Tax Morality and Transparency

Transcription

1 Institute of Chartered Accountants of British Columbia Professional Development Course Tax Morality and Transparency Presented by: Michael Glaser, CPA, CA Jodi Kelleher, CPA, CA COPYRIGHT All rights reserved. No part of this publication/course material may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means (photocopying, electronic, mechanical, recording or otherwise) without the prior written permission of the copyright holder and publisher. DISCLAIMER This course material deals with complex matters and may not apply to particular facts and circumstances. As well, the course material and references contained therein reflect laws and practices which are subject to change. For these reasons, the course material should not be relied upon as a substitute for specialized professional advice in connection with any particular matter. Although the course material has been carefully prepared, neither the Institute of Chartered Accountants of British Columbia, the course author and/or firm, nor any persons involved in the preparation and/or instruction of the material accepts legal responsibility for its contents or for any consequence arising from its use. Winter 2014

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3 Tax Morality and Tax Transparency February 4, 2014 Introductions and Speakers Michael Glaser Partner, GVA Tax Transparency Leader and Global Transfer Pricing Services, KPMG LLP Jodi Kelleher Partner, National Leader, International Tax, KPMG LLP 2 1

4 Tax Transparency and Tax Morality Agenda and Objectives What factors led to this debate and what is the debate all about? Who are the key stakeholders involved and why are they asking the questions now? A closer look at the shifting tax landscape in Canada and beyond 3 What are we seeing in the Media? 2

5 The headlines: society s perceptions Google has paid less than 0.1% of its billions in UK revenue back to the government in tax. ctvnews.ca The headlines reach Canada 6 3

6 Examples of the tax morality and tax transparency debate 7 Examples of the tax morality and tax transparency debate 8 4

7 UK Parliament Public Accounts Committee Meetings 2012/2013 Large US Multinationals Amazon Starbucks Google HMRC Activist Groups / NGOs Big 4 Accounting Firms 9 What is the debate about? It s focused only on corporate tax. Do taxpayers have a moral duty to pay their fair share of taxes? Do directors have a fiduciary duty to shareholders to minimize their tax bill? Should corporations show what they are contributing to society? It is not a technical tax debate. It is highly political, it has become a social issue and it is very public due to the media and public appearance of taxpayers at government hearings. 10 5

8 Aspects that the Media Debate is not covering Business continues to integrate globally; taxation continues to be primarily national Taxation challenges caused by the digital economy Governments competing for investments using tax rates Prevalence of mobile value drivers - IP 11 Background on the debate: How did we get here? 6

9 Context How did we get here? Factors Driving the Public Debate and the Political Call to Action Post-Global Financial Crises Governments are looking to raise revenues to cover deficits. The public to some extent blames banks and large corporates for the crises and may look to them to shoulder the burden of increased tax revenues Modern Business Models Globalization, complex supply chains, internet, digital commerce, and cloud computing Rise of Media Focus US Senate Permanent Subcommittee on Investigations of tax abuses, UK Parliament s Public Accounts Committee, and investigative reporting Themes Driving the OECD Initiative and Proposals for Action Greater Transparency Governments, regulators and the public are demanding more transparency in corporate tax matters Antiquated Tax Systems Growing consensus that the global tax system is outdated in light of modern business models and global supply chains Abusive Tax Structures Global focus on identifying and curtailing aggressive tax planning and structures 13 Who are the stakeholders? 7

10 The context and a deeper perspective Governments under significant pressure to reduce deficits and balance finances. Simultaneously, countries compete for investment and jobs via their tax rates. Government Tax systems have not kept up with complexity in global business model. Board Shareholders The Tax Debate Communities Customers/ Suppliers Customers negative perceptions, particularly of household names. Media NGOs Lobbyists Citizen groups, such as Canadians for Tax Fairness, are keeping the spotlight on this issue KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International 15 Organization s Reliance on Government Well beyond the tax authority - veiled threat in the UK reevaluate overall relationship between the Corporation and Government could be various levels of Government, not only Federal Government as a customer e.g. aerospace and defense, transportation Government as a regulator e.g. financial services, pharmaceuticals Government as a rights grantor e.g. mining concessions / licenses Government as a financial supporter e.g. incentive programs such as SR&ED / Advantage BC / Technology partnerships Canada Could CRA s current risk assessment approach be broadened to rank companies? 16 8

11 OECD BEPS Initiative and Action Plan Drivers of Base Erosion and Profit Shifting Action Plan Endorsed by the G20 Three fundamental pillars: 1) Coherence, 2) Substance, and 3) Transparency Drivers of BEPS initiative Perception that tax base of high tax jurisdictions is significantly eroded to the benefit of low tax jurisdictions Double non-taxation / low effective taxation While these corporate tax planning strategies technically can be legal, overall effect may lead to erosion of corporate tax base globally or an overall reduction in the effective global tax burden Tax morality debate: Backdrop to BEPS BEPS initiative accelerator Significant involvement of Business and Industry Advisory Committee to the OECD (BIAC)

12 Tax Morality and Tax Transparency BEPS Action Plan 15 Priority Areas Taxing the digital economy Neutralize hybrids Strengthen CFC rules Limit deductions for interest and other financial transactions Counter harmful tax practices Prevent treaty abuse Prevent avoidance of PE status Transfer pricing IP issues Transfer pricing allocations of risk and capital Transfer pricing recharacterization Collecting BEPS data Disclosure of aggressive tax planning Transfer pricing documentation Effectiveness of MAP Develop a multilateral instrument 19 BEPS Action Plan Financing Example Base Case Hybrid Instrument Foreign Financing Company Canco Interest Income Canco Tax-Free Dividend Income Canco Tax-Free Dividend Income Debt Hybrid Instrument Equity for Canada Debt for Foreign Sub Foreign Sub Interest Expense Foreign Sub Interest Expense Foreign Sub Finco Interest Expense Debt Interest Income Low or No Tax 20 10

13 BEPS Action Plan Financing Item Action Description (2) Neutralize the effects of hybrid mismatch arrangements (3) Strengthen CFC rules (4) Limit base erosion via interest deductions and other similar financial payments Develop model treaty provisions and recommendations for the design of domestic rules to neutralize the effect (e.g., double non-taxation, double deduction, long-term deferral) of hybrid instruments and hybrid entities Expected output: Revise OECD Model Tax Convention and make recommendations regarding the design of domestic rules by September 2014 Develop recommendations regarding the design of CFC rules Expected output: Recommendations regarding design of domestic rules by September 2015 Develop recommendations regarding best practices in the design of rules to prevent base erosion through the use of interest expense, for example through the use of related-party and third-party debt to achieve excessive interest deductions or to finance the production of exempt or deferred income, and other financial payments that are economically equivalent to interest payments Expected outputs: (i) Recommendations regarding design of domestic rules by September 2015; (ii) changes to transfer pricing guidelines by December BEPS Action Plan Other International Item Action Description (5) Counter harmful tax practices more effectively, taking into account transparency and substance Revamp the work on harmful tax practices with a priority on improving transparency, including compulsory spontaneous exchange on rulings related to preferential regimes, and on requiring substantial activity for any preferential regime Expected outputs: (i) Finalize review of member country regimes by September 2014; (ii) establish strategy to expand participation to non-oecd members by September 2015; (iii) revise existing criteria for identifying preferential regimes by December 2015 (6) Prevent treaty abuse Develop model treaty provisions recommendations regarding the design of domestic rules to prevent the granting of treaty benefits in inappropriate circumstances Expected output: Changes to the OECD Model Tax Convention and recommendations regarding domestic rules by September 2014 (7) Prevent the artificial avoidance of permanent establishment status Develop changes to the definition of permanent establishment (PE) to prevent the artificial avoidance of PE status in relation to BEPS, including through the use of commissionaire arrangements and the specific activity exemptions Expected output: Changes to the OECD Model Tax Convention due by September

14 BEPS Action Plan Digital Economy Item Action Description (1) Address the tax challenges of the digital economy Identify the main difficulties that the digital economy poses for the application of existing international tax rules and develop detailed options to address these difficulties, taking a holistic approach and considering both direct and indirect taxation Expected output: Report identifying issues and possible actions to address the issues by September BEPS Action Plan Transfer Pricing and Data Collection Item Action Description (8) Assure that transfer pricing outcomes are in line with value creation/ intangibles (9) Assure that transfer pricing outcomes are in line with value creation/risks and capital (10) Assure that transfer pricing outcomes are in line with value creation/other highrisk transactions (11) Establish methodologies to collect and analyze data on BEPS and the actions to address it Develop rules to prevent BEPS by moving intangibles among group members including: adopting a broader and clear definition of intangibles, ensuring that profits associated with the transfer of intangibles are associated with value creation, developing special rules for hard-to-value intangibles, and updating guidance on cost contribution arrangements Expected output: Changes to the OECD transfer pricing guidelines and the model tax convention by September 2014 September 2015 Develop rules to prevent BEPS by transferring risks among, or allocating excessive capital to, group members including adopting rules to prevent inappropriate returns from accruing to entities solely on the basis of provision of capital or contractual assumption of risks Expected output: Changes to transfer pricing guidelines and possibly the OECD Model Tax Convention by September 2015 Develop rules to prevent BEPS by engaging in transactions that would not, or would occur only very rarely between third parties including adopting recharacterization rules, clarifying the application of transfer pricing methods in global value chains, and protecting against base eroding payments such as management fees and head office expenses Expected output: Changes to transfer pricing guidelines and possibly the OECD Model Tax Convention by September 2015 Develop recommendations on the indicators of the scale and economic impact of BEPS and ensure tools are available to assess effectiveness and impact of measures to address BEPS Expected output: Recommendations on data to be collected and analytic methodologies by September

15 BEPS Action Plan Transfer Pricing and Data Collection Item Action Description (12) Require taxpayers to disclose their aggressive tax planning arrangements (13) Re-examine transfer pricing documentation (14) Make dispute resolution mechanisms more effective Develop recommendations regarding the design of mandatory disclosure rules for aggressive or abusive transactions, arrangements, or structures, taking into consideration the administrative costs for tax administrations and businesses and drawing on experiences of the increasing number of countries that have such rules Expected output: Recommendations regarding the design of domestic rules by September 2015 Develop rules regarding transfer pricing documentation to enhance transparency, including a requirement that multinational entities provide all relevant governments with information on global allocation of income, economic activity, and taxes paid among countries in accordance with a common template Expected output: Changes to transfer pricing guidelines and recommendations for the design of domestic rules by September 2014 Develop solutions to address obstacles that prevent countries from solving treaty-related disputes under Mutual Agreement Procedures (MAP), including the absence of arbitration provisions and denial of access to MAP in certain cases Expected output: Changes to the OECD Model Tax Convention by September BEPS Action Plan Multilateral Instrument Item Action Description (15) Develop a multilateral instrument Analyze tax and public international law issues related to the development of a multilateral instrument to enable jurisdictions that wish to do so to implement BEPS measures and amend existing bilateral treaties Expected outputs: (i) Report on relevant public international law and tax issues by September 2014; (ii) Develop a multilateral instrument by December

16 Main elements of BEPS that will impact transfer pricing Current OECD activity relating to transfer pricing BEPS Action plan 15 key areas (July 19, 2013) Action items 4, 8, 9, 10, and 13 Intangibles Revised Discussion Draft (July 30, 2013) Transfer Pricing Documentation White Paper (July 30, 2013) Country by Country Reporting Memorandum (October 3, 2013) Transfer Pricing Safe Harbors TPG revision approved (May 21, 2013) Transfer Pricing Risk Assessment Draft Handbook (April 30, 2013) 28 14

17 First area where BEPS initiative will have a significant TP impact Transfer pricing aspects of intangibles Definition of IP general principles (what s in, what s not) Legal vs. Economic ownership (legal ownership is just a starting point) Role of people functions location of true value creation Relevance of equity deals to pricing of IP Treatment of uncertainty 29 Second area where BEPS initiative will have a significant TP impact Substance to support the transfer pricing outcome Why do we need substance? OECD recognizes the emergence of new business operating models and will respect the attribution of profits where value is created What is substance? Operational substance (functions) Managerial substance (functions, risks and assets) Substance of risk allocation (risks) Financial substance (risks and assets) Non-tax skills required to distinguish between a tax-driven structure and an operationallydriven / tax optimized structure OECD is expected to release guidelines that contain a much more operational definition of substance 30 15

18 Third area where BEPS initiative will have a significant TP impact Country-by-country reporting Action item 13 on the BEPS Action Plan Revisit TP Documentation OECD White Paper on TP Documentation: OECD TP Guidelines are not adequate to deal with the emergence of new business operating models Masterfile / Country-files approach to TP documentation Country-by-country reporting consultation paper released Activities, revenues, in-country employees, assets, taxable income, taxes paid, etc. The objective behind the above initiatives: give the Big Picture to tax authorities Balancing simplicity and increased transparency for risk-assessment A few challenges ahead Where is the simplicity in all of this? Harmonization with domestic TP documentation rules Risk of getting side-tracked with a formulary apportionment sanity-check Information exchange and confidentiality of taxpayer information 31 Country-by-country reporting The future big picture snapshot Headcount by Location (% of total) Profit by Location (% of total) 32 16

19 Country-by-country reporting The future big picture snapshot Assets by Location (% of total) Profit by Location (% of total) 33 Country-by-Country Reporting The future big picture snapshot Profit Margin by Location 34 17

20 A closer look at the Canadian and Global Tax Developments Tax Morality and Transparency A Canadian Perspective Legislation in Action Budget 2013 Closing tax loopholes Rewarding whistleblowers Disclosure requirements in the extractive industries Administration in Action Risk-based audits Real practical implications associated with a high, medium or low risk rating Specialized CRA team focusing on tax avoidance and evasion On-going transfer pricing audits The Courts in Action Soft-Moc Federal Court upholds CRA s foreign-based information requirement 36 18

21 Tax Morality and Transparency A Canadian Perspective 2007 Proposal to deny interest deductions on money borrowed to invest in foreign subsidiaries Subsequently repealed after consultation and outcry from the tax community 2008 Advisory Panel on Canada s International tax system Budget Debt dumping provisions - Treatment of interest on borrowings of Canadian multinationals - Budget Contained a number of measures focused on international aggressive tax avoidance, incentives for whistleblowers (snitch), T1135 Form, broader information gathering powers Information exchange and increased Inter-governmental co-operation (TIEAs and multilateral convention) Department of Finance consultation paper on Treaty Shopping Introducing Public disclosure of financial payments to governments for Extractive Industry 37 Some International Developments New rules limiting deducibility of interest payments to related parties (e.g. Sweden, France, Norway, Mexico) October 2013 Ireland abolished the possibility for an Irish company to have no tax residence Introduction of local anti-abuse rules 38 19

22 Looking forward: Tax Developments that we can expect Global Tax Planning What can we predict? An artificial structure represents a threat to the possibility of realizing sustainable benefits in the current tax landscape Principal Operating Company / Supply Chain Structure The media scrutiny of tax structures in a period of austerity measures will only increase with time Exchange of information between states and the increase in taxpayer transparency requirements will fuel the capabilities of tax autorities to react promptly to tax planning strategies and structures IP Structure Treaty Financing Structure Holding Company / Hybrid Instrument Financing LEVEL OF SUBSTANCE 40 20

23 How companies are reacting to the changing tax landscape: Best Practices Tax Morality and Transparency Impact on Corporate Groups and Tax Directors Tax is now a brand issue Tax is linked to reputation, social responsibility and brand value The court of public opinion is not a forum attuned to the complexities and subtleties of tax Financial and reputational risks have a clear impact on shareholder value The Board must be able to explain total tax payments made by the corporation 42 21

24 Client specific circumstances driving the degree of proactivity Extractives and Banking Industries are subject to mandatory public disclosure Most clients with a fairly low ETR Limited substance in foreign entities Transfer pricing disconnect between location of key value drivers and location of profits Significant interest deductions Significant use of hybrid entities / hybrid instruments 43 Client specific circumstances driving the degree of proactivity (cont d) Clients whose financial results are positively impacted in a significant way by tax planning strategies Digital / online business Complex international structure / value chain PE planning Aggressive tax structures 44 22

25 Tax Morality and Transparency Questions You Need to Be Able to Answer What is the company s position on tax? What are other companies doing? What should we be doing? What challenges might we face? 45 Tax Governance and tax profile Tax Governance Tax profile and taxes paid $ Is the level of Board involvement appropriate? Do we have a Tax strategy? Are we compliant with internal controls over tax? Is there consistency between the various departments that are impacted by the approach to tax? What is our effective tax rate? How much tax do we pay and where? How does it compare to the statutory rate? To peers in the industry? What s driving the tax profile? e.g. Geographical spread Investment profile Financing Location of intangibles 46 23

26 Approach to planning and tax authority relationships Past and Current Planning Relationship with Tax Authorities? How aggressive have we been? Could we clearly articulate our tax strategy and what would our stakeholders make of it? Are we comfortable with our approach in the current environment? What is the status of the company s relationships with tax authorities in each relevant jurisdiction? Would we be comfortable disclosing our tax positions to these authorities? 47 How are companies reacting? Short term Assemble country-by country revenue, headcount and tax data and review Understand the tax planning undertaken, transfer pricing approach, benefits and risks Understand the new stakeholders and their needs Consider performing a forensic review Evaluate the quality of tax authority relationships around the world Medium term Review tax governance framework and the Board s role in relation to tax Confirm proper implementation of existing tax structures Ensure transfer pricing analyses are robust under current requirements Prepare stakeholder communications Coaching for CFO or Board - media training with a tax overlay Longer term External reporting, including economic contribution to society Embed a process / system for collating total tax data Ensure consistency of communications from different parts of the organization 48 24

27 Concluding Remarks Concluding Remarks Changes are happening and will continue to happen Preparation for those changes is key Understanding the impact of tax strategies on financial results International structure health check Contingency planning: value preservation and value creation 50 25

28 Contact us Michael Glaser Partner, GVA Tax Transparency Leader and Global Transfer Pricing Services, KPMG T: E: Jodi Kelleher Partner, National Leader, International Corporate Tax, GVA, KPMG T: E: 51 Thank You 26

29 KPMG CONFIDENTIAL The information contained herein is of a general nature and is not intended to address the circumstances of any particular individualor entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is receivedor that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examinationof the particular situation KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ( KPMG International ), a Swiss entity. All rights reserved The KPMG name, logo and cutting through complexity are registered trademarks or trademarks of KPMG International. 27