global tax controversy management focus: digital economy · 2019-10-10 · 18 taking control of the...

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Global Tax Controversy Management

Focus: Digital Economy

Avisha Sood, Senior Manager, TPA Global

October 10, 2019

2 Taking control of the future tpa-global.com

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?


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



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

https://www.tpa-global.com/webinars



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/

https://www.gtc-global.org/news/global-workshop-talk-tax-boardroom/



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.)


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).


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


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


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


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


Value chain of a Data factory (Web streaming service)



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.


Value chain of a Data factory (mobility solution)



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.


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


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:


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


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


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


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


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


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

tpa-global.comTaking control of the future

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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Step 2: Identifying your high-riskcountries


Changing landscape: New legislations

Country of destinationprevailing

Economic Principles

Country of sourceprevailing

Legal PrinciplesCCCTB

EU digital Economy

BEPS

Unilateral standards

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Step 3: Selecting an appropriatedispute avoidance instrument


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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Step 4: Adopt a global approach to taxcompliance


Global approach to tax compliance


Global approach to tax compliance: RACI Framework (Illustration: Tax/TP framework)

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Step 5: Manage in-house challenges


In-house challenges


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


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?


Avisha SoodSenior ManagerTPA Global, the Netherlands

Speaker Contact Details

http://www.tpa-global.com/a.sood

https://www.tpa-global.com/dv/page18673/contact/dv/professional17076


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/

https://www.tpa-global.com/webinars

https://www.gtc-global.org/news/global-workshop-talk-tax-boardroom/


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).


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.

H.J.E. Wenckebachweg 210 . 1096 AS Amsterdam . The Netherlands . +31 (0)20 462 3530 . tpa-global.com

The views expressed and the information provided in this material are of general nature andis not intended to address the circumstances of any particular individual or entity. The abovecontent should neither be regarded as comprehensive nor sufficient for making decisions.No one should act on the information or views provided in this publication withoutappropriate professional advise. It should be noted that no assurance is given for any lossarising from any actions taken or to be taken or not taken by anyone based on thispublication.

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global tax controversy management focus: digital economy · 2019-10-10 · 18 taking control of the...

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