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Global Tax Controversy
Susan BennettErnst & Young LLP
Houston, TX
Americas Tax Director –
Engineering and Construction
Rob HansonErnst & Young LLP
Washington, DC
EY Global Tax
Controversy Leader
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The global business environment is changing
► 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
Technology
shift
► 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
Demographic
shift
► 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.
Digital
shift
► 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
Economic
shift
Disruptors
Global
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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.
Aggressive tax enforcement continues
to increase as tax authorities look for
more ways to collaborate and share
information, particularly on cross-border
transactions.
Enforcement 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.”
Reputational risk Operational risk
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.
Legislative risk
Impacts planning, accounting and compliance
Four trends driving the global increase in tax controversy
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“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)
“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
Tax burden increases as a result of increased enforcement are forecast in 62%more countries in 2017 – EY 2017 Global tax policy outlook
The view of global tax policy leaders
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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. No41% 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
41%
Argentina
Australia
Belgium
Canada
Brazil
China
Costa Rica
Cyprus
Deteriorating enforcement landscape
Consistent enforcement landscape
Improving enforcement landscape
Czech Republic
Denmark
Dominican Republic
El Salvador
Fin
land
United StatesFrance
Germany
Guatemala
Greece
HondurasHong Kong
Hungary
India
Indonesia
Ireland
Italy
United Kingdom
JapanLuxembourg
Malaysia
Dominican Republic
Netherlands
New Zealand
Norway
Nicaragua
Philippines
Panama
Poland
Russia
Singapore
South Africa
Spain
Slovakia
TaiwanSwitzerland Turkey
ThailandVietnam
Venezuela
Mexico
Israel
Source: EY Global tax policy outlook, 2017
Has the enforcement landscape improved, deteriorated or stayed the same?
Remember: this is just year-on-year change – a country may already have had a challenging approach.
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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 1,400respondents 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…
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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.
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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 2017.
► 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 2017.
► Multinational Anti-Avoidance Law (avoided PE treaty override) applies to SGEs and benefits obtained on or after 1 January 2016.
► GPFS reporting to ATO by SGEs applies to financial reporting periods commencing from 1 July 2016.
► Tighter thin capitalisation rules enacted for income years commencing on or after 1 July 2014.
► 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 2018.
► Common Reporting Standard legislation applies from 1 July 2017 and initial exchange of information with foreign tax authorities will take place in 2018.
► 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 2017.
► 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.
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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 2017.
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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
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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
2016.
► 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 2017.
► 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”
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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)
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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
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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
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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.
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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).
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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
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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% said that Tax Controversy
management has become much
more or somewhat more important
for their company in the last two
years
64%
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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
Complete27%
Substantial27%
Partial13%
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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
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Putting it into practiceHave you run a risk assessment and solutions evaluation workshop?
Assessing
existing
structures
& rulings
► Understanding current controversy activity
► Assessing existing structures in the light of a post BEPS environment
► Benchmarking areas of strength/weakness
► Reviewing existing rulings
► Supporting tax provision position
Establishing
a global
controversy
strategy
► Planned approach to coordinated multi-country 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)
Managing
reputational
risk
► Reputational awareness
► Assessing possibility of a proactive approach
► Active preparation for crisis management
► Supporting external tax communication strategy
Moving to
acceptable
structures
► Moving to a post-BEPS legal framework
► Aligning functions and substance
► Proactively managing the transition so as to reduce rather than increase historic risks
Mitigating
the risk
of double
taxation
► Assessing treaty changes – MLI and “traditional” treaty changes
► Creating a platform for world-class MAP/arbitration/ADR
► APA / BAPA / MAPA
► Multi-sided analysis
► Ensuring US FTC offset available
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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.
Client scenario - how
EY helped
Customizable
reporting of a
company’s tax
controversy
around the
globe.
Global controversy tracking and managementGain a world of insight through one powerful tool
The client had no process or central database for
monitoring global controversy.
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Bringing it all togetherA global approach to Tax Controversy
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
Go
global
Assess
open
issues
Underpin with
policies and
procedures
Present a
consistent
defense
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