Strategizing International Tax Best Practices – by Keith Brockman

Posts tagged ‘transparency’

Australia’s Diverted Profits Tax salvo

The Australian Tax Office (ATO) has recently released a consultation paper re: implementation of a Diverted Profits Tax (DPT); comments are due by 17 June 2016.  Although Australia has taken a long look at the DPT in concert with UK’s quickly enacted provisions, it took a breather while the OECD urged restraint on a far-reaching “tax” that may go beyond the intent of the OECD’s Guidelines.  A link to the paper is provided for reference:

http://www.treasury.gov.au/~/media/Treasury/Consultations%20and%20Reviews/Consultations/2016/Implementing%20a%20diverted%20profits%20tax/Key%20Documents/PDF/Diverted-profits-tax_discussion-paper.ashx

The focus of the paper is summarized in the first sentence: “The Government is strongly committed to ensuring that multinationals pay their fair share of tax in Australia.”

Highlights of the proposal:

  • 40% penalty tax (non-deductible) rate, not offset by another jurisdiction’s tax (30% tax rate if an amended tax return is filed)
  • Subjective determination (i.e. reasonable to conclude)
  • Will not operate on a self-assessment basis
  • Pay first, discuss later philosophy, copying UK’s direction (12-month review period and a right to appeal)
  • Effective for years commencing on or after 1 July, 2017
  • Flow chart appendix
  • Efective for transactions that have an effective tax mismatch test (objective test) and insufficient economic substance (subjective test)
  • Draft guidance will be developed in consultation with stakeholders.

All interested parties should review this consultation paper, and provide comments to the ATO for potential changes.  It is interesting to see that transactions failing the effective mismatch test will be left exclusively with subjective determinations for possible assessments by the ATO without the benefit of dual transparency.  Additionally, the philosophy of assess now and discuss later will not be a mechanism to effectively provide more trust by taxpayers as UK, Australia and other jurisdictions are creating unilateral laws to capture taxes payable on income in other jurisdictions, potentially without the right to access treaties, claim an offset in the other jurisdictions and have access to the full process of appeals prior to payment.  As a result, the incidence of double taxation will increase.

It is hopeful the ATO will consider the comments received, and include changes to the current proposal to enhance transparency and mutuality by all parties.

 

 

 

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Tax Risk Management

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TAXE: Final report for Parliamentary actions

The EU Parliament’s resolutions were passed by a vote of 508 to 108, with 85 abstentions.  The proposals call for mandatory country-by-country (CbC) reporting, a common consolidated corporate tax base (CCCTB), defined tax terms and transparency / exchange of tax rulings.  A summary press release and the full report are provided for reference:

http://www.europarl.europa.eu/news/en/news-room/content/20151120IPR03607/html/Parliament-calls-for-corporate-tax-makeover

http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//TEXT+TA+P8-TA-2015-0408+0+DOC+XML+V0//EN&language=EN

Key points:

  • Welcomes the EU Parent-Subsidiary Directive amendments, effective at year-end 2015, for a general anti-abuse rule and hybrid mismatches.
  • EU Commission has breached its obligations under Article 108 of the Lisbon Treaty by not launching state aid investigations previously.
  • EU Member States should respect the principle of profits taxation where they are generated.
  • Promote good practices on transfer pricing and the pricing of loans and finance fees in intra-group transactions.
  • Commission to further investigate restrictions of deductions for intercompany royalty payments (i.e. counter profit shifting).
  • All rulings that have an impact on other Member States to be presented in the CbC report, and shared with the Commission and tax administrations.  Rulings to be publicly disclosed in accordance with confidentiality requirements.
  • Mandatory CCCTB, with a deadline for the consolidation element and without any further impact assessments.
  • Develop measures to tackle cross-border VAT fraud.
  • Reform of the Code of Conduct on business taxation.
  • New State Aid guidelines by mid-2017.
  • EU to be a global leader in tax transparency.
  • More extensive CbC report, with intra-group transactions.
  • Accelerate European Tax Identification Number project.
  • Aggressive tax planning is incompatible with Corporate Social Responsibility (CSR).
  • Outgoing financial flows from EU are taxed at least once (i.e. withholding tax).
  • Transition period for developing countries to align with Global Standard on Automatic Information Exchange.

This report is compelling, far-reaching and a resource that will be used worldwide, as most non-EU countries will attempt to follow the ever-increasing EU intensity and propensity for changes in the international tax arena.  Thereby, it is a must read and a learning tool for non-tax executives in multinational organisations, as well as tax advisors, tax administrations and other interested parties.

Category:

OECD / UN

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Transparency & Disclosure: zooming in

EY’s recent publication takes a close-up view of transparency and disclosure trends, including a detailed analysis of several countries’ latest trends.  A link to the report is provided for reference:

Click to access EY-are-you-ready-for-your-close-up.pdf

Key Points:

  • Transparency issues of the future:
    • Country-by-Country (CbC) implementation and inconsistency of approaches
    • New transfer pricing documentation requirements
    • Public access for CbC reports and tax rulings
    • Growing trend to disclose a company’s planning, strategy, risk appetites and effective tax rates
    • Tax codes of conduct, formal and informal
    • Increased disclosure of aggressive tax positions
    • Electronic data gathering
    • Use of third-party data
    • Direct ERP access
    • Matching of data and watching for transactional trends
  • EU transparency update, including proposed Directives
  • Country transparency updates: Argentina, Australia, Brazil, China, Denmark, Ecuador, France, Germany, Greece, Mexico, Netherlands, Poland, Singapore, South Africa, South Korea, Spain, UK, US

The level of future transparency will continue to increase, with new and dissimilar demands by countries around the world.  This report unveils the global trends and issues, with comprehensive analyses of various transparency trends of major countries.  Accordingly, it is a publication that should be reviewed to better understand where the current trends are requiring future demands for transparency in a new world of international taxation.

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Tax Risk Management

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UN: Corp. tax responsibility

Principles for Responsible Investment (PRI), a UN sponsored initiative, published a report entitled “Engagement Guidance on Corporate Tax Responsibility.”  The guidance is investor oriented addressing the conduct of corporate tax responsibility, disclosure, transparency and good tax risk governance.  Therefore, this report is a valuable reference to understand today’s trend of tax disclosure and transparency from an investor’s perspective, and how multinationals may be queried in the new world of international tax transparency.

A link is attached for reference:

Click to access PRI_Tax-Guidance-2015.pdf

Key points:

  • Earnings that rely on tax planning vs. economic activity are vulnerable to tax regulatory changes, earnings risk via strategies are increasing, and some Boards may be unaware of the effect that incentives have on tax planning.
  • Corporate sustainability officers should understand tax decisions and their impact on financial results and stakeholders, with alignment between tax strategies and sustainability commitments.
  • ” Companies should be able to defend how they allocate profit to each country both to tax authorities and the general public to avoid reputational risk and investor backlash.”
  • Before engaging with companies on tax practices, investors should understand various strategies, including IP transfers, financing, marketing service arrangements, principal structures, tax havens, shell companies and tax incentives, that are summarily explained. 
  • A step plan to engage companies:
    • Identify red flags, including a formula to measure tax gap
    • Questions for Senior Management/Board re: tax policy, tax governance, managing tax-related risk, effective tax rate, tax planning strategies including structure and IP rights, and country-by-country (CbC) reporting.  

Appendices are provided for additional reference of the OECD BEPS project, examples of good tax practices re: disclosures, summary of findings from discussions with Heads of Tax in eight multinational organisations, and a Glossary / Resources.

The report, in providing formulas and explanations, includes educational material for the investor community re: tax strategies and governance, while also providing examples of tax queries and good tax governance by many multinationals.

Best Practices:

The report should be used as a metric to assess readiness and alignment for these important topics that may be raised by stakeholders, both internal and external.  To the extent such questions have not been a primary focus, this report is an impetus to raise the priority threshold in addressing tax policies, strategies and governance in a very transparent world.  Additionally, it is also worthy to review the names of multinationals cited in the report for awareness and recognition.

 

Category:

OECD / UN

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Global mobility & BEPS risks

Global mobility will face, directly and indirectly, various challenges resulting from OECD’s BEPS proposals.  PwC’s Insights provide a concise summary of these proposals, included for reference:

Click to access pwc-oecd-final-beps-package-what-does-it-mean-for-global-mobility.pdf

Key points:

  • Treaty changes, either bilaterally or via the Multilateral Instrument, will affect key issues and risks, including permanent establishment (PE).
  • Unilateral changes, several of which have been enacted, should be reviewed with a focus on global mobility functions.
  • The transparency initiative will encourage tax authorities to aggressively pursue PE and treaty based rules.
  • What is the impact of the change for PE dependent/independent test.
  • Responsibilities of senior executives, sales representatives and regionally based employees will need to be reviewed for the new rules.
  • People functions re: controlling risk should receive separate review.
  • Intercompany agreements (i.e. legal form) should be compared to practical substance responsibilities to evidence conformity, as analyses will use legal agreements as only a first step to understand the transactions and potential consequences.

Post BEPS, it is imperative that global mobility’s function and responsibilities should be reviewed, from a tax risk awareness perspective as well as internal governance controls.  To the extent that global mobility is not closely collaborated with the tax function, the ways of working and reporting should be reviewed to address this new world of international tax transparency and the emphasis on multinationals paying their fair share of tax, however construed.

 

 

Category:

OECD

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Tax reputation / transparency survey: 2014-15

EY’s publication discussing tax reputation readiness and transparency provides suggestions for increasing readiness with good processes, robust documentation/audit trail and class-leading data management.  The publication is very timely, noting the recent European Parliament’s unanimous vote for public reporting of country-by-country (CbC) and beneficial ownership information.

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

Key points:

  • More than 60% of companies believe that engaging with the media is a “no-win” situation.
  • Excellent timeline/events of transparency initiatives commencing from 2003 until present, and future, state.
  • 65% of respondents have developed a more structured approach to managing their public tax profile in the previous 2 years.
  • 94% of respondents expect increased growth in global disclosure and transparency initiatives.
  • “Business can do more and be more proactive to prepare for new reporting obligations and, as one proposed step, either proactively or defensively,  Whatever choices a business makes, developing and sustaining the ability to source accurate data, in the right format and in a timely manner will be a critical factor for all large businesses in the years ahead.”
  • Multiple transparency initiatives are succinctly depicted in a table on page 9.
  • Transparency will be the new normal.
  • Quality information requires quality data.
  • Transparency readiness is a significant and underestimated need of companies.
  • Transparency readiness assessment questions are posed for consideration.
  • Detecting risk anomalies in the data is an important consideration; thoughtful questions are posed for review.
  • Companies that can quickly and clearly explain their tax transactions and strategies are best positioned to manage reputation risks.
  • Six proactive actions to consider:
    • Actively monitor the changing landscape
    • Assess readiness, and desire, to respond
    • Enhance communication with internal and external stakeholders
    • Develop steps to prepare the total tax picture
    • Decide with whom the company wishes to communicate
    • Embed reputation risk thinking into core business strategy

This survey provides an excellent approach and proactive roadmap in addressing the challenges, readiness and complex actions required to develop transparency readiness and engage reputation risk proactively.  Accordingly, this should be required reading for all MNE’s as a primer and self test mechanism to address the new era of international tax transparency and potential angles of attack for reputation risk.

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Tax Risk Management

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EU ownership registers: 2 year timeline

The European Parliament approved the maintenance of public registers listing ultimate ownership of EU companies, as part of the 4th Anti-Money Laundering Directive.  The new rules must be introduced in all EU Member States within the next 2 years.

A KPMG Euro Tax Flash outlines details of this proposal:

Click to access etf-248.pdf

Key points:

  • Beneficial ownership is broadly defined, covering individuals who ultimately (directly or indirectly) control the entity.  The control threshold is premised on a 25% ownership criterion although Member States may adopt lower percentages.
  • Information accessible by: competent authorities, financial intelligence units, “obliged entities” and persons/organisations that can demonstrate a “legitimate interest” (not a defined term).
  • Member States have 2 years from adoption to implement its provisions into their domestic legislation.

In an ever-increasing quest for transparency, this Directive will fulfill EU’s obligation to meet that objective.

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Tax Risk Management

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Tax Transparency: Pension/Institutional focus

The referenced article provides additional evidence that tax transparency is growing more universal and attracting the interest of many interested parties.  A quote from the first portion of the article addresses interest in a taxpayer’s tax risk framework and governance procedures.

“In an exclusive interview with FTFM Local Authority Pension Fund Forum Chair Kieran Quinn has confirmed that the Forum has launched the Corporate Tax Transparency Initiative (CTTI), writing to every FTSE 100 company in late March seeking technical information via ten detailed taxation questions around tax related governance and accounting practices, taxation risk.”

management and minimisation strategies.http://www.lapfforum.org/news/lapff-seeks-tax-transparency-from-ftse-100

This article raises the question of what public tax posture, if any, companies want to exhibit to address tax authorities, individuals/companies having access to company data, individual / institutional investors, pension funds, etc.  This topic relates directly to reputational risk, and should be aligned with the Board and senior management.

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Tax Risk Management

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Norway: TP confidentiality ok, transparency violated

The attached KPMG Alert provides dangerous precedent for transfer pricing audits in Norway.  In summary, the Supreme Court has ruled that Norwegian tax authorities may use comparables of other taxpayers to provide assessment information for a taxpayer, while asserting that such information is confidential.

In this era of transparency, Norway has violated the mutuality of this concept while attempting to hide behind its method of transfer pricing assessments with information it is not willing, and legally not obliged, to share with the taxpayer.

Taxpayers should be aware of this development, and proactively engage the tax authorities as to their intent to use secret comparables for any purposes during the audit.

Norway – Tax authorities may use “secret comparables”
April 15: Tax authorities may have information available to them from examinations of other taxpayers or from other sources of information not disclosed to taxpayers undergoing transfer pricing audits. The use of this information, when determining the arm’s length price, is referred to as the use of “secret comparables.” In a recent decision, the Norwegian Supreme Court held that the Norwegian tax authorities may use such secret comparables.
The Supreme Court found that the Norwegian tax authorities had provided the taxpayer with sufficient information regarding the secret comparables—third-party contracts provided by other taxpayers—for the taxpayer in this case to have an adequate opportunity to defend its own position and to invoke effective judicial safeguards by the courts.
Background

In the case before the high court, a Norwegian resident oil company sold gas to a related-party company.

The oil company / taxpayer was the subject of a tax audit, and the Norwegian tax authorities concluded that the company’s transfer pricing determinations for its related-party gas sales were not in adherence with the arm’s length principle.

The tax authorities conducted a discretionary assessment of income and used contracts that had been provided to the tax authorities by other taxpayers—third-party contracts—in performing the comparability analysis. The tax authorities did not fully disclose these contracts to the taxpayer, due to confidentiality rules barring the disclosure of sensitive information.

At issue was whether the tax authorities were required to fully disclose the third-party contracts and whether the tax authorities were allowed to base a reassessment on secret comparables.
Confidentiality rule

The Supreme Court first assessed whether the duty relating to confidentiality prevented the tax authorities from sharing the third-party contracts with the taxpayer. The high court concluded that the tax authorities could not share the third-party contracts with the taxpayer because of the confidentiality rule.
Secret comparables

Because the Supreme Court concluded that the confidentiality rule blocked full disclosure of the third-party contracts, the next question was whether the Norwegian tax authorities could base its reassessment on secret comparables.

The Supreme Court referred to measures under the OECD transfer pricing guidelines—i.e., tax authorities must use great care when relying on information available to them from examinations of other taxpayers within the limits of the domestic confidentiality requirements.

According to the Supreme Court, the tax authorities had shared with the taxpayer as much information about the third-party contracts as they could without violating the domestic confidentiality rule. Therefore, the Supreme Court found that the tax authorities could use the third-party contracts—the secret comparables—in their comparability analysis. The Supreme Court explained that the tax authorities had shared sufficient information about the third-party contracts so that the taxpayer would have had an adequate opportunity to defend its own position and to invoke effective safeguard controls by the courts.

In addition, the high court emphasized that the taxpayer had received several enquiries regarding resale prices from the tax authorities, but had not provided a satisfactory response.

The Supreme Court concluded that the tax authorities were allowed to use secret comparables.
KPMG observation

The case illustrates a conflict between a taxpayer’s right to have access to evidence and the duty of confidentiality imposed on the tax authorities. Further, the case also sheds light on the level of disclosure required in order for the tax authorities to use secret comparables.

Even though this decision and a previous decision regarding captive insurance have allowed the use of secret comparables, tax professionals in Norway have expressed an opinion that the tax authorities need to refrain from using data or information from other sources that may not or cannot be disclosed to the taxpayer. As has been observed, when the tax authorities use secret comparables, the taxpayer has a limited opportunity to defend itself and the courts’ have a limited ability to control the discretionary assessment performed by the tax authorities. Further, the use of secret comparables may affect a taxpayer’s right to due process. Still, despite these concerns, this decision of the Supreme Court shows that the Norwegian courts may accept the use of secret comparables in certain cases.

Category:

Transfer Pricing

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Transfer pricing documentation & BEPS: Refresh strategy

As time is of the essence for various OECD BEPS proposals to be made public, the interim time gap may be an excellent time to refresh global transfer pricing documentation strategies.  Several questions that may be addressed in a transparent and critique perspective include the following:

  • Have each of the BEPS proposals been matched to current TP methodology, questioning the future state of global TP documentation?
  • For current cooperative compliance relationships, is a discussion contemplated / scheduled to discuss the potential impacts of BEPS on the ongoing ways of working, including TP documentation?
  • Are future cooperative compliance relationships in focus, aligned with BEPS initiatives, especially among countries seeking unilateral legislative actions re: General Anti-Avoidance Rules (GAAR) implementation, etc.?
  • Are the attributes of a GAAR, including a taxpayer’s responsibility for GAAR compliance, being considered globally and /or in local country files?
  • Should compliance roles and responsibilities of TP compliance change re: internal / external resources due to BEPS with additional complexities envisioned?
  • If a Master File and Local Country file methodology is not currently in place, will there be a global and/or regional shift to such methodology?  What is the proposed timing for change?
  • Are the local tax return disclosures re: TP aligned with that country’s TP documentation?
  • What tax team / TP resources are being aligned to address the BEPS initiatives and proposed documentation?
  • Are tax policy statements of the Tax Risk Framework being reviewed for desired TP transparency?
  • Have there been “idea” meetings to discuss next steps in a creative atmosphere?

A BEPS / TP review will be valuable in aligning future vision, flexibility and transparency in today’s volatile atmosphere of TP assumptions and perceptions.

 

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Transfer Pricing

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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.

 

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Tax Risk Management

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Tax transparency & Country reporting: PwC briefing

The timely and comprehensive PwC update is insightful into the various aspects of the transparency and country-by-country reporting initiatives.  Selected topics include:

  • Extractive Industries Transparency Initiative (EITI)
  • Dodd-Frank Wall Street Reform and Consumer Protection Act
  • EU Directives on Accounting and Transparency
  • EU Capital Requirements Directive (CRD IV)
  • Appendices re: country-by-country reporting information requirements, EITI reporting framework, EU Accounting and Transparency Directive requirements, and EU Capital Requirements Directive IV.

Click to access pwc_tax_transparency_and-country_by_country_reporting.pdf

This guide is a valuable overview of the multiple initiatives re: transparency and country-by-country reporting.  Tax executives should use this guide in developing a conceptual tax framework for providing summary/detailed data, developing a relevant methodology for capturing such information and providing supplemental information that may be beneficial.

 

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Tax Risk Management

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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 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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