Tectonic changes in tax policy

Transcription

1 Tectonic changes in tax policy How ready are you? Key messages from the 13 th Annual EY India Tax Workshop Goa 3-5 September 2015

2 Contents of the report Keep a watch on your tax planning ideas BEPS is not to be ignored An endeavor to find right solutions in transfer pricing disputes

3 Burgeoning tax litigation and dispute resolution GST will be disruptive unless you plan for it Looking up to technology for tax solutions! Final thought

4 01 Keep a watch on your tax planning ideas 38% consider tax planning sparingly 59% perceive tax as a cost and therefore engage to reduce its vigour Aggressive tax planning is often, not the modus operandi of a majority of businesses. This was amply made clear by our panellists, who unanimously saw tax as a cost that needs to be factored in like any other costs for transacting in a particular manner. However, a majority (i.e., 59%) of the audience polled, still actively consider tax planning. Given the ongoing debate on tax planning and the resultant global tax changes, a good 38% consider it sparingly, with 3% actually having deferred tax planning. The panellists discussed the following decisions, which need to be taken, when setting up a new business or acquiring an existing one: Selection of form of entity Choice of an appropriate holding structure Selection of jurisdiction Mode of financing Business model to be adopted Mode of acquisition These decisions have elements of planning built into them with regard to the tax and regulatory environment in which the concerned businesses operate. Added to this, one has to consider rampant changes being made to domestic legislations aimed at targeting structures that lack substance. In the Indian context, the place of effective management (POEM) rule to determine residency for companies and the indirect taxation transfer rules, are engaging the attention of tax directors. The Panel discussed how these rules impact decisions on appropriate holding structures and selection of an appropriate jurisdiction, which now needs to be carefully considered from an India perspective. With administrative guidance on these rules still awaited, these are indeed taxing times for tax directors in India! Key takeaways/action points: Tax directors need to be mindful of POEM and Indirect transfer provisions 4

5 Tectonic changes in tax policy 02 BEPS is not to be ignored Important trends that mark the changes in the global tax environment Coordinated international action Unilateral country tax law changes Conflict between providing competitive tax regime while protecting the tax base Increase in enforcement and audit Global tax changes are also triggered by various unilateral actions taken by countries aimed at protecting their tax bases and preventing tax avoidance. The Panel discussed some of the most significant unilateral actions such as the diverted profits tax in the UK, crackdown on PE avoidance in Italy and France, anti-inversion rules in the US, and GAAR in China. Countries are becoming more collaborative, with transparency and reporting being given greater priority and importance. Developments such as the black money law in India, India s agreement with the US to facilitate implementation of US Foreign Account Tax Compliance Act (FATCA) by exchanging financial information on automatic basis, India signing the competent authority agreement for exchange of financial information under the automatic exchange of information (AEOI) program starting 2017, all point towards co-ordinated international action and the resultant enhanced reporting obligations for taxpayers. The OECD BEPS project, which is designed to address government concerns on perceived flaws in the current international tax rules, and the potential for MNEs to locate profits where they are subject to favorable tax treatment, is receiving considerable support from countries across geographies. It was therefore not surprising to find that 85% of poll respondents are tracking the BEPS development, with nearly 25% of them tracking it very closely. A considerable percentage of participants (33%) consider countryby-country (Cbc) reporting to have the biggest BEPS impact on their group. While CbC reporting represents a new era of looking at transfer pricing from a taxpayer as well as tax authority perspective, taxpayers are concerned that documentation burden will be excessive and will lead to increased and intense audit and enforcement. 58% of the respondents voted that global tax changes will impact various areas of their business such as increased reporting, enforcement and audit, protracted litigation and structural reorganization. Key takeaways/action points: OECD BEPS project is likely to have significant impact on businesses. Various unilateral country law changes focus on tax avoidance. It is important to proactively participate in BEPS developments, especially at the countrywise implementation phase. 85% 33% 58% participants are actively tracking BEPS developments perceive country by country reporting to have the biggest BEPS impact feel BEPS would impact different spheres of its operation including audit, enforcement, litigation and structural organisation 5

6 03 An endeavor to find right solutions in transfer pricing disputes Disputes inevitably involve costs, for both the tax administration and the taxpayer, alike. Tax disputes become more complex in a cross-border scenario. Panellists revealed that Transfer pricing (TP) was the key focus area that witnessed increased litigation in the past few years. Audience also concurred with this, since 86% have faced a transfer pricing audit in the last two years. Among the various transactions subjected to audit, provision of services, especially with mark ups, was ranked at the top (57%) followed by adjustments on intra group services availed (47%) and head office/ management recharges (33%). The panellists discussed how an Advance Pricing Agreement (APA) could help mitigate disputes and how successful the program has been. An APA can be filed on a unilateral or on a bilateral basis. A bilateral APA can facilitate corresponding adjustments in the other country as well. However, there appears to be reluctance from Indian participants to explore the APA option (50% of the audience polled have not considered APA). Not being sure of the outcome (29%), higher wins at the appellate forum (24%) are some of the reasons for not opting for an APA. The panellists discussed various kinds of transactions that have come up for APA resolution and how issues faced were effectively resolved. APAs can be made applicable for past years also (up to 4 years) under the roll-back mechanism. This also has a positive result of improving the taxpayer s experience in dealing with tax administration. Therefore, APAs are a good option to achieve certainty on TP disputes. The panellists urged companies to actively consider using the APA mechanism to mitigate TP disputes. Key takeaways/action points: APA can be an effective mechanism for resolving TP disputes. Companies should consider APAs for resolving TP disputes. 86% audience polled faced a Transfer Pricing audit in the last two years 57% subjected to audit of transactions relating to provision of services and their mark-ups 50% have never considered filing of APAs to resolve TP disputes 6

7 Tectonic changes in tax policy 04 Burgeoning tax litigation and dispute resolution According to EY s 2014 tax risk and controversy survey, nearly 90% of the surveyed Indian companies believed that tax risk and controversy is likely to become important in the next few years. In hindsight, these results were so very accurate. Increased litigation was witnessed in transfer pricing (66%), service tax (47%) and direct taxes (34%). The panellists discussed some of the key areas, which are the focus of controversy in the Indian tax scenario. They include: Import of tangible/intangible assets, conflict on valuation for customs v. Transfer Pricing Prosecutions under tax laws for technical and non-technical defaults Transfer of intellectual property including BOLT scheme/bot contracts/ Project delivery Payment/ reimbursement by Indian company to its head office/parent company/ associate company within and outside India Income Computation and Disclosure Standard that have been recently introduced The credibility of the tax administration of a country depends, to a very large extent, upon the credibility of its dispute resolution mechanism. The panel also discussed factors that have resulted in increased litigation such as Aggressive tax collection targets (71%), Huge data requests during audits (45%) and complex law (31%) and what the outlook is likely to be in the future. The Indian tax law does provide for alternate mechanisms of resolving disputes such as the Settlement Commission, Authority for Advance Rulings (AAR), Dispute Resolution Panel (DRP), Advance Pricing Agreement (APA), Mutual agreement procedures (MAP), to reduce litigation. However, an overwhelming majority (80%) still preferred the traditional appellate process to resolve disputes. An environment of a large number of tax disputes, particularly in the area of international taxation and transfer pricing, results in a perception of risk and uncertainty among investors, which is best avoided. The panelists also discussed following measures, which companies could consider to reduce tax disputes: Evaluating tax treatment and tax certainty at the time of entering into transaction and considering tax certainty options such as APA, AAR. Tax data management identifying and plugging gaps in internal systems for TDS compliance and also to meet tax requests during revenue audits/assessments Readiness for revenue audits, identifying pressure points and solutions Preparing litigation strategy and putting in place a robust tax litigation tracking mechanism to manage and stay on top of tax litigation Key takeaways/action points: Companies can consider availing alternate mechanism to mitigate disputes such as APA, AAR, MAP, etc. Proactively managing litigation, by having the necessary data points ready, is the key to managing tax risks. 66% consider transfer pricing attracts maximum litigation 71% voted aggressive tax collection targets as the key factor for increased tax litigation 80% prefer the traditional appellate process to resolve disputes 7

8 05 GST will be disruptive unless you plan for it Even though, the industry expects a delay of three to six months in the roll-out of GST, considering the Constitutional Amendment Bill is pending in the Rajya Sabha, the Government s preparations for this change are on track, and they will be ready even if the move over to GST is beyond 1 April The industry also seems to be gearing up for the change with more than 52% confirming that they have started the GST impact analysis. Contrary to the belief, a majority of the audience (54%), believe that the compliance under GST is likely to be more complex than the current compliance. However, an assurance that the design of Goods and Service Tax Network (GSTN) is robust, and will contribute significantly to ease in compliance for taxpayers and administration for the Revenue, came as a relief during the discussion. Another key revelation that came during the discussion was the audience was equally split on assessment of impact of GST on their business, with 33% seeing the change as favorable to their business, while a close 31% expect it to be unfavorable; the remaining audience did not have a significant view on the subject. The Government is keen to receive feedback from the industry on policy as well as operational issues. Joint platforms of state and the Centre will be formulated to accept consultation from the industry. According to our survey at the event, 47% of the participants have already started taking efforts to represent to the Government either through industry bodies or directly. A whopping 70% of the participants felt that lack of clarity on GST is delaying strategic business decisions. Preparing for the GST The panel of Being GST ready emphasized the need to prepare for GST well in advance. Assuming that the GST implementation is planned for April 2016, the industry has a little more than seven months to plan for it. Sharing his experience, an industry representative on the panel, mentioned that industry should earmark at least 6 months to get ready for GST. The industry also voiced the same, with 93% of the participants agreeing they need more than 3 months to prepare for GST; close to 60% mentioned they need more than 6 months. The Government indicated that they are sensitive to the time required by the industry to prepare and implement GST and will consider issuing draft laws and regulations, sooner than later. The panel suggested that the companies should follow a heat-map approach 1 to understand and identify impact areas, clearly outlining the objectives as zero business disruption, zero noncompliance and business value creation. According to the panel, the top five impacted areas are: Business impact analytics Accounting and compliance Cut-over management Change management Training and communication 1. Head map approach - An approach to identify the origin and destination of goods purchase, sold, as stock transferred. 8

9 Tectonic changes in tax policy Government continues to work toward a roll out on 1 April 2016 Government on track; seeks industry comments 52% 64% have started the GST impact analysis identified business as the key impact area 70% feel lack of clarity on GST is delaying strategic business decisions 93% need more than 3 months to prepare for GST 9

10 Among the audience, a whopping 64% identified business as the key impact area and not tax, which was identified as an impact area by 34%, while technology followed closely at 31%; however, in only 14% of the cases business teams were internally leading GST impact assessment for their companies. The panel strongly recommended that the Board should be a key stakeholder in the GST journey, and the entire effort should be coordinated through a project management team to ensure all work-streams are suitably mapped and developments or issues are appropriately tracked. Key takeaways/action points: Engage the board as a key stakeholder in GST implementation Build a project management team Map the key impact areas The aspect of need for systems and ERP to be ready for the change was also discussed. The migration to new ways of recording, and the need for all customizations to be suitably updated and ready for GST was identified as a potential area that will take the maximum time, and errors or shortfalls could create the maximum disruption. 10

11 Tectonic changes in tax policy 06 Looking up to technology for tax solutions! Technology intervention can address tax risks and challenges Litigation management and compliance consume the maximum time of tax professionals The ever-growing requirements under tax transparency norms, the need to keep pace with changing laws and the resultant compliance requirements has led to an increase in vast reporting and documentation obligations of a taxpayer. Not surprisingly therefore, 92% of the audience thought use of technology can help address various tax risks/challenges faced. Tax functions are increasingly finding it difficult to divide their time between litigation management (52%) and compliance (48%), which were recognized as the most time consuming activities of a tax function. The management of different companies have to consciously dedicate increased amount of resources in terms of time, efforts and money on organizing and managing their data to meet with the ever-changing and diverse documentation and reporting requirements. According to the panellists, technology is contributing to the following eight aspects of tax: Data quality Tax determination Compliance and reporting Information storage ERP sensitization Management reporting Data analytics Workflow management While the delegates, unanimously recognized the use of technology can be an enabler to effectively manage and mitigate tax risks and challenges, a significant 34% acknowledged not using any tax technology tool. The technology tools are customarily being employed in tax computation (43%) and tax compliance (32%), there is scope to use these tools more comprehensively and on a large scale in many aspects of the tax function in areas such as depreciation optimization, planning for POEM provisions, litigation management, and GST impact. Tax authorities are also increasingly seen using technology in asserting and expanding their tax bases. The focus on tax transparency has provided easy access to considerable information readily at the tax authority s disposal. Taxpayers need to be ready to keep pace with the changing enforcement environment! Key takeaways/action points: Use technology on range of areas, including, depreciation optimization, planning for POEM provisions, litigation management and GST impact. 92% believe technology can help address various tax risks/ challenges 34% have not used tax technology tools 58% stated litigation management and compliance management consume most of their time 11

12 07 Final thought Caution in tax planning: Business decisions are taken in light of various considerations. Tax cost is one such consideration. In the Indian context, POEM and indirect transfer provisions have a significant impact on decisions in relation to setting up or acquisition of an existing business. BEPS outcome: BEPS is likely to be a big game changer in country legislations. This development is likely to result in an overall increase in enforcements and audits and result in titanic impact on the manner in which businesses operate. It is important for businesses to be prepared. Tax certainty through APA: Transfer pricing audits have been the cause of major tax litigation with 85% of the participants facing TP audits in the past two years. It is, therefore, essential that companies explore APA as a dispute resolution mechanism to achieve tax certainty. Proactive litigation management: Companies should consider focusing on maintaining proper documentation to be ready for tax audits and also have in place necessary data points to effectively address queries. Companies can take proactive steps such as identifying key pressure points, evaluating tax treatment in advance and obtaining tax certainty through options such as APA, AAR, Settlement commission and MAP to effectively manage tax risks. Use technology for efficiency: Technology is contributing to the following eight aspects of tax, such as data quality, tax determination, compliance and reporting, data analytics and so on. Companies should use technology in wider range of areas of taxation, including, depreciation optimization, planning for POEM provisions, litigation management tools and GST impact analytics. Think beyond tax while preparing for GST implementation: The GST will impact beyond tax to overall business, and will include technology. It is important that the Board is engaged right at the beginning of the GST preparation and a project management team is built. Engage in debate: The Government is keen to receive feedback from the industry on policy as well as operational matters, it is important that the industry make consistent effort in representing to the Government either through industry bodies or directly. 12

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