From a tax controversy perspective TP documentation is important and often results in conflicting priorities within the tax function (allocation of budget and tax resources).
Better resource allocation and process improvement can be achieved via (semi)automated documentations, configure ERP systems to support TP needs or implement add-on or bolt-on tools. For example, in the area of data extraction and workflow management, entity charting, document storage, real time reporting, scenario planning and data interrogation.
Yesterday's TP world
- During design, implemention and maintenance of the company's business model in most cases the company's ERP system is not configured in such a way that relevant intercompany transactional data can be automatically generated or specific high risk intercompany transactions monitored realtime.
- Often TP work is a manual process from data gathering through analysis and beyond. Data is often gathered from various source systems, received in 'wrong' formats and thus has to be manipulated first to get it 'ready' for its needs.
- Many multinationals still save documents on the hard drives of local computers and / or local servers without central access.
- TP process owners have to use MS Word/ Excel and possible SharePoint if there is a central data storage.
- Spreadsheets are usually found at critical points in the audit trail and are often designed by non-specialists with no system expertise. There is most likely no dedicated IT support to the tax function.
- Working with complex Excel sheets that contain (TP specific homegrown) formulas is risky as for the effectiveness of a control framework you have to rely on work performance and accuracy of your SMEs and preventive and detective controls to manage (e.g. operational) risks. According to a Big 4 survey nearly 70 percent of respondents said they use spreadsheets to perform ongoing legal entity reconciliations.
- Manual processes due to human error increases tax risk - data is manipulated outside the system and need tax controls to properly manage - but causes also workforce inefficiencies as getting access to the relevant transactional data is a cumbersome and time consuming exercise.
- TP adjustments are in the rule done at Year End as a lump sum. Only sophisticated companies have a periodical forecasting process and conduct price adjustments to avoid substantial Year End adjustments.
- TP planning, implementation and periodical assessment(s) are normally done on a profit and not on a transactional basis (consolidated versus individual).
- The inherent risk is in practice often that what has initially designed and contractually agreed is not in line (anymore) with the (current) factual reality. The financial data could disclose what is really occurring from a business model perspective. For example, more local risks could for example exist due to (new) services, supply of goods, sales support, amount of employees and their skill set / roles.
More time spent on compliance could negatively affect cash flow
Tax transparency - access to quality data
According to a Big4 survey 21% of respondents spend more than 50% of their time gathering data. Only 7% of survey respondents’ tax departments spend more than 50% of their time analyzing data.
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According to Big4 survey finds the large majority do not have a tax technology strategy in place and/or have a dedicated tax technology role within their company.
System accessibility and data accuracyNot only finance but also tax needs access to data that shows how transactions are processed and how IT systems are set up. Data integrity is an operational risk factor when transactions are booked in any given country and are not properly evaluated for tax purposes.
It could that the financial data in the system does not reflect the business model design or that change is not properly managed.
Accessible across the business Direct tax will become more concerned with the details of the intercompany transaction; what product or service are performed; who the actual order taker is; intercompany margins, deviations per product, goods flows and periods and the terms upon the transaction has taken place. That is also the overlap with indirect tax data needs.
In the current 'as is' it is often already a challenge to get access to the relevant tax data that must be reported to regulators, investors and tax authorities in every business unit and country in which a company operates.
The new tax world - anticipate what users would want
Many countries are implementing the BEPS recommendation, i.e. master- and local file and CBC reporting due to the new regulations. These regulations will heavily increase the TP compliance work, but will also highlight bugs and errors which were not visible before.
The tax authorities or external auditors will investigate the parameters of a company's tax strategy.
One of the cornerstones of the OECD BEPS is Country-By-Country Reporting (CbCR).
CbCR contains detailed financial and tax information about the global allocation of income and taxes. CbCR applies where the ultimate parent company has its tax residence. If the parent company taxing jurisdiction has not implemented CbCR, a obligation might exist in the jurisdictions where business is conducted. In addition to the CbCR, countries might request a master file detailing the transactions and activities of the group as a whole, as well as a local file detailing the company’s local business operations.
OECD CbC Reporting XML Schema
User Guide for Tax Administrations and Taxpayers March 22, 2016
The high pace of legislative change has created more risk and uncertaintyMNCs should have an efficient governance process in place to manage BEPS queries. A shift in roles and responsibilities within the transfer pricing documentation process is one of the areas that should probably be assessed.
Countries are implementing mandatory global tax disclosure statements that for example provide information of entities with legal ownership of IP, entities that have no assets or substance (i.e. holding companies).
Such disclosures increases operational compliance tax risks. Central storage and access to this relevant information is required.
Increased tax uncertainty and disputes
- IP taxation will be nowadays more aligned with the location of economic activity and value creation causing multinationals to reevaluate their global IP supply chains.
- Countries like the UK and Australia fine companies that are artificially diverting taxable profits from their shores.
- The new reporting trend requires also closer coordination of headquarters that has relevant knowledge of the global ownership of IP and legal structures.
Tax technology strategy
'Value proposition' According to a Big4 survey 77% companies surveyed do not have a tax technology strategy, and the majority of those have no plans to develop one. Such a strategy is important to set priorities for the short, mid and long term and get timely buy in from senior management.
Anticipate technology needs and requirements
A tax technology strategy describes how certain tax technology could support company's tax operations (e.g. eliminate validation and manipulation tasks and reduce time on collecting data, embed automated controls, etc.) and rank solutions as 'essential', 'nice to have' or 'irrelevant'. Clear measures and targets make it possible to quantify the expected return. A good understanding of 'as is' tax processes and their performance, what is available in the technology market respectively in-house IT knowhow is important.
It is therefore essential for defining such strategy that the tax function has an excellent relationships with senior management, finance/accounting and IT as a mutual understanding of the impact of the company's tax challenges and solutions should exist to realize that investment budgets are actually made available.
Define the tax requirements
Cross-reference taxpayer information and share among governments and agencies
The goal is that via the Country-by-Country reporting tax administrations, where a company operates, will get aggregate information annually, starting with 2016 accounts, relating to the global allocation of income and taxes paid, together with other indicators of the location of economic activity within the MNC.
The first CbCR will cover fiscal years beginning after January 1, 2016
It will also cover information about which entities do business in a particular jurisdiction and the business activities each entity engages in.
The information will be collected by the country of residence of the MNC, and will then be exchanged through exchange of information supported by such agreements as signed today. According to the OECD, the first exchanges will start in 2017-2018 on 2016 information.
On 28 January 2016, the EU Commission published its Anti Tax Avoidance Package. The package is part of the Commission's ambitious agenda for fairer, simpler and more effective corporate taxation in the EU.
Apple’s, Google's and Coca Cola’s tax assessments are material from an annual report perspective besides financial risks contain reputational risks.
- Italian tax police believe Google evaded 227 million euros in taxes.
- Apple has agreed to pay €318m (£235m, $348m) to Italian tax authorities following a two-year fraud investigation, according to reports.
- Google agreed to pay the UK treasurer £130 million ($185 million) in back taxes, covering the period since 2005, and to also pay higher taxes in the future.
- France is seeking 1.6 billion euros ($1.76 billion) in back taxes from U.S. Internet giant Google. Although the tax topic is related to the existence of a permanent establishment in France or not, it is at the end of the day a TP question in the sense what would have been the proper transfer pricing between a French and a foreign subsidiary. Investigators raid Google Paris HQ in tax evasion inquiry (May 24, 2016 - Reuters).
- Facebook (FB, Tech30) disclosed on Thursday that it could owe billions due to an IRS investigation into the way it moved assets to an Irish subsidiary to avoid higher taxes.The IRS tax penalty could total $3 billion to $5 billion, plus interest, according to a Facebook filing with the Securities and Exchange Commission. If so, Facebook says the penalty could have a "material adverse impact" on its financial position. CNN Money
- Will the current tax strategy change when the Executive has to sign off?
- Will ‘tax assurance’ mandatory be reviewed by External and Internal Auditors?
- How will assessments take place (e.g. data analytics)?
Assessments performed by tax administrations or external auditors could make new tax risks visible: does economic substance exist, compare profitability with number of employees and total amount of labour costs, what is the total overall tax contribution, etc.
In addition the EU Commission is challenging countries on their current advanced pricing agreements (APAs) between taxpayers and tax authorities. That causes tax uncertainty.
Real-time monitoring of individual intercompany transactions is a 'must have' to manage tax risks properly. TP is under higher scrutiny and therefore TP teams will put more emphasis on managing the IC prices during the year instead of Year End. Retrospective TP adjustments require also VAT adjustments through credit notes/new invoices and VAT returns and 'fair tax' could be monitored by auditing other taxes.
Value-chain analysisBesides that it is important that the financial data (still) reflects what has been initially designed and contractually agreed (substance over form).
The root cause of tax material weaknesses are often caused by a lack of review, being underresourced, lack of right skill set or simply poor process execution or implementation.
Example is an entity which was previously characterized as a contract manufacturer, this means that the entity is only acting on instructions from the HQ. If the financial data show that purchases come from China, resulting in stock provisions on the balance sheet, and FX results because sales is in EU, the transitions will challenge the contract manufacturer status.
As more governments adopt tax transparency measures, compliance costs, such as processes, controls, and IT systems, will likely increase also due to IT-driven tax audits
How important is ongoing monitoring of proper implementation of advice and easy access to data?
Produce large volumes of data in new formatsTax authorities around the world investing in better tools (IT-driven audits: data analytics). Some countries want either direct access to systems or have implemented OECD's Tax Audit Files for tax purposes to improve the efficiency of tax audits.
The SAF-T is intended to give tax authorities easy access to the relevant data in an easily readable format for both corporate income tax as VAT.
Benchmarking provides objective evidence. It can show whether or not you have achieved your objective set such as a 'mature' tax function' or make visible what needs to be done to make that happen. It might provide the extra arguments to realize change and get buy-in.
Benchmarking yourself against your peers
The slide deck starts with a trend overview of the author and subsequently relevant tax survey findings were gathered that relate to these trends spotted.
The complete overview is relevant from a priotization and tax strategy perspective.
According to a Big4 survey the majority of respondents (more than 90%) rely on shared drives and e-mail as the primary documentation management approach.
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 an EY partner where he led the indirect tax performance team for Netherlands and Belgium. Currently, he is a managing director of SAP Tax Consultancy Firm.
Richard has over 20 years of experience advising clients on international VAT issues. He is specialized in the tax aspects of financial transformations, shared service center migration, and post-merger integration work.
What is the Multilateral Competent Authority Agreement
The Multilateral Competent Authority Agreement (“the MCAA”) is a multilateral framework agreement that provides a standardised and efficient mechanism to facilitate the automatic exchange of information in accordance with the Standard for Automatic Exchange of Financial Information in Tax Matters (“the Standard”). It avoids the need for several bilateral agreements to be concluded.
Multilateral Competent Authority Agreement
‘Country-by-Country reporting will have an immediate impact in boosting international co-operation on tax issues, by enhancing the transparency of multinational enterprises’ operations,’ said OECD Secretary-General Angel Gurría.
‘Under this multilateral agreement, information will be exchanged between tax administrations, giving them a single, global picture on the key indicators of multinational businesses. This is a much-needed tool towards the goal of ensuring that companies pay their fair share of tax, and would not have been possible without the BEPS Project.’
EU - Anti Tax Avoidance Package
The Anti Tax Avoidance Package is part of the Commission's ambitious agenda for fairer, simpler and more effective corporate taxation in the EU.
The Package contains concrete measures to prevent aggressive tax planning, boost tax transparency and create a level playing field for all businesses in the EU. It will help Member States take strong and coordinated action against tax avoidance and ensure that companies pay tax wherever they make their profits in the EU.
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The Chapeau Communication outlines the political, economic and international context of the Anti Tax Avoidance Package and gives an overview of the different elements.
Anti Tax Avoidance Directive
The Anti Tax Avoidance Directive proposes six legally-binding anti-abuse measures, which all Member States should apply against common forms of aggressive tax planning.
It aims to create a minimum level of protection against corporate tax avoidance throughout the EU, while ensuring a fairer and more stable environment for businesses.
The proposed Directive sets out six key anti tax avoidance measures, which all Member States should apply:
- Interest limitation rule
- Exit taxation
- Switch-over clause
- General anti-abuse rule
- Controlled foreign company legislation
- Hybrid mismatches
Revision of the Administrative Cooperation Directive
The revised Directive proposes country-by-country reporting between Member States' tax authorities on key tax-related information on multinationals operating in the EU.
These new transparency provisions will allow all Member States the information that they need to detect and prevent tax avoidance schemes.
The recommendation on Tax Treaties
The Recommendation advises Member States how to reinforce their tax treaties against abuse by aggressive tax planners, in an EU-law compliant way. It covers the introduction of general anti-abuse rules in tax treaties and the revision of the definition of permanent establishment.
Communication on an External Strategy for Effective Taxation
The External Strategy presents a stronger and more coherent EU approach to working with third countries on tax good governance matters. It also sets out a process to create a common EU list of third countries for tax purposes.
External Strategy for effective communication - document 1
External Strategy for effective communication - document 2
Study on Aggressive Tax Planning
The study looks at Member States' corporate tax rules (or lack thereof) that can facilitate aggressive tax planning and key structures used by companies to avoid taxation.
It includes factsheets with the main findings for each Member State and examples of tactics used by multinationals to lower their taxes.
- Video - Anti Tax Avoidance
- Chapeau Communication
- Anti Tax Avoidance Directive
- Revision of the Administrative Cooperation Directive
- Recommendation on Tax Treaties
- Communication on an External Strategy for Effective Taxation
- Study on Aggressive Tax Planning
- Press release
- Questions and answers
- Staff Working Document
- Tax Transparency Package
- Action Plan on Corporate Taxation
- Tax good governance in the world as seen by EU countries
OECD BEPS Webcast - June 16, 2016