Global Tax Controversy

Transcription

1 Global Tax Controversy Navigating the future facing the challenges 4 May 2017

2 Global Tax Controversy Susan Bennett Ernst & Young LLP Houston, TX Americas Tax Director Engineering and Construction Rob Hanson Ernst & Young LLP Washington, DC EY Global Tax Controversy Leader Page 2

3 The global business environment is changing Economic shift Technology shift Demographic shift Digital shift Disruptors Global The global stock index volatility has increased by 50% over the last 3 years The combined GDP of the developing economies is now greater than that of the developed countries Every two days as much digital information is created as was created from the dawn of civilization until 2003 The share of data stored in the cloud is expected to triple in the next two years More than 50% of tax workforce are Millennials and Gen X Bulk of the developed countries is likely to experience significant talent shortage, impacting nearly US$10 trillion of world GDP Online sales are growing at three times the rate of store-based retail Integration of digital technologies into everyday life by the digitization of everything that can be digitized. Page 3

4 Four trends driving the global increase in tax controversy Reputational risk Operational risk Businesses are being scrutinized by public, government, media and NGOs on the amount of taxes they pay, where they pay those taxes, and whether they are paying their fair share. Aggressive tax enforcement continues to increase as tax authorities look for more ways to collaborate and share information, particularly on cross-border transactions. Increased global tax controversy Many companies recognize the need to update their global tax risk strategy but lack the appropriate resources to effectively implement changes. The volume of new regulations and laws continues to increase, largely driven by the focus on base erosion and profit shifting (BEPS). The MLI will likely drive more change. Enforcement risk Legislative risk Impacts planning, accounting and compliance Page 4

5 The view of global tax policy leaders For the next few years, taxpayers are bracing for more disputes and possibly litigation with tax authorities, until reforms to the international tax system (hopefully) deliver greater consistency and certainty. Martin Kreienbaum - Director General of International Taxation at Germany s Federal Ministry of Finance (and current chair of the OECD s Committee on Fiscal Affairs) Tax burden increases as a result of increased enforcement are forecast in 62% more countries in 2017 EY 2017 Global tax policy outlook I firmly believe that there has been an increase (in the number of tax audits). It is the consequence of the BEPS project, or is it just reflection which has just defined the BEPS project? I think it s probably a mixture of both. Pascal Saint-Amans Director of the OECD s Centre for Tax Policy and Administration Page 5

6 Aggressiveness of tax audits? Over the course of the last two years, have you seen an increase in the number or aggressiveness of tax audits? A. Yes B. No 41% 41% of all companies* said that they have seen an increase in the number or aggressiveness of tax audits *901 tax and finance executives in 69 jurisdictions, completed in January 2017 Page 6

7 Finland Has the enforcement landscape improved, Norway deteriorated or stayed the same? Denmark Canada United Kingdom Ireland Netherlands Poland United States Czech Republic Slovakia France Belgium Luxembourg Hungary Japan Mexico Spain Germany Russia Taiwan Switzerland Italy Greece Turkey China Dominican Republic Cyprus Israel Panama Guatemala Dominican Republic Hong Kong Honduras Nicaragua Costa Rica El Salvador Thailand Vietnam Malaysia Philippines Brazil India Singapore Venezuela Indonesia South Africa Deteriorating enforcement landscape Consistent enforcement landscape Improving enforcement landscape Australia Argentina Source: EY Global tax policy outlook, 2017 New Zealand Remember: this is just year-on-year change a country may already have had a challenging approach.

8 Disputes rising: Global trends Page 8

9 Tax enforcement 2017 Greater uncertainty, reduction in trust-based relationships Greater levels of information available to tax authorities on both sides of a cross-border transaction More forensic approaches to PE, Transfer Pricing (DPT Australia, UK. France failed.) Prior structures/transactions continue to be scrutinized against new concepts/measures More aggressive positions being taken by tax authorities Greater threat of criminal sanctions (some Latin, some European countries) Coming soon? Reduced access to treaty benefits / higher subjectivity as a result of Action 6 (treaty abuse) implementation via the OECD multilateral instrument? On a recent EY webcast, we asked around 1,400 respondents to name the one thing the OECD could do to help improve dispute resolution 34% responded that it didn t matter because countries will do their own thing anyway The 34% figure was more than the combined figure for improvements to the Mutual Agreement Procedure (16%) and more countries adopting mandatory binding arbitration (12%) combined Page 9

10 EU State Aid investigations Individual transfer pricing rulings The individual cases involving Luxembourg and the Netherlands are mainly focused on transfer pricing rulings. Ireland concerns profit allocation to a branch (profit allocation within a legal entity ). The Commission examines whether rulings comply with the arm s length principle. Tax ruling regime (Belgian excess profit rulings) Downward adjustment to exempt profits generated by group synergies and not by activities in Belgium. Adjustment were granted irrespective of whether the profits were taxed elsewhere. Luxembourg Non-application of a subject to tax rule allegedly embedded in Luxembourg law and US-Luxembourg tax treaty. Ruling resulted in double non-taxation due to international mismatch. Luxembourg Intercompany financing transactions classified as equity and debt at the same time, allowing the borrower to deduct provisioned interest payments without any interest income being taxed on the lender s side. Rulings resulted in double non-taxation due to domestic mismatch. EU Task Force The ad hoc Task force established following Lux Leaks which deals with tax planning has now become a permanent unit and comprises a gradually growing staff of more than 20 members. Page 10

11 Australia More stringent anti-avoidance rules Diverted Profits Tax introduced into Parliament to target significant global entities (SGEs; global annual turnover of AU$1bn+) that artificially divert profits from Australia through related-party arrangements with a penalty tax rate of 40% from 1 July Increased penalties for SGEs for (a) failure to lodge documents to ATO (100-fold increase in penalties); (b) making false statements to the ATO (double existing penalties) from 1 July Multinational Anti-Avoidance Law (avoided PE treaty override) applies to SGEs and benefits obtained on or after 1 January GPFS reporting to ATO by SGEs applies to financial reporting periods commencing from 1 July Tighter thin capitalisation rules enacted for income years commencing on or after 1 July ATO focus on inappropriate recognition of internally generated intangible assets and revaluation of intangible assets. Public tax transparency recent developments Mandatory disclosure rules for aggressive tax arrangements by tax advisors - ongoing consultation to consider implications of adopting this OECD recommendation. New arrangements to protect whistle-blowers who disclose information to the ATO on tax avoidance behaviour and other tax issues on or after 1 July Common Reporting Standard legislation applies from 1 July 2017 and initial exchange of information with foreign tax authorities will take place in Administrative penalties for breach of reporting obligations to be increased from AU$4,500 to AU$525,000 for significant global entities from 1 July Mandatory annual public reporting of 2014 and 2015 tax data of large companies (public companies: turnover of AU$100m+; private companies: turnover of AU$200m+). Voluntary Tax Transparency Code for companies with Australian turnover of AU$100m+ with adoption encouraged for 2016 financial reporting year onwards. Page 11

12 Australia Tax administration and increased tax enforcement Tax Avoidance Taskforce to raise AU$3.7b over the next four years. ATO Taxpayer Alerts released to identify certain issues of concern: Inappropriate recognition of internally generated intangible assets and revaluation of intangible assets for thin capitalisation purposes. Interim arrangements and restructures involving foreign partnerships in response to MAAL. Related party foreign currency denominated finance with related party cross currency interest rate swaps. Cross-border leasing arrangements involving mobile assets such as lease-in-lease-out arrangements. Warn of incorrect R&D claims related to specific industries or activities. Re-characterization of income from trading businesses. Trust income reduction arrangements. ATO s multilateral co-operation and focus on on the edge minimisation strategies, particularly debt-loading, digital companies and offshore marketing/procurement hubs. Transfer pricing controversy around high risk transactions and Commissioner s power to reconstruct or disregard a cross-border transaction. Amended assessments in the amount of approx. A$2.1bn issued to multinationals in March Page 12

13 Canada Continued Focus on Transfer Pricing audits Financial transactions financing; reinsurance, etc. IP migrations Royalty payments Focus on BEPS concepts value creation Significant additional funding expect more audit coverage Cracking Down on tax evasion and tax avoidance Reliance on guidance from OECD BEPS projects Reviewing hybrid financial instruments and entities Reviewing base erosion through interest deductions and other financial payments Significant additional funding allocated Mobile employee compliance Extreme vetting of FTC claims of mobile employees of Canadian employers Enforcement of withholding and reporting requirements on inbound employees of foreign employers Proper documentation for foreign workers coming into Canada Implementation and initial compliance activities of new Certified Employer program Page 13

14 China 1000 Enterprise Program The SAT launched 1000 Enterprise Program in March 2016 to carry out national tax information collection on head offices of selected groups of enterprises and key affiliated companies, aiming to identify tax administration risks. The SAT further issued Notice [2017] 7 regarding the Administrative Measures on the Directory of Group Enterprises under the Thousand-Enterprise Program (effective from 1 May 2017). Large MNCs or domestic enterprises should consider performing sensitivity analyses to identify potential risk areas More stringent transfer pricing and anti-avoidance rules The SAT issued Notice [2016] 42 on 29 June 2016 on contemporaneous documentation requirements for master file (annual related party transactions over RMB 1 Billion), local file, Country-by-Country Report (consolidated income over RMB 5.5 Billion), cost sharing and thin capitalization, effective from 1 January The SAT issued Notice [2017] 6 which provides guidance on the application of the arm s length principle, including guidance with respect intangible property transactions, intercompany services transactions, location specific advantages, transfer pricing methods, various procedural matters including detailed guidance on mutual agreement procedures (MAP) under double taxation treaties, effective from 1 May Large MNCs are advised to proactively manage transfer pricing and other international tax risks in the context of BEPS. Tax audit/inspection trends and focus areas for 2017 Focused industries for tax inspection includes real estate, construction, transportation, consumer services, etc. Double-Random selection system (i.e. targeted company selected by random, tax officials selected by random) Emphasis on the Big Data analytics in the Golden Tax Administration System Phase III Page 14

15 Indonesia Tax Treaty Abuse Issue of Beneficial owner More requirements to meet for tax treaty to apply (Form DGT 1 or Form DGT 2) Transfer Pricing Tax Authority takes a very aggressive position in making unfavorable corrections Application of Master/Local file and CbCR (starting 2017) Dispurte case most likely continues up to Tax Court/Supreme Court level Permanent establishment More issues for e-commerce (e.g. Google case) Page 15

16 México enforcement policy Focus on more selective enforcement, particularly for multinational companies based on judicial precedents and tax planning utilizing OECD principles. Mexico emerges as a leader in tax digitization. E- audits E- accounting E- invoicing Action 13 Action 12 Exchange of information Page 16

17 México enforcement focus areas Tax reorganizations IP Migration Maquiladora conversion Related party transaction Services Royalties Management Fees Permanent establishment Beneficial owner Transfer pricing and supply chain Page 17

18 The Netherlands Exchange of information Based on domestic tax law and international developments (OECD, BEPS Action items for example country by country reporting - and EU), there is an increase in exchange of information between jurisdictions to improve transparency between jurisdictions. The Netherlands considers itself as a frontrunner in relation to this topic. Based on domestic law the following forms of exchange of information can take place: exchange of information on request automatic exchange of information spontaneous exchange of information In relation to the exchange of rulings per 31 March 2017, the Netherlands exchanged 2683 standard rulings templates to other jurisdictions and received 585 standard rulings templates from other jurisdictions. Page 18

19 The Netherlands Increase in number of tax audits and question letters; mainly increase in tax audits of third parties (both in and outside the Netherlands) We see an increase in the number of tax audits especially at third parties concerning the tax position of a taxpayer. This third party is obliged to cooperate and should provide information to the Dutch tax authorities that can be of relevance for the tax position of a taxpayer (not being the third party). Higher tax penalties If a taxpayer is not compliant with its tax obligations they can be confronted with tax penalties (the goal of those tax penalties is to encourage / drill the taxpayer to meet its obligations or to punish more serious offences involving gross negligence or intention). We see a trend that the amount of tax penalties increases (i.e., if a taxpayer is not compliant with its tax obligations they will be confronted with higher tax penalties). Page 19

20 United Kingdom Strengthening cross border focus Additional TP resource/increasingly holistic challenge to cross-border transactions BEPS - Digital Economy Project/Diverted Profits Tax Increased information powers/emphasis on administrative cooperation Avoidance focus New powers, e.g. accelerated payments/follower notices/avoidance penalties/serial avoiders/enablers/special measures regimes/partial closure notices New specific anti-avoidance measures, e.g. disguised remuneration HMRC success in the courts claims 80% + success rate in avoidance cases UK Finance Bill 2016 introduced the requirement for certain businesses in the UK to publish their tax strategy as it relates to or affects UK taxation. Settlement versus litigation Collaborative enquiry/settlement remains the norm, but under pressure from tight governance Growth in litigation fueled by new powers/more formal approach Page 20

21 UK Corporate Criminal Offence Page 21

22 Disputes rising: Forming your response Page 22

23 Importance of tax controversy management Has Tax Controversy management become more or less important for your company in the last two years? A. Much more important B. Somewhat more important C. About the same D. Somewhat less important E. Much less important 64% 64% said that Tax Controversy management has become much more or somewhat more important for their company in the last two years Page 23

24 Visibility over audits What level of visibility does your company have over active tax disputes (including open audits) around the world? A. Complete visibility B. Substantial visibility C. Partial visibility 27% 27% Complete Substantial 13% Partial Page 24

25 Approach to tax controversy management How would you characterize your current approach to managing Tax Controversy? 1. We do not have a consistent tax controversy strategy 2. We apply the same global guidelines to all of our audit and court cases 3. We have a strong centralized tax controversy management 4. We organize regular calls to ensure that all participants are fully aligned 5. We use internal tools to help us follow in real time all of our audits and controversy in the world 6. We have a single external adviser Page 25

26 Putting it into practice Have you run a risk assessment and solutions evaluation workshop? Understanding current controversy activity Assessing treaty changes MLI and traditional treaty changes Assessing existing structures & rulings Assessing existing structures in the light of a post BEPS environment Benchmarking areas of strength/weakness Reviewing existing rulings Supporting tax provision position Creating a platform for world-class MAP/arbitration/ADR APA / BAPA / MAPA Multi-sided analysis Ensuring US FTC offset available Mitigating the risk of double taxation Establishing a global controversy strategy Planned approach to coordinated multicountry tax audits Prioritizing issue resolution Address multi-year, multi-jurisdictional impacts Ensuring consistency/accuracy in facts Exploring all paths for dispute resolution (proactive vs reactive, traditional vs alternative, one-country vs multi-country) Moving to a post-beps legal framework Aligning functions and substance Proactively managing the transition so as to reduce rather than increase historic risks Moving to acceptable structures Managing reputational risk Reputational awareness Assessing possibility of a proactive approach Active preparation for crisis management Supporting external tax communication strategy Page 26

27 Global controversy tracking and management Gain a world of insight through one powerful tool Customizable reporting of a company s tax controversy around the globe. Client scenario - how EY helped The client had no process or central database for monitoring global controversy. The client implemented a quarterly monitoring process and central database that was used to generate a global dashboard. This significantly reduced the time required during quarter-end to validate local tax controversy and the impact on uncertain tax positions. It also facilitated better visibility and the ability for corporate tax to provide assistance to the local finance directors for critical controversy. Page 27

28 Bringing it all together A global approach to Tax Controversy Go global Assess open issues Underpin with policies and procedures Present a consistent defense Replace single country, tactical controversy management with a global approach to Tax Controversy Assess the multijurisdictional (and potential multi-year) impact of open issues. Prioritize issues requiring remediation Establish global policies and procedures to facilitate management oversight of global tax controversies Present a consistent and coordinated defense across multiple jurisdictions Page 28

29 Thank you Page 29

30 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the US Ernst & Young LLP. All Rights Reserved ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice. ey.com