Written by Richard Cornelisse
Revenue losses from BEPS are conservatively estimated at USD 100-240 billion annually , or anywhere from 4-10% of global corporate income tax (CIT) revenues. Given developing countries’ greater reliance on CIT revenues as a percentage of tax revenue, the impact of BEPS on these countries is particularly significant.
G20 finance ministers endorse reforms to the international tax system for curbing avoidance by multinational enterprises – OECD
On 22 July 2015 the Revenue & Customs in the UK have published two linked consultation documents that relate to compliance and anti-avoidance. Both are directed at behaviours and behavioural change for large corporates in particular.
The document entitled Improving Large Business Compliance contains 3 main proposals:
- A legislative requirement for large businesses to publish their tax strategy
- A voluntary ‘Code of Practice on Taxation for Large Business’
- A ‘Special Measures’ regime to apply to businesses continually undertaking aggressive tax planning or persistently refusing to engage with HMRC in an open and collaborative manner.
In relation to tax strategy, the document sets out the areas that should be covered by a tax strategy and also proposes that businesses could publish information to demonstrate how the tax strategy is being applied in practice.
The strategy should set out the business’s attitude to tax risk, its appetite for tax planning and its approach to its relationship with HMRC. It may also cover the governance framework describing the way a business takes decisions on taxation. The research found that “businesses with a greater appetite for risk tend[ed] not to have written (or published) tax strategies, while those with lower risk-appetite tended to have more formalised strategies.
Businesses will be required to inform HMRC as and when it is published.
There are varying media for publication including the business’s website, or existing publications such as the Annual Report and Accounts. Suggested elements to be covered in a published strategy:
We want to be as clear as possible in our guidance. Our priority, and that of the government, is to support businesses that want and try to get things right, and to tackle those that seek to avoid or evade tax. This applies to all types of organisations and businesses liable to VAT. Those that act to avoid tax or adopt tax practices that bend the rules, bringing about unintended benefits, know what they’re doing. They have to be prepared to accept the consequences of their actions.
Q&A: HMRC’s view on VAT issues | Tax Journal
Examples of a published 'public tax transparancy transparancy ' on a business website and/or annual report.
Importantly it also envisages that there should be a named individual at Executive Board level who is responsible for owning and signing off the tax strategy.
It also shows us that increased scrutiny of tax strategy by a business’s Board actively discourages aggressive tax planning, with businesses stating that tax was now of “particular concern for senior management. Building on this, the proposal is to include a requirement to have a named individual at Executive Board level who is responsible for owning and signing off the tax strategy.
This will further encourage bringing responsibility for tax into the boardroom and align with the best practice many businesses already exhibit.
The proposed requirement for Board-level oversight echoes the existing Senior Accounting Officer (SAO) regime, which provides assurance that a business has adequate tax accounting arrangements in place.The SAO regime does not, however, extend to a business’s tax strategy. It is our intention that this proposal is kept apart from the existing SAO regime.
What to do?
As these elements apply to indirect taxes, we believe that this is an important development in approaching the work that we have been discussing and the level of focus that this will receive internally.
Although the potential application is just to the UK, you will clearly want to consider being consistent across jurisdictions. Perhaps most importantly this type of thinking within Revenue authorities is or will become commonplace and is important to be thinking a few years ahead to the challenges you will be facing from a compliance perspective.
BEPS - Country by Country report also implemented in the Netherlands. On the 15th of September 2015 the Dutch legislator announced new Dutch reporting standards for the Dutch Corporate Income Tax Act. The annual TP documentation package should consist of a master file and a local country file. The reporting standard is intended for intercompany transactions with more than €50 million annual revenues. Further Country by Country reporting requirements are also included with an treshold of €750 million. A penalty is included as well. The report will be mandatory per Januari 2016 due to obligations with OESO /G20.
The UK has played a leading role in the transformation of international tax transparency, working through the OECD to establish a common standard for the automatic exchange of information on financial accounts with more than 90 countries. [See for more detailed info Chapter 'Audit Defense' and 'Tax Trends'. Both contain overview of global initiatives in more detail]
The consultation papers give a clear indication of the thinking in this regard of one of the world’s leading tax authorities.
We think there are a number of things to do:
- Take some time to think about a sensible response to the consultation by the deadline of October 14
- From a direct tax and indirect tax perspective begin to think further about how this aspect of tax strategy will be articulated on both a UK and international basis
- If the UK document is going to be published, as planned in the consultation, it will be accessible to other tax authorities of course and they will need to be considered when drafting even a purely UK strategy document
- Make all the improvements possible in the time before such legislation comes into force so that the starting position is as strong as possible
- For companies that do significant acquisitions we would also expect there to be some comment of substance in a tax strategy document as to how such businesses are brought within a high quality control environment for direct tax and indirect tax and within what timeframe
Read more about the roadmap of how to set up a Tax Strategic Plan
By Richard Cornelisse and Richard Baxter
HMRC published a report following research into what it is that drives large businesses’ approach to their tax strategy. In particular they wanted to investigate what the triggers are to a change in tax strategy and who within the business takes that decision.
UK’s Large Business Compliance Consultation: TEI’s comments
Publication date: December 9, 2015
HM Revenue and Customs (HMRC) is committed to dealing with all customers fairly and efficiently while making sure that the correct tax is paid to the Exchequer. HMRCʹs Large Business Directorate manages the largest 2,000 or so businesses using a risk based approach. This is due to their size and complexity, the tax at stake, and the consequent risk they present to the Exchequer.
This measure seeks to encourage tax transparency and compliance across all large businesses. To achieve this, we are introducing the requirement for qualifying large businesses to publish their tax strategy in relation to UK taxation.
This legislation will includes details of the tax strategies required to be published by such large business together with details of where and when publication is required and details of penalties for non‐compliance.
General description of the measure
The measure will introduce a legislative requirement for all large businesses to publish an annual tax strategy, in so far as it relates to UK activities, approved by the Business’s Executive Board.
The strategy will cover 4 areas:
- the approach of the UK group to risk management and governance arrangements in relation to UK taxation
- the attitude of the group towards tax planning (so far as affecting UK taxation)
- the level of risk in relation to UK taxation that the group is prepared to accept
- the approach of the group towards its dealings with HM Revenue and Customs (HMRC)
Non-publication of an identifiable tax strategy or incomplete content based on the 4 areas outlined above could lead to a financial penalty. This penalty will be subject to the usual HMRC appeals process.
Tax strategy means:
- a group tax strategy
- a sub-group tax strategy
- a company tax strategy or
- a partnership tax strategy.
- Contents of a group tax strategy
A group tax strategy required to be published must set out:
- the approach of the UK group to risk management and governance arrangements in relation to UK taxation,
- the attitude of the group towards tax planning (so far as affecting UK taxation),
- the level of risk in relation to UK taxation that the group is prepared to accept, and the approach of the group towards its dealings with HMRC.
The company publishing information as a group tax strategy must make clear (in a way that is accessible to anyone accessing it online) that the company regards its publication as complying with the duty to publish a group tax strategy in the current financial year.
Penalty for non-compliance
The head of the UK group is liable to a penalty of £7,500 if there is a failure to publish a group tax strategy for the group that meets the legal requirements or there is a failure to comply. And is liable to a further penalty of £7,500 at the end of each subsequent month in which no such group tax strategy is published.
Who is likely to be affected
Around 2,000 largest businesses in the UK.
The publication of tax strategies will ensure greater transparency around a business’s approach to tax to HMRC, shareholders and consumers. And board level oversight of those strategies will embed tax strategy in existing corporate governance processes. Taken together this should drive behaviour change around tax planning and therefore enhance tax compliance.
In relation to a tax strategy required by this Schedule to be published for a UK group, UK sub-group, company or partnership, means
any of the following (so far as affecting that group, sub-group, company or partnership)
- income tax,
- corporation tax, including any amount assessable or chargeable as if it were corporation tax or treated as if it were corporation tax,
- value added tax,
- amounts for which the company is accountable under PAYE regulations,
- diverted profits tax,
- insurance premium tax,
- annual tax on enveloped dwellings,
- stamp duty land tax,
- stamp duty reserve tax,
- petroleum revenue tax;
- customs duties,
- excise duties,
- national insurance contributions.
Legislation will be introduced in the Finance Bill 2016 to require qualifying large businesses or qualifying groups to publish a tax strategy, in relation to UK taxation, on the internet.
The legislation sets out the content required for inclusion in the tax strategy.
The strategy will need to remain accessible until the next update to the strategy, typically on an annual basis.
A penalty may be chargeable either for the non-publication of a tax strategy or if the information contained within the published strategy does not meet the requirements of the legislation.
Monitoring and evaluation
This measure will form part of HMRCs business risk review processes and implementation and impact will be measured within the internal governance and risk management processes within Large Business Directorate.
HMRC International Benchmarking report 2011
Benchmark – Cost and Effectiveness of GST/VAT Risk Assessment
BEPS 2015 Final Reports
See also Technical consultation: country-by-country reporting - UK
BEPS and Indirect Tax
Let's highlight action 7 and 13:
Prevent the artificial avoidance of PE status'
- Country-by country reporting (CbC)
Action 7 – prevent the artificial avoidance of PE status
The final BEPS report includes changes to the definition of PE for income taxes of Article 5 of the OECD Model Tax Convention. Action 7 broadens the threshold to determine when such PE status exists. Currently such a PE status does not exist for commissionaire arrangements and the specific activity exemptions in treaties, such as warehousing, purchasing and preparatory and auxiliary activities.
The indirect tax definition of a fixed establishment (FE) is different from a PE and has its foundation in EU VAT law and should therefore not be affected by the BEPS initiative or OECD definition. Some countries however do (still) not accept the absence of a FE once a PE has been established. Note that the amount of PEs will increase when "Action 7" is in force.
As businesses are facing global challenges it makes sense that the existing business model is reevaluated and amended when necessary to meet the new PE environment. That most likely means moving away from a commissionaire structure?
Action 13 – country-by country reporting (CbC)
Action 13 provides a template for multinationals to report on an annual basis and for each tax jurisdiction in which they operate revenue figures and other key figures should be reported. The data of these reports give direct tax authorities the possibility to audit the amount of direct tax paid.
However for indirect tax authorities it is useful data as well. From a custom perspective it could be supportive during auditing the valuation of the transactions when customs duties are due and for VAT cross border intercompany transactions have always qualified as a high risk area.
The SAF-T standard, originally created by the OECD, is intended to give tax authorities easy access to the relevant data in an easily readable format for both corporate income tax as VAT. This leads to much more efficient and effective tax inspections. Data analytics will become the most efficient and effective way of future tax auditing.
Related GITM articles
- Examples of public Fiscal Transparency statements
- The Tax Transparency Benchmark 2015
- BEPS 2015 Final Reports
- EU - Public consultation on further corporate tax transparency
- CbC reporting / tax transparency: Accounting Directive
- Improving large business compliance
- Tax administration: large businesses transparency strategy
- Spreadsheets and Compliance
- Tax Strategic Plan
- Tax Control Framework
Written by Richard Cornelisse
Richard advises multinational businesses in improving the efficiency and effectiveness of their Indirect Tax Function and Tax Control Framework.
He started his career as a manager at Arthur Andersen and then became a partner in EY where I led the indirect tax performance team for Netherlands and Belgium. Currently he is a senior managing director of Phenix Consulting.
Richard has over 20 years’ experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service centre migration, and post merger integration work. Richard is also somewhat of a mentor, giving back to the profession. If you are interested in conversation and discussion, please feel free to contact him.
Phenix Consulting - our services - team - network
Compliant tax software solutions for the global management of tax processes
In essence, HRMC’s increases its expectations towards large businesses with regard to a more and more transparent tax management strategy. However, the publication of a tax strategy will clearly not be sufficient. It is just the starting point for the provision of a clear picture about the risk management and controls in place of tax relevant processes. The daily management turns on the radar.
State-of-the-art tax compliance management software is required.
In difference hereto, the view into the current daily practice provides a different and non-compliant picture:
Widespread use of Excel spreadsheets, decentralized storage of tax relevant documents, lack of documented controls, lack of automation, global lack of tax compliance software tracking individual changes and filings, lack of standardized reports immediately available upon request, lack of in-built double-checks for the calculation of current and deferred taxes on reporting entity level, lots of tax relevant data stored at external outsourcers (e.g. external tax advisors and accounting firms), several tax software tools in place at various locations which are neither interfaced among each other and with the ERP systems in place, etc.
It is obvious that tax departments which are not adapting its process management to the requirements addressed by HMRC and other tax authorities may struggle with regard to compliance, efficiency and transparency.
Therefore, compliant tax software solutions for integrated tax management like the U² software from Universal Units become more and more important