transfer-pricing-documentation.htm

The Organization for Economic Cooperation and Development (“OECD”) is quickly following up Step 13 in its Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”) for enhanced transparency, information on global income allocation, economic activity and taxes paid among countries, according to a common template.  Refer to my 19 July 2013 post for information on the OECD BEPS and Action Plan.

The White Paper takes a “big picture” approach, with interested parties invited to comment by 01 October 2013.  An insightful summary outlines significant differences in transfer pricing documentation requirements from country to country, concluding with a recommended two-tiered approach (“Coordinated Documentation Approach”) consisting of a Masterfile and a Local file.

The recommended Masterfile is broad in scope, requesting global legal ownership/structure, geographical location of principal operating entities, in addition to management structure and geographical location of key management personnel.  Major business lines would be described in extensive detail, as well as intangible strategies, intercompany financing activities, listing of APAs, MAP procedures and the consolidating income statement.

The Local File describes local management structure and geographical location of senior executives, recent business restructurings including transfers of intangibles, controlled transactions and financial information.

Annex 1 and 2 provide multi-country surveys on transfer pricing documentation and tax return disclosure requirements, with related sources of information for reference.

The OECD believes the Coordinated Documentation Approach offers a balanced trade-off between greater transparency and streamlined transfer pricing documentation requirements.

All international tax executives should follow public comments that are posted by  OECD for this new Coordinated Documentation approach, discuss advantages and disadvantages with their peers, in addition to determining if they will provide comments directly.  The current methodology of preparing transfer pricing documentation reports should be compared to this suggested approach to initiate insightful planning and efficiencies that will form Best Practices for future years.

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OECD / UN, Tax Risk Management, Transfer Pricing

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EY survey: Tax risk awareness gaps

Click to access 2012-13-Canadian-tax-governance-survey.pdf

This insightful survey, published by Ernst & Young, polled Canadian executives from 120 companies to review the tax level awareness in organizations.  The findings include the following observations:

  • 56% of non-tax business unit leaders are unfamiliar with risk management policies.
  • 7% of time spent by the tax function is devoted to tax risk management reporting.
  • 15% of tax risks and opportunities are identified timely.
  • Over 50% of the respondents are planning to improve existing tax risk policies and procedures.
  • Significant areas of tax risk requiring improvement include transfer pricing processes and controversy, foreign tax planning, and legal entity accounting.

The findings should be compared to current Best Practices within every organization.  Some ideas for consideration include:

  1. Develop / review the Tax Risk Management Policy.
  2. Communicate all significant tax risks, and corresponding Tax Risk Management Policy, to business leaders globally.
  3. Prioritize tax risk awareness, including reputation risk, in business reviews and training.
  4. Measure the time spent by the tax function on tax risk awareness and internal controls.  (Refer to 23 June blog posting)
  5. Develop a system to measure tax risks on a quarterly basis to address potential issues timely.
  6. Conduct tax risk workshops with the business leaders.
  7. Review significant risks, noting areas for improvement, and establish a timeline to address such risks.
  8. Address tax risk management as a priority agenda item for the global tax function.
  9. Develop an efficient process to address tax controversies around the world.

Tax risk awareness is a critical issue that should be prioritized within an organization, ensuring alignment with the CFO and Board of Directors.

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Tax Risk Management

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Tax Risks & Your Tax Organization: Best Practice Alignment

A proliferation of complex and significant tax risks are at the forefront of global news.  Aggressive tax planning, tax avoidance, tax evasion and fraud are terms used interchangeably to describe actions by multinationals.  Tax authorities, governments, G8, G20, among others, are discussing new ways to combat these perceived risks in the form of additional tax transparency, audit resources, new legislation, etc.  Similarly, tax organization structures should also be reviewed based on a tax risk management approach.  Ideas for developing Best Practices in tax risk management include the following:

  • List the top 5 tax risks; then align these risks with the tax personnel whose primary function it is to focus on such risks.
  • Are the top 5 risks being managed efficiently internally and / or externally?
  • Is each risk the top priority of one or more members of the tax team?
  • Is the strength of each tax member aligned with the respective risk?
  • Are you currently able to shift resources away from geographical / functional responsibilities to address current risks?
  • Are the tax members adding focus on these risks in addition to their other responsibilities?
  • Have specific strategies been developed to address the top tax risks, and champions assignable for each risk?
  • Are specific training courses being developed to better inform the tax team and the business of developing risks?
  • Are proactive discussions being held with senior management and the Board to ensure efficient tax risk management?
  • Is there a quarterly tax risk review to assess status and future actions?
  • Have internal procedures been reviewed, as well as mitigating controls, to address potential risk gaps?
  • Is the business aware of such risks on an ongoing basis?
  • Is this an opportunity to review tax resources to achieve the proper focus on the top tax risks?
  • Compare the current tax organizational structure with the tax risks; is it fit for purpose?
  • Review Best Practices for obtaining APA’s, entering mutual audit procedures such as CAP, horizontal monitoring, enhanced cooperation in today’s increased emphasis on mutuality and and tax transparency with tax authorities.
  • Who conducts audit meetings with tax authorities around the world?  Is this an opportunity to minimize risks at an early stage?  Are these individuals knowledgeable of the top tax risks?  Do you conduct training for audit meetings, including negotiation skills?
  • Is internal audit aligned to identify tax risk gaps in their routine audit reviews?
  • Is Global Mobility trained to identify potential PE risks?  Consider a review of their internal processes for assignments.
  • Who reviews Branch activities to ensure such activities do not inadvertently lead to a PE?
  • Review the Transfer Pricing documentation framework to address transfer pricing issues early.
  • Ensure Treasury is aligned with the tax risks and processes are in place for intercompany loan arrangements.
  • Align cross-functionally to ensure new strategies, or a change in current strategies, are reviewed for tax risk exposure.

In summary, I would encourage a review of the tax organization structure based upon a creative tax risk approach, as compared to the present organization to highlight opportunities and Best Practices.

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Audits, Tax Risk Management

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A European Taxpayers’ Code

http://ec.europa.eu/taxation_customs/common/consultations/tax/2013_tpcode_en.htm

The Commission adopted on 27th June 2012 a Communication on the fight against tax fraud and tax evasion. An Action Plan which details concrete proposals to strengthen the fight against tax fraud and tax evasion was adopted on 6th December 2012.

One of the 34 measures contained in the Action Plan is the development of a European Taxpayer’s Code which is described as follows (action 17):

“In order to improve tax compliance, the Commission will compile good administrative practices in Member States to develop a taxpayer’s code setting out best practices for enhancing cooperation, trust and confidence between tax administrations and taxpayers, for ensuring greater transparency on the rights and obligations of taxpayers and encouraging a service-oriented approach.

The Commission will launch a public consultation on this at the beginning of 2013. By improving relations between taxpayers and tax administrations, enhancing transparency of tax rules, reducing the risk of mistakes with potentially severe consequences for taxpayers and encouraging tax compliance, encouraging Member States’ administrations to apply a taxpayer’s code will help to contribute to more effective tax collection.”

In anticipation of this initiative, some points worthy of consideration are:

  • Does your company have a Taxpayers’ Code or Best Practices within a Tax Policy or Tax Risk Policy?
  • Should the concept of a Taxpayers’ Code be discussed at the beginning of an audit to enhance trust and confidence?
  • Will this initiative be helpful in a simultaneous or joint audit?
  • Should a discussion be initiated with the auditor to establish a mutual Taxpayers’ Code?

I look forward to your thoughts on this interesting topic.

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Audits, Tax Risk Management

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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.

 

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Tax Risk Management

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Tax Leadership Center of Excellence: Be a Mentor

The tax function is unique, as it necessitates collaboration with all functions and levels within an organization.  Additionally, it should be viewed as a talent source for current and potential leaders, knowledge, creativity, planning expertise, governance and Best Practices.  However, individuals not connected to the tax function are often unaware of these valuable attributes that form a valuable resource for others to learn from.  Providing mentor opportunities provide the following benefits for Best Practices in Tax Leadership:

  • Forming additional alliances throughout the organization to achieve a win-win relationship.  
  • Providing a valuable asset for recruiting talent.
  • Increasing awareness of tax risks and roles locally, regionally and globally.
  • Forming a catalyst for Mentor Programs within other functions.
  • Teaching the art of conducting collaborative meetings and achieving buy-in for cross-functional programs.
  • Developing a strong foundation for future leadership roles.
  • Learning the importance of, and distinguishing, legal entity and operating structures.
  • Proactive and interactive leadership training for Tax Team members.
  • Recognition as a Leadership Center of Excellence.
  • Expansion of tax and risk awareness into non-financial functions of the company.

Providing a Tax Leadership Mentor Program will yield a multitude of benefits while increasing awareness and perception of Tax as a highly valued Center of Excellence for current and future leaders.  Partner with Talent Management and Organizational Development to make it happen!

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Leadership

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European Council May Agenda: Energy; Tax Evasion/Avoidance/Fraud

http://www.european-council.europa.eu/the-president.aspx

In a speech by European Council President Herman Van Rompuy, he mentioned energy and taxes as two issues that will be discussed at the meeting in May.  Interestingly, the press release states: “The other issue I put on the May agenda for European leaders is tax evasion and avoidance.  There we have to seize the current political momentum, especially on improving exchange of information between our countries.  Tax fraud is exactly the kind of issue where it is first and foremost for Member States to act, but where they cannot effectively do so on their own.”

  • The phrases “tax evasion,” “avoidance” and “tax fraud” all seem be used interchangeably with no distinction in application or meaning.  This seems to be a growing trend in public communications, leading to potentially wrong conclusions and inappropriate actions.  Ensure the relevant phrases, supplemented by intent, are used to convey the message.
  • Ensure one or more members of Tax are keeping aware of these meetings and trends.
  • Inform senior management regularly of current trends, as perceived by the European Council and Member States.

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Transfer Pricing

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Pre-Audit Best Practice strategies

Some examples of Best Practice strategies to strategize for audits, before they begin.

  • Audit defense file for significant transactions and potential risks
  • Transfer pricing documentation; contemporaneous, available within the audit request period, without significant penalties
  • Inter-company Agreements: signed, readily available; does substance of transactions match the form
  •  Tax reserves on statutory financials: review, know how to respond to auditor’s queries
  • Loan agreements, review for arms-length documentation, rationalize different loans with different interest rates
  • Audit notice/telephone call: is there a global communication process for prompt notification and pre-audit planning
  • Change of finance personnel, ensure a seamless transition for audit defense files and documentation
  • Identify the first point of contact for an audit “raid”
  • Who will meet with auditors regularly, company personnel/outside advisors
  • Company information, organization charts, etc.; identify what should and should not be provided
  • Information for other entities/years not under audit; be prepared to react to such queries quickly and consistently
  • Consistency of global methodologies, ensure there is a governance process as tax authorities do exchange information
  • Amnesty provisions; how are you made aware of them, process for review if applicable
  • Annual review of pre-audit Best Practice strategies for awareness and governance

Hope this is helpful, I look forward to your valuable ideas.

 

 

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Audits

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