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Global Tax Controversy Management
Focus: Digital Economy
Avisha Sood, Senior Manager, TPA Global
October 10, 2019
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Index
• Introduction• Types of disputes concerning digital economy
• Companies undergoing a (full or partial) digital transformation• “Fully digital” companies
• Unilateral and global measures to taxing digital economy • OECD, EU-wide measures• Individual country regulations
• Dispute avoidance vs. dispute resolution• Dispute resolution – measures, processes, timelines and effectiveness• Dispute avoidance
• What does it mean?• What controversy management instruments are available?• How to choose an instrument most suited to your value chain?• What are the key components of designing a ‘controversy management roadmap’?
• Final Remarks and highlights• Questions
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Introduction
Have disputes increased?
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Where are we witnessing most disputes post-BEPS?
3 main categories :
1. Traditional structures: Existing agreements challenged (ref.: State aid)2. Excessive reporting requirements + personal liability (most recent: DAC 6)3. Changing business models
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Where are we witnessing most disputes post-BEPS?
3 main categories :
1. Traditional structures: Existing agreements challenged (ref.: State aid)2. Excessive reporting requirements + personal liability (most recent: DAC 6)3. Changing business models
Webinar on State aid: October 30, 2019
Link to register: https://www.tpa-global.com/webinars
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Where are we witnessing most disputes post-BEPS?
3 main categories :
1. Traditional structures: Existing agreements challenged (ref.: State aid)
2. Excessive reporting requirements + personal liability (most recent: DAC 6)3. Changing business models
How to bring tax in the Boardroom?
Workshop in Amsterdam: November 15, 2019
Link to register: https://www.gtc-global.org/news/global-workshop-talk-tax-boardroom/
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Where are we witnessing most disputes post-BEPS?
3 main categories :
1. Traditional structures: Existing agreements challenged (ref.: State aid)2. Excessive reporting requirements + personal liability (most recent: DAC 6)
3. Changing business models
Digitising existing models
Example: traditional shops restructured to omni-channel
sales
New (fully digital) models
Example: Platform economy (Uber, Netflix etc.)
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Changing landscape: New value chains
• Data and information do not feature in Porter’s value chain.
• Steps in Porter’s value chain do not address multiples geographic locations.
• Describe a process where inputs are converted to outputs in a sequence (e.g. traditional manufacturer).
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Changing landscape: New legislations
Country of destinationprevailing
Economic Principles
Country of sourceprevailing
Legal PrinciplesCCCTB
EU digital Economy BEPS
Unilateral standards
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Types of disputes concerning digital economy
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Digitising existing models: Case 1
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Apparel Industry: Changing Value Chains
Strategy and design Manufacturing Warehousing Transportation
and logistics Sales (Stores)
Setting global strategy and creating designs based on market trends
Producing assets Storage of final goods
Planning, implementing, and controlling procedures for the efficient and effective transportation of goods
Distribution to costumers through establishments
Data analysis Manufacturing Warehousing Transportation and logistics
Sales (Customers)
Value chain of a traditional retailer model
Identifying trends through big data (e.g. machine learning), social buzz, RFID, amongst others
Optimized production of assets in line with consumers demand
Optimized inventory data in real time
Control of transportation of goods and accurate forecast in real time through technology tools
Direct distribution to customers
Value chain of a “digital economy” impacted retailer model
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Apparel Industry: Online Puts Pressure on Existing Sales Channels
Retail apparel industry margins over the years
Year 2014 2015 2016 2017 2018Pre-tax margin 11% - 12% 10% - 11% 6% - 8% 6%-7% 6%
Source: CSIMarket
Questions
- Would you use an APA for sales & marketing in this industry?- How to deal with a change in business models from a tax controversy perspective?
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Digitising existing models: Case 2
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Automotive industry – Digital Economy Impacted product Value Chains
Inbound logistics Operations Outbound
logisticsSales and marketing Services
Purchase parts from a network of OEMs
Warehousing and Delivery to manufacturing unit
Liaise with technology firms, app developers and innovators to adopt latest and unique developments
Network of shared garages, parking spaces
Processing of innovative solutions to Manufacture a vehicle
Warehousing
Delivery to distribution unit
Collection of data from vehicle and processing
Network of distributors and dealers
Network of hotels, parking garages
Deliver services and the connection to your car through apps
promotions, advertising, distribution, sales force management, customer relationship management
Deliver services and the connection to your car through apps
Online advertisements and route sales to original car manufacturer
Customer support provided via mobile app
Regular maintenance for certain issues, performed automatically from remote
Network partners
Self-improving Technology used in building car
Collected customer data such as movement and use data, vehicle and personalised data etc.
Processing of data to improve products and services (for e.g.: provide customer service via remote location)resolve customer issue=
Brand name/logo on the car
Partner network
Collected Customer data such as location, preferences in car type, payment methods, credit history
Customer base
Collected Customer data such as location, preferences in car type, payment methods, credit history
Collected Customer data such as complaints with the car, time taken to resolve, frequency of complaints etc.
Des
crip
tion
Key
asse
ts(In
tang
ible
s?)
Changes based on the impact of digital economy are marked in red
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Intangible or service?
Functionality
Tool/Platform
Recording/ collection
of raw data
Internal transfer of
data for processing
Data Extraction
Quality control
Storage in cloud
Proper storage,
coding of data,
contractual agreements
Analysis/ bundling
and Processing
of data
Own exploitation or Transfer of data to external parties
Platform 1 (Development of raw data) X X
Platform 2 (Enhancement of data/ preparation for processing)
X X
Platform 3 (Day-to day maintenance and storage of data)
X
Platform 4 (Protection of data) X
Platform 5 (Transformation of data into usable information)
X X
TP classification as an intangible or
service
(as per Chapter VI of OECD TP guidelines)
Chapter VII
Chapter VII/ Chapter VI
Chapter VII
Chapter VII
Chapter VI/ Chapter VIII
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New (fully digital) models:Case 3
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Value chain of a Data factory (Web streaming service)
Inbound logistics Operations Outbound
logisticsSales and marketing Services
Licenses of TV/movie rights i.e. licenses from content creators/providers
Building and managing website and improving the streaming platform
Collecting data from end users and processing it to be able to offer content most in demand
Ensuring servers and websites are functioning properly
Liaising with telecom providers to use their internet and/or mobile services to broadcast in-licensed content
Online or TV advertisement
Free trial month
Online support
Troubleshooting on the website
Ensuring website is running smoothly
Key characteristics:
- An asset light industry due to no costs in content creation or building infrastructure for distribution.
- Draws return on its capability to collect and process data from customers to be able to offer improved customer experiences.
- Pays a much smaller commission to content creators/distributors as well as to internet service providers as compared to that earned by them in their traditional value chains.
- Follow a return on data instead of a return on investment model based purely on customer - Examples: Netflix, Amazon Prime etc.
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Value chain of a Data factory (mobility solution)
Inbound logistics Operations Outbound
logisticsSales and marketing Services
A large network of car providers (manufacturers, drivers, distributors)
Network of consumers connected via an app
Building and managing app/website and improving the streaming platform
Collecting data from end users and processing it to be able to offer highly customised and accurate services
Network of cloud storage space providers
A wide network of users
Ensuring servers and app are functioning properly
All sales of mobility services carried via app
Advertising and marketing online or through users
All support on mobility and complementary services provided via app
Key characteristics:- This value chain is emerging alongside the technological advancements in manufacturing vehicles. As of now, this sector is dominated by new
players who currently rely on drivers to use their own vehicles to provide services. - However, moving forward, such service companies could be an integral part of the automotive industry’s value chain as the provider of the vehicles
to end customers as a service. - Examples of peer group: Uber, Taxify etc.
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Main disputes on these value chains
Describe a process where inputs are converted to outputs in a sequence (e.g. traditional manufacturer)
• Data and information do not feature in Porter’s value chain.
• Each link in the value chain cannot anymore be linked to a geographical location.
• Thus, the only thing that still remains in each location: USERS
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Unilateral and global measures for taxing digital economy
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OECD and EU Measures
OECD Latest proposals:
- Pillar 1: Revised Nexus and Profit Allocation rules- User participation- marketing intangibles- significant economic presence
Unified approach?
EU latest proposals:
- Short-term Measure: Digital Services Tax i.e. a 3% interim tax on gross revenues of a digital business, characterised by user value creation.
- Long term Measure: Based on Significant Digital Presence, which will be deemed to exist when one or more of the following conditions are met: - More than EUR 7 million annual turnover in one Member State in a tax period;- More than 100,000 users in a Member State in a taxable year; and- More than 3000 contracts for digital service supply in a taxable year
- CCCTB: Formulary allocation based on:
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Unilateral Measures - EU
Country Global Revenue Threshold
Domestic Revenue Threshold Tax Rate Scope Status
Austria (AT) €750 million €10 million 5% Online advertising Proposed
Belgium (BE) €750 million €50 million in the EU 3% Selling of user data Proposed
Czech Republic (CZ) €750 million €2 million 7%
· Placing targeted advertising on digital interfaces· Use of multilateral digital interfaces· Sales of data collected about users of digital services
Announced
France (FR) €750 million €25 million 3%
· Provision of a digital interface to enable users of platforms to interact with each other in order to exchange goods or services· Advertising conducted on digital interfaces· Resale and management of personal data for advertising purposes
Approved by French Senate and National Assembly. Waiting for President Macron’s signature to be enacted.
Hungary (HU) 100 million HUF (€306,890) N/A 7.5% Advertising revenue Implemented
Italy (IT) €750 million €5.5 million 3%· Advertising on a digital interface· Multilateral digital interface that allows users to buy/sell goods and services· Transmission of user data generated from using a digital interface
Proposed
Poland (PL) – – – – Deputy finance minister indicated that Poland will introduce digital taxation. A formal proposal is expected.
Slovenia (SI) – – – –
The Slovenian Ministry of Finance on June 20 announced a government proposal to submit a draft bill to the National Assembly introducing a digital services tax. No details published yet.
Spain (ES) €750 million €3 million 3%· Online advertising services· Selling of online advertising· Selling of data
ProposedThe Spanish Parliament rejected the government’s proposed budget bill for 2019, which included the digital services tax. However, the DST discussion will likely be re-introduced.
United Kingdom (GB)
£500 million (€554 million) £25 million (€28 million) 2% Revenues of search engines, social media platforms, and online marketplaces Proposed
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Unilateral Measures – non-EU
- Australia: Multinational Anti-Avoidance Law
- New Zealand: Digital Services Tax
- Israel: New Nexus and Significant Economic Presence Test
- India: New Nexus and Equalisation Levy
- Saudi Arabia: Virtual PE
- Taiwan: New Nexus rules
- Turkey: Withholding Tax on E-payments
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Commonalities between these measures
Change of balance of power in favour of source jurisdictions i.e. even when investment into development of intangibles is made by parent/residence jurisdiction, the source jurisdiction is allocated rights to tax income from it.
Application of the tax on revenue as opposed to profit
Increased reliance of “users”
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Dispute avoidance vs. dispute resolution
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Controversy Management Instruments
Multi-lateral
Re-active Pro-active
Uni-lateral
Multi lateral APA
ISO certificate
G20/OECD listings E.g.: Exchange of information
Safe harbors
Mediation
Pre-audit settlementAPA
Tax Audits
JointTaxAudits
EU Arbitration Conventions
EUCommissionInvestigation
Source: TPA Global Dispute Avoidance and Resolution Matrix
Arbitrage committee under investment treaty
Local courts
MAP
Tax Rulings
MAP
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Dispute Resolution
Source: TPA Global Dispute Avoidance and Resolution Matrix
Timeline of Evolution of International Instruments for dispute management
Even with these changes, time to resolve = 3-5 years+, depending on the country
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Benefits of a proactive attitude towards disputemanagement
Procter and Gamble has obtained APAs in over 17 countries, most of which are bilateral by providing extensive detailed information backed by financials which has helped them reduce their tax provisioning from USD 4 billion to USD 500 million, which allows them to improve the quality of their earnings
YTax
provisions
Ze.g. Stateless
income
X
Reported
and taxed
(not) Reported
and not (yet) taxed
Reported
and not taxed
Returns
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Roadmap for dispute avoidance
Step 1: Understand (and explain) yourvalue chain
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Financial Reality
Understanding value chains: Qualitative
Economic Reality
Legal Reality
Operating Model
Corporate Governance
Move from Pre to Post BEPSPost BEPS
Value ChainAnalysis
Pre BEPSFunctional Analysis
Finance/Tax/TP Model
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Legal Entities
Residual: Other: Cost Plus: Cost Plus or Percentage of Operating Margin:
IP Owner Match making
Finance Activities (cash pool)
Contract manufacturing Contract R&D
Local sales or marketingoffices
Support Services (admin, legal, HR etc.)
Starting PointDetermine EBIT%
Key People FunctionsAllocation of EBIT% Allocation of People
Functions and EBIT%
Residual
Investment Center Profit Center✓Capital market/customer driven activities✓Mostly performed for stakeholders/MNE as a whole✓Core Activitye.g., IP Owners
✓Capital market/customer driven activities✓Mostly performed for external customers✓Mostly coree.g., Distribution Centers
DEMPE Functionso + Filter Match-Making
Source: TPA Global. - a Development Enhancement Maintenance Protection Exploitation Functions.
Understanding value chains: Quantitative
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Roadmap for dispute avoidance
Step 2: Identifying your high-riskcountries
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Changing landscape: New legislations
Country of destinationprevailing
Economic Principles
Country of sourceprevailing
Legal PrinciplesCCCTB
EU digital Economy
BEPS
Unilateral standards
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Roadmap for dispute avoidance
Step 3: Selecting an appropriatedispute avoidance instrument
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Residual
Oth
er
Man
ufac
turin
g
Sale
s
Services
Valuation based allocation
Residual
Royalty / interest / guarantees etc.
Manufacturing
Sales
ServicesHQ / SSC / BU
C. Main questions:- which disputes to handle?- which toolbox to use?- what timing of risk management?- what professional process to use?
What will be your Global tax risk mitigation strategy?
A. A value chain analysis after BEPSB. Dispute avoidance / resolution toolbox
• Multilateral APAs• EU Arbitrage Court• MAP
• Mostly through audit process
• As sub part of APA
• Unilateral APAs• Mililateral APAs / industry standards
• ISO Cetificate• Safe Harbor
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Linking tax controversy management instruments with value chain analysis
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Roadmap for dispute avoidance
Step 4: Adopt a global approach to taxcompliance
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Global approach to tax compliance
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Global approach to tax compliance: RACI Framework (Illustration: Tax/TP framework)
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Roadmap for dispute avoidance
Step 5: Manage in-house challenges
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In-house challenges
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Summary
Staying out of trouble
Fully in control
Understand your value
chains
5
4
3
2
1
Identify your high-risk countries
Carefully select a dispute avoidance
instrument
Adopt a global approach to tax
compliance
Manage in-house challenges (HR, IT
and succession planning)
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Final remarks and highlights
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Run it through consistent storyboard/ VCA + “fit for purpose” FAQs
Question/ anticipated questions from tax authorities (i.e. before or in the year of your intercompany transactions)
Step 1
Adopt a controversy management instrumentbased on your value chain
Yes (i.e. answer located in the storyboard/ FAQ and it is accepted by tax authority)
No further controversyinstrument needed until audit
No (i.e. either no answer located in the storyboard/FAQ or it is accepted by tax authority)
Check the CONTENT required by the localcountry for your chosen instrument based
Step 2
No
Too much unpredictable contentrequest or multiple rounds ofadditional information requested*
Content request is more or less similar to ICAP process
Yes
Step 3
Check the PROCESS required by the localcountry for your chosen instrument based
No
>12 - 24 months (depending onseverity of the case) from the dateof disclosure of content*
Process is more or less similar to ICAP process
Yes
No
i.e. likely to change within the next 1-2 years
Yes
Choose and APA/ BAPA*
Wait until audit
Step 4
Stability of business model i.e. how compatibleis your current business model to stay the samefor the next 3-5 years.
*Note: In case the deviations on process and/or content persist significantly beyond the norm or no economic/econometric/statistical defense is given by the tax authorities i.e. the reasoning is more politically driven than an actual intention to resolve disputes, your best alternatives may be to choose from:
- Local courtroom litigation against local tax authority
- MAP procedure- EU Arbitration Convention- Mediation Procedure with local government
and/or tax authority- Filing claims against local governments
Decision tree on managing controversy – Standards
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Questions?
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Avisha SoodSenior ManagerTPA Global, the Netherlands
Speaker Contact Details
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Upcoming events
Webinar on State aid: October 30, 2019
Link to register: https://www.tpa-global.com/webinars
How to bring tax in the Boardroom?
Workshop in Amsterdam: November 15, 2019
Link to register: https://www.gtc-global.org/news/global-workshop-talk-tax-boardroom/
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TPA Global
Who we areTPA Global is a world leading professional services and solutions partner that operates through a global members network. Ourglobal team consists of 2000 professionals who are experienced in the area of Transfer Pricing & BEPS, Value Chain Analyticsand Technology Solutions. We understand the multiple requirements of multinationals and deliver pragmatic solutions for ourclients.
Our solutionsWe offer Transfer Pricing & BEPS related services, full value chain analyses for multinationals along with a variety of tax,business and educational technology solutions.
Your benefits• Full synchronization of financial data with tax and operating models;
• Global tax compliance;
• Pro-active Risk Management;
• Efficient management of in-house challenges (HR, IT, Training and succession planning).
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https://www.tpa-global.com
TPA Global serves international businesses with integrated and value-added solutions. To ensure the highest quality and seamlessservice provision, thereby meeting international standards and regulations, a global network of dedicated professionals and specialistsis a key and determining factor. Please select the region and contact our specialist in the country of choice.
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TPA Global provides international businesses with integrated and value-addedsolutions in improving financial performance, operational efficiency, strategicdevelopment and talent coaching through a cross-border and cross-discipline teamof professionals which identifies the right solutions for customers and targets;efficient and streamlined advisory and implementation processes which cutthrough operational complexities across functions and borders; and superiorcustomer service and support which proactively anticipate the evolving needs ofthe clients.
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