Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘transfer pricing’

OECD (Revised) Draft: Transfer Pricing Aspects of Intangibles

http://www.oecd.org/ctp/transfer-pricing/intangibles-discussion-draft.htm

Working Party No. 6 of the Organization for Economic Cooperation and Development (“OECD”) has prepared a Revised Discussion Draft on Intangibles, following an earlier Discussion Draft in June 2012.  This revised Draft includes changes based upon comments received, including a public consultation, in 2012.

This Draft addresses, directly and indirectly, actions contained in the OECD Action Plan on Base Erosion and Profit Shifting (“BEPS Action Plan”).  Refer to my 19 July 2013 post for information on the OECD BEPS Action Plan.

The changes in the Draft  include a new section addressing local market features, location savings, assembled workforce and group synergies, in addition to explanatory changes to the definition of intangibles.  As stated in the Revised Discussion Draft, a transfer pricing intangible is not solely determined by its general tax or accounting characterization.  The intangible definition is also mutually exclusive from the definition of royalties for purposes of Article 12 of the OECD Model Tax Convention.  Additionally, functions, assets and risks related to intangibles are determined via the functional analysis, and are not presumed to be held by the legal owner of the intangible.

The Draft includes an interesting discussion of the use of projected growth rates and discount rates, including examples in the Annex to illustrate the guidance on special considerations for intangibles.

Written comments may be submitted to the OECD on or before 1 October 2013.  A public consultation will also be held on 12-13 November 2013 in Paris, France, selecting speakers from those providing written comments.

Analogous to my 31 July 2013 post for the OECD White Paper on Transfer Pricing Documentation, this Revised Discussion Draft should be reviewed and compared with the current methodology for intangibles, noting significant variations for internal analysis.  Intangibles are a significant component of transfer pricing, thus this Draft should be seriously considered by all multinationals.

Category:

OECD / UN, Tax Risk Management, Transfer Pricing

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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.

Category:

OECD / UN, Tax Risk Management, Transfer Pricing

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OECD Base Erosion and Profit Shifting (BEPS) report & Action Plan

http://www.oecd.org/tax/beps.htm

Click to access OECD.pdf

The BEPS report, previously released, and the new Action Plan are available for public review, with many commentators already providing insight on the Action Plan.

The 24 month Action Plan is comprehensive and aggressive, with tax transparency and disclosure rules likely to be implemented early in that timeline.  The report also discusses an improvement of global rules in developing countries, further referenced by work of the Tax Inspectors without Borders study, as discussed in my 9 June 2013 post.

One very interesting proposal in the report is the development of a multilateral convention to address BEPS issues.  This will allow countries to rapidly implement some actions without formally renegotiating bilateral treaties.  Additionally, Appendix C provides examples of tax planning structures by multinational organizations.

The OECD BEPS report and Action Plan will provide additional momentum and debate for the proposed actions, for which multinationals should prepare an internal action plan to address such initiatives.

Category:

OECD / UN, Tax Risk Management, Transfer Pricing

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Best Practices for new Transfer Pricing disclosures & Peru’s new rules

http://www.kpmg.com/global/en/issuesandinsights/articlespublications/taxnewsflash/pages/peru-changes-to-transfer-pricing-obligations.aspx

The Peruvian tax authority (SUNAT) has implemented new rules for submission of a transfer pricing study annually by corporate taxpayers with transactions or revenue exceeding prescribed amounts.  This change will be effective for the 2012 year, to be submitted in October 2013.  Previously, as in many other countries, this report was required to be available upon request.

The transfer pricing report is in addition to an information return disclosing intercompany transactions.

This new rule highlights several important governance questions for new guidance on transfer pricing documentation, including the following:

  • How are members of the transfer pricing team (local/regional/global) informed of new disclosures timely for planning and process changes?
  • Are there gaps that could occur, resulting in last minute actions or untimely disclosures?  If so, controls are necessary to mitigate such gaps.
  • Is there an internal or external process documented, and used, to review new transfer pricing disclosure rules on a regular basis?
  • Is there timely engagement with the relevant Business Units to ensure alignment and execution?
  • What procedures are in place to implement new transfer pricing disclosures into the transfer pricing documentation and review process?
  • Is the information readily available, or are system changes required?
  • Have the new disclosures been discussed with the local auditors to ensure alignment?

This topic is increasing in importance, as countries initiate or expand contemporaneous information and transfer pricing documentation requirements.  Such disclosures include identification of transfer pricing methods used for intercompany transactions, assertion that relevant documentation exists and is readily available, amounts of intercompany transactions for goods and services, etc.

Category:

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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UN: Practical Manual on Transfer Pricing & Tax Training Initiatives

Click to access UN_Manual_TransferPricing.pdf

This link directs you to the final version of the U.N’s Practical Manual on Transfer Pricing for Developing Countries.  This version corrects minor technical errors in the 2012 version.  The separate country guidance is already attracting controversy since these countries are provided an official platform to express their views on location-specific advantages, etc. that compete with OECD guidelines.

In addition to this document, Alexander Trepelkov, Director of Financing for Development Office (FFDO), U.N. Department of Economic and Social Affairs has stated three primary initiatives of the FFDO.  The three initiatives will create tax training tools to:

  1. Strengthen developing nations’ capacity to conduct transfer pricing analyses,
  2. Negotiate, administer, and interpret tax treaties, and
  3. Develop tax administration systems.

Transfer pricing analyses initiative:

  • A meeting is being held this week to determine the scope and content of the project, focused on supporting tax administrators apply the arms-length principle to transactions between associated enterprises.

Tax treaty initiative: Training tools in development for tax administrators

  • Fundamentals of tax treaties course, including similarities/differences between the U.N. models, is planned for early 2014
  • Advanced tax treaty course to be developed jointly with the OECD, ensuring materials covering the U.N. model are included
  • A joint project to create training tools on tax treaty administration with the German Federal Ministry for Economic Development and Cooperation.

Develop tax administration systems initiative:

  • A joint project with the Inter-American Center of Tax Administrations to develop an empirical method to measure and assess tax administration cost.  Pilot programs are taking place in Costa Rica and Uruguay.

These developments should be closely followed, especially in developing countries that are developing transfer pricing expertise and non-OECD countries that have publicly stated their views in the U.N.’s Practical Manual on Transfer Pricing for Developing Countries.  This insight is also valuable information to review in a pre-audit strategy for such countries, having advance knowledge of their stated positions and differences with OECD methodology.

 

 

 

Category:

Audits, OECD / UN, Tax Risk Management

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OECD: (Revised) Safe Harbours, Chapter IV, Transfer Pricing Guidelines

Click to access Revised-Section-E-Safe-Harbours-TP-Guidelines.pdf

The OECD approved this revision on 16 May 2013 and discusses the benefits and concerns for safe harbour provisions.  It encourages appropriate bilateral or multilateral safe harbors for which the previous guidance was generally silent.  In an effort to facilitate negotiations between tax administrations, sample memoranda of understanding (MOUs)” are included for competent authorities to establish bilateral safe harbors for certain classes of transfer pricing cases.  Sample MOUs are provided for low risk activities of Manufacturing, Distribution, and Research and Development Services.

Benefits to be gained:

  • Compliance relief
  • Certainty
  • Administrative simplicity

Safe harbour concerns:

  • Divergence from the arm’s length principle
  • Risk of double taxation, double non-taxation, and mutual agreement concerns
  • Possibility of opening avenues for tax planning opportunities
  • Equity and uniformity issues

Sections 4.128 and 4.129 emphasize the fact that safe harbours can be negotiated on a bilateral or multilateral basis, providing significant relief from compliance burdens and administrative complexity.  Additionally, a safe harbour is not binding, or precedential, for countries which have not themselves adopted the safe harbour.

In an environment of increasing request for assistance from competent authorities, I am hopeful this tool is used proactively and efficiently by competent authorities to provide certainty for past, current, and future low risk activities.  Multinationals should be familiar with these new guidelines and the respective MOUs to aid negotiation efforts in bilateral or multilateral transactions.  Discussion of this principle in meetings with competent authorities will hopefully lead to enhanced mutuality, cooperation and resolution.

Category:

OECD / UN, Transfer Pricing

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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.

Category:

Audits, Tax Risk Management

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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.

Category:

Tax Risk Management

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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.

 

 

Category:

OECD / UN, Transfer Pricing

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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

Category:

PE

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