Global Tax Disputes Update - March 2015 issue

Global Tax Disputes Update - March 2015

Welcome to the March 2015 edition of our quarterly Global Tax Disputes Update, bringing you the latest news in tax controversy around the world.

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With tax audit and dispute activity rising in almost every country, keeping up with trends and developments is more important than ever. In this edition, you'll find briefings on key news, events and thought leadership submitted by Global Tax Dispute Resolution & Controversy professionals in KPMG member firms worldwide. Staying informed can be a crucial first line of defense as you manage your disputes around the globe.

Make sure to view our past issues of Global Tax Disputes Update.

FOCUS ON TAX DISPUTE RESOLUTION AND CONTROVERSY

  • Australia – New first step for new APAs and renewals
  • Australia – Final guidance on transfer pricing released 
  • Australia – Year-end transfer pricing check-up
  • Belgium – New wave of transfer pricing audits
  • Brazil – São Paulo offers amnesty program
  • Brazil – Court rejects ICMS assessment made under ‘Red Carpet Operation’
  • Brazil – Tax authorities announce 2015 audit plan 
  • Canada – Court reverses CRA’s findings about research tax credit 
  • China – New guidance on China’s GAAR
  • Czech Republic – Tax authorities focus on transfer pricing 
  • European Union – EU Commission sets sights on state aid
  • European Union – EC’s investigation into Amazon’s transfer pricing deals with Luxembourg
  • France – Enhanced penalty for failing to meet demands for transfer pricing documents
  • Greece – New Greek government focuses on combatting tax evasion
  • Greece – New guidelines on APA procedures
  • India – First bilateral APA with Japan
  • Indonesia – New tax information exchange agreements ratified
  • Luxembourg – Advance tax rulings, transfer pricing rules codified
  • Malaysia – Important changes to Monthly Tax Deduction rules
  • Netherlands – Appeals court issues decisions in fiscal unity cases
  • New Zealand – Inland Revenue finalizes view on debt capitalization
  • Nigeria – ‘Actual profit basis’ required for non-residents’ returns 
  • OECD – BEPS Action Plan – discussion drafts and guidelines released 
  • OECD – Implementation guidance for country-by-country reporting
  • OECD – Initial impressions on discussion draft on MAP
  • South Africa – Tax authority’s power to request data trump prescription?
  • Switzerland – Agreement with Australia enables automatic tax information exchange
  • United Kingdom – HMRC opens consultations on closure rules for tax enquiries
  • United Kingdom – HMRC risk reviews increasingly favor evidence over trust
  • United Kingdom – UK government takes more action to tackle evasion and avoidance 
  • United States – A peek behind the curtain: LB&I International Practice Units• United States – Congress reacts to OECD BEPS project
  • United States – Competent authorities debate sovereignty and arbitration
  • United States – Final regulations on reporting foreign financial assets
  • United States – IRS 2014–2015 Priority Guidance Plan updated
  • United States – IRS budget cuts ‘devastating’, Taxpayer Advocate report says
  • United States – IRS releases user guide for FATCA-IDES system
  • United States – New regulations on research credits for internal-use software
  • United States – Taxpayers not ready for Transfer Pricing Roadmap

Australia – New first step for new APAs and renewals

The Australian Taxation Office (ATO) has introduced a new first step for the advance pricing arrangement (APA) process – known as the ‘Triage Review Panel’. The panel’s purpose is to:

  • allow the ATO to identify any significant risks upfront
  • decide whether the APA progresses to an APA pre-lodgment meeting
  • provide initial recommendations and specify key information that will be required.

What is the effect for taxpayers? Now much of the technical work that needs to be undertaken for an APA submission must be done upfront (e.g. functional analysis, financial forecasting, proposed transfer pricing methodology, and collateral issues considered). Once the Triage Review Panel step has been completed, the remaining steps for the APA renewal are unchanged.

Read the article 

Australia – Final guidance on transfer pricing released

The Australian Taxation Office (ATO) released administrative guidance that allows taxpayers to alleviate the costs of preparing and retaining contemporaneous transfer pricing documentation for some or all of their international related-party dealings, provided certain eligibility criteria are satisfied.

Read the article 

Australia – Year-end transfer pricing check-up

With the first full year under the new Australian transfer pricing laws now complete, it is now time for companies to verify that their transfer pricing policies are clearly defined and appropriately supported.

Many companies may have a transfer pricing policy that establishes an overall profit-margin target achieved through periodic (e.g. year-end) adjustments. However, certain risk factors may be present, given the dynamics of complex calculations (using a mixture of budget and actual information and conducted under pressure) and the uncertainty regarding one-off ‘abnormal items’ – thus increasing the margin for error and risk.

To address these and other risks, companies need to review their transfer pricing policies and prepare contemporaneous documentation.

Read the article

Belgium – New wave of transfer pricing audits

Since December 2004, transfer pricing audits of Belgian companies have been conducted by inspectors of the special transfer pricing department of the Belgian tax administration. The magnitude of the transfer pricing adjustments made by this specialized department is considerable, making the transfer pricing department one of the more ‘profitable’ (based on adjustments per capita) departments of the Belgian tax administration. 

At the end of January 2015, a new wave of transfer pricing audits was launched, and hundreds of companies in Belgium have received or will receive a detailed request for information on their transfer pricing policy.

Read the article

Brazil – São Paulo offers amnesty program

The city of Sao Paulo offers an amnesty program for tax and non-tax debts that were due up to 31 December 2013. This amnesty program allows debt settlements and provides discounts and penalties reduction for taxpayers in São Paulo, opening opportunities for companies operating in the city.The tax debts covered by the PPI 2014 amnesty program are:

  • service tax (ISS) 
  • property transfer tax (ITBI) 
  • municipal real estate tax (IPTU). In light of the amnesty program, taxpayers located in Sao Paulo need to:
  • determine amounts that qualify for the tax amnesty program
  • develop a strategy for existing tax assessments, weighing the pros and cons of the tax amnesty program
  • consider the implications of the amnesty program on other taxes, such as on corporate income tax (e.g., effect on profit and loss, tax deductibility of payments).

Read the article 

Brazil – Court rejects ICMS assessment made under ‘Red Carpet Operation’

In a recent case1 about the Brazilian tax authority’s ‘Red Carpet Operation’ (Operação Cartão Vermelho), the Court of Appeals of the São Paulo State held that a tax assessment notice issued under the program should be cancelled. 

The Red Carpet Operation requires credit and debit card companies to provide data from ICMS taxpayers operations directly to the state tax authorities. The court ruled that the tax authorities could not access confidential data from taxpayers without a previous judicial order or specific administrative proceeding.

Further information: Marcos Matsunaga or Daniel Porto 

Brazil – Tax authorities announce 2015 audit plan

In March 2015, Brazil’s tax authorities issued their plan for determining which issues warrant a tax audit – the 2015 annual tax assessment plan. The document says the tax authorities will focus on addressing ‘abusive tax planning’ – structures that have tax avoidance as their sole purpose. The plan also sets out a list of 7 transactions or items that may trigger an audit in 2015, and how the tax authorities intend to address these issues.

Read the article

Canada – Court reverses CRA’s findings about research tax credit

Canada's scientific research and experimental development (SR&ED) tax credit program offers generous incentives for business undertaking eligible research or experimental development work. But the Canada Revenue Agency (CRA), which administers the program, sometimes disagrees with taxpayers as to whether certain kinds of work are eligible for these incentives. These disagreements can sometimes mislead a taxpayer into believing that the CRA is the final arbitrator (or the end of the line) in resolving disputes on the eligibility of projects for SR&ED incentives.

A recent tax case serves as a reminder to taxpayers not to fall subject to this misperception. In the case, the taxpayer elevated its dispute with the CRA to the Tax Court of Canada, with the court overturning the CRA’s conclusions that the taxpayer was not eligible for the SR&ED incentives on four shop floor-type process improvement projects.

Read the article 

China – New guidance on China’s GAAR

On 2 December 2014, the Chinese State Administration of Taxation released the General Anti-Avoidance Rule (GAAR) Measures following an earlier public consultation. These measures define the ambit of tax avoidance schemes and set out in detail the tax authority procedures to be followed for GAAR case selection, examination and conclusion.

Read the article

Czech Republic – Tax authorities focus on transfer pricing

In November 2014, the Czech Financial Administration published a final version of a separate appendix, to be included with income tax returns, on which taxpayers will list a summary of transactions with related parties and separately report transactions for each individual related party. The appendix is mandatory for the tax period that begins in 2014.

If a company recognizes losses or has been granted investment incentives, it would have to include in the appendix all related parties with which it conducted any transaction in the given period. In other cases, the taxpayer would have to report only the transactions with its foreign related parties.

Read the article

European Union – EU Commission sets sights on state aid

The current European Commission (EC) presidency has identified tax competition between European Union (EU) member states as a key priority. While the Commission has always policed state aid, particularly in the wake of the recent allegations in the media, the Commission is now taking a more aggressive stance.         

For example, the Commission has started investigations into Apple, Fiat Finance, Starbucks, Amazon and the Gibraltar tax rulings system. It has also written to all EU Member States asking them to provide details of all advance pricing agreements and other ‘popular’ rulings that they have issued since 1 January 2010.

If the Commission finds unlawful state aid is involved in a tax ruling, it will order the member state concerned to cancel the ruling and recover from the beneficiary the unpaid tax with compound interest going back for a period of up to 10 years. 

Both the taxpayer and the member state have the right to challenge the decision as wrong on the facts and in law. However, there are not many defenses available. Defenses of ‘legal certainty/legitimate expectation’ and of ‘impossibility to recover’ have been granted only on a few occasions out of hundreds. There are also reputational issues for to consider. 

At this stage, the extent of the investigations the Commission intends to commence is unknown – but tax and state aid are clearly high on the agenda. Taxpayers should review their tax rulings and settlements with a view to assessing the risk of state aid and where necessary, gather and retain relevant evidence ready to prepare their defense if challenged. In particular, taxpayers should check whether their rulings are arm’s length/market based and whether the national tax authority applied due diligence when issuing them. 

Read the article 

Further information: Kevin Elliot 

European Union – EC’s investigation into Amazon’s transfer pricing deals with Luxembourg

The European Commission (EC) has brought a state aid case against Luxembourg for some perpetually effective advance tax rulings given to Amazon in 2003, which effectively cap Amazon profits taxable in Luxembourg at a fixed proportion of revenues. The commission argues that Luxembourg ruling practices constitute state aid because Amazon got rulings for intragroup transfer prices that were probably wrong.

A recent news analysis by Lee A. Sheppard looks at Amazon’s structure and the EC’s case, and finds the EC’s arguments are misplaced for a number of reasons. For example:

  • The EC takes the position that the 2010 OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrators are black-letter law and that the arm's-length principle is enforceable. But the EC rejects the guideline’s central idea that there is a range of acceptable transfer prices.
  • The author says the guidelines are “like the Bible in that they can be read selectively to satisfy everyone's beliefs…. Cutting deals – politely called advance pricing agreements – is what transfer pricing has become. Transfer pricing is not enforced. It is managed. APAs are an adaptation mechanism to cope with rules that are fundamentally unenforceable.”
  • The commission seems to have missed the point that the problem was Luxembourg's definition of the tax base more than the internal pricing Amazon was permitted to use. The EC “would have been better off focusing on Luxembourg's deliberate mismeasurement of the taxable base, which is the crux of the matter. It could argue that Luxembourg's tax regime is not really a corporate income tax but a benefit program for multinationals.”
  • Luxembourg superficially has a normal corporate income tax. Its ruling practices bring it within the realm of selective advantages for multinationals. The Luxembourg regime is selective in that the principal beneficiaries are foreign multinationals.

While rejecting the EC’s arguments regarding the transfer prices at issue, the author concludes that, since tax havens define themselves by features other than rates – such as discretionary ruling practices – “it's open season for state aid arguments.”

Further information: Sharon Katz-Pearlman

France – Enhanced penalty for failing to meet demands for transfer pricing documents

The French legislative assembly on 18 November 2014 passed a draft Finance Bill for 2015, sending the bill to the Senate for its consideration. One provision in this legislation would tighten the transfer pricing penalties for a taxpayer’s failure to respond to a tax authorities’ request of transfer pricing documentation.

Read the article

Greece – New Greek government focuses on combatting tax evasion

The new Greek government has announced that it will intensify its efforts to address tax evasion in order to secure additional revenues that would allow the realization of the commitments included in its election platform.

The new Greek prime minister identified tax evasion and tax avoidance as the real reasons for the country’s current situation. Among the areas of focus are:

  • tax audits and registration of wealth
  • the possibility of a tax amnesty 
  • exchange of information on the basis of the income tax treaties 
  • regularization of income and assets.

Read the article

Greece – New guidelines on APA procedures

The Greek Ministry of Finance issued new guidelines on its the advance pricing agreement (APA) procedure. Highlights of these guidelines are as follows: 

  • An APA can be unilateral or bilateral or multilateral and it establishes a transfer pricing method in accordance with the arm’s length principle for a given time period.  Further criteria for the determination of the intercompany prices may be agreed (e.g. the comparable data to be used).  
  • The submission of an application for preliminary consultation prior to the official APA application is recommended in order to evaluate the possibilities of the application’s approval.  
  • The APA cannot exceed 4 years in duration or relate to a tax year prior to the submission of the APA application. 

Read the article 

India – First bilateral APA with Japan

On 19 December 2014, India’s tax authority, the Central Board of Direct Taxes, announced the signing of a bilateral advance pricing agreement (APA) involving a Japanese company. The APA is for a period of 5 years and was reportedly completed within 12 – 18 months.

Read the article 

Indonesia – New tax information exchange agreements ratified

Indonesia has ratified tax information exchange agreements (TIEAs) with Guernsey, Jersey, Bermuda and Isle of Man. These TIEAs are effective from September 2014.

Read the article 

Luxembourg – Advance tax rulings, transfer pricing rules codified

The Luxembourg 2015 Budget, as passed by Parliament on 18 December 2014, includes new rules for advance tax ruling process and new transfer pricing rules. On 10 December 2014, the Luxembourg Ministry of Finance released a position paper concerning tax transparency and advance rulings.

Additional guidance concerning the ATA procedure was published on 29 December 2014 as a grand-ducal decree.

Read the article 

 

Position paper on advance tax rulings

The position paper states that, among other items, under an enhanced framework for tax rulings regarding transfer prices, Luxembourg tax law would be amended to require related-party transfer prices to be set using the arm’s length principle and to set documentation requirements for transfer prices. Both amendments were included in the 2015 Budget (see below).

The paper also says the tax administration would provide an annual report (beginning with 2015) of all tax rulings issued for the year.

Read the article 

 

2015 Budget – Advance tax rulings

The Luxembourg 2015 budget formalizes the advance tax ruling (advance tax agreement) process and expressly includes it in Luxembourg tax law. Among the provisions are the following:

  • Advance tax rulings are generally valid for a 5-year period (the new law lists reasons why a ruling may be found invalid).
  • Advance tax rulings cannot result in a tax exemption or tax reduction or provide any tax advantage without any legal basis
  • Corporate taxpayers seeking an advance tax ruling will be required to pay an administrative fee. 

 

2015 Budget – Transfer pricing rules

The Luxembourg tax law (article 56) has been amended:

  • To make explicit reference to the arm’s length standard for evaluating agreements between related parties
  • To provide new language in article 56, that profits can be adjusted upwards or downwards for transfer pricing purposes, with no distinction made between cross-border and domestic intra-group transactions

The general tax law also has been adjusted to reflect that general information and documentation obligations required of taxpayers are also extended to transactions between related parties – that is, transfer pricing documentation.

Read the article

Malaysia – Important changes to Monthly Tax Deduction rules

The government of Malaysia has amended the definition of ‘remuneration’ for withholdings under the Monthly Tax Deduction (MTD). The due date of MTD payments is extended from the 10th of the calendar month to the 15th of the calendar month, among other changes.

Employers should be aware that their compliance responsibilities have changed for certain employees who have an income tax liability in Malaysia. With effect from Year of Assessment (YA) 2014, employees whose total income tax is equivalent to the total amount of MTD are deemed to have made an election not to submit their returns if no returns are filed by 30 April of the following year (i.e. YA 2014 tax return is due for submission on 30 April 2015). The MTD made would be deemed as tax payable for that year of assessment, which represents the final tax paid.

However, the Director General of the Malaysian Inland Revenue Board may raise assessment or additional assessment where it appears that additional income tax ought to have been charged. It is important for an individual taxpayer to establish that the MTD deducted by the employer is equivalent to that individual’s tax liability on their income before electing not to submit a tax return for the relevant YA.

Read the article 

Netherlands – Appeals court issues decisions in fiscal unity cases

The Court of Appeals Amsterdam issued decisions in three cases, holding that the Dutch rules for fiscal unity for corporate income tax purposes are contrary to the European freedom of establishment, and so the Dutch tax authorities may not deny a taxpayer’s application for fiscal unity in these cases. 

The cases concerned requests for the formation of a fiscal unity between sister companies of a European parent company and between a domestic parent company and a domestic sub-subsidiary held through an intermediate holding company resident in another European Union (EU) member state.

These decisions follow a June 2014 judgment of the Court of Justice of the EU issued in response to the Dutch court’s request for a preliminary ruling.

Read the article

New Zealand – Inland Revenue finalizes view on debt capitalization

The New Zealand government has proposed to address Inland Revenue’s concerns with debt capitalizations. In a report from analyzing the implications for affected companies, KPMG in New Zealand says Inland Revenue has confirmed its position that debt capitalizations are potentially tax avoidance.

Read the report

Nigeria – ‘Actual profit basis’ required for non-residents’ returns

Nigeria’s Federal Inland Revenue Service previously indicated that it would no longer accept tax returns filed by non-resident companies on a ‘deemed profit basis’, but that non-resident companies must file their tax returns on an ‘actual profit basis’. 

These returns are to include audited financial statements as well as income tax computations, showing the taxable income, tax-deductible expenses, and capital allowances. The tax authority is expected to issue guidance that would specify the commencement date for filing on returns on an actual profit basis.

Read the article

OECD – BEPS Action Plan – discussion drafts and guidelines released

The Organisation for Economic Co-operation and Development (OECD) released a series of discussion drafts and guidelines as its base erosion and profit shifting (BEPS) project moves forward:

Action 1 – Two discussion drafts relate to the International VAT/GST Guidelines that are being developed to address Action 1, which aims to resolve issues of double taxation and unintended non-taxation resulting from inconsistencies in the application of VAT to international trade. The discussion drafts relate to:

  • The place of taxation of business-to-consumer (B2C) supplies of services and intangibles
  • Provisions to support the application of the guidelines in practice (supporting provisions)

Read the article 

 

Action 4 – A discussion draft on Action 4 (Interest deductions and other financial payments) aims to identify solutions to address base erosion arising from interest and economically equivalent payments. The concern appears to be that multinational groups may be able to claim total interest deductions that significantly exceed their actual third-party interest expense.

Read the article 

 

Actions 8, 9 and 10 – This discussion draft proposes revisions to Chapter I of the Transfer Pricing Guidelines (including risk, re-characterization and special measures).

Read the article 

 

Action 10 – Two discussion drafts focus on transfer pricing aspects – specifically under BEPS Action 10 (“Assure that transfer pricing outcomes are in line with value creation” in relation to “other high risk transactions”). 

Read the article 

 

Action 10 – One of the discussion drafts on Action 10 relates to both transfer pricing aspects of cross-border commodity transactions and profit splits in the context of global value chains. 

Read the article 

OECD – Implementation guidance for country-by-country reporting

Receipt of country-by-country (CbC) reporting data would be conditioned upon confidentiality safeguards, consistent implementation, and avoidance of formulary apportionment under newly released guidance from the Organization for Economic Co-operation and Development on Action 13 of its base erosion and profit-shifting project.

The guidance provides an agreed framework for developing a government-to-government exchange implementation package by April 2015 and recommends that CbC reporting be required for fiscal years beginning after December 31, 2015, with initial reports filed by December 31, 2017 – or in 2018 for non-calendar-year taxpayers. The package is crucial to implementation of the BEPS project, according to an OECD release, and to facilitate timely integration into local law, will include key elements of domestic legislation requiring multinational parent companies to file CbC reports in their jurisdictions.

The guidance exempts from general filing requirements multinational groups with annual consolidated group revenue of less than 750 million Euros (EUR). The exemption is designed to balance costs and benefits of the reporting burden and may exempt as many as 90 percent of multinational groups from the filing requirement, the guidance says, but the CbC report will be filed by groups controlling 90 percent of corporate revenue.

Further information: Sharon Katz-Pearlman 

OECD – Initial impressions on discussion draft on MAP

The Organisation for Economic Co-operation and Development (OECD) released a proposed discussion draft pursuant to Action 14 (Make dispute resolution mechanisms more effective) under the base erosion and profit shifting (BEPS) action plan.

BEPS Action 14 aims to improve the effectiveness of the mutual agreement procedure (MAP) in resolving treaty-related disputes. The OECD’s proposed discussion draft attempts to identify comprehensively the obstacles that prevent countries from resolving disputes through MAP and to develop possible measures to address those obstacles.

Recognizing that there is no consensus on moving towards universal, mandatory binding MAP arbitration, the OECD’s report introduces a three-pronged approach to improving the resolution of treaty-related disputes through MAP:

  • Secure political commitments to eliminate taxation not in accordance with treaties.
  • Provide new measures to improve access to MAP and improved procedures.
  • Establish a monitoring mechanism to check the proper implementation of the political commitment.

Read the article 

South Africa – Tax authority’s power to request data trump prescription?

Changes in South African tax law raise questions as to when the limitations period for a tax year is closed.

Previously, a tax matter was deemed closed three years after assessment, provided that the taxpayer had made a full disclosure. Accordingly, the tax authority (SARS) did not seek to reopen years that had been ‘prescribed’.

However, the Tax Administration Act (specifically, TAA (i.t.o.s46)) permits SARS to request that a taxpayer provide relevant material that SARS requires. There is no prescription period in this provision.

View the video

Switzerland – Agreement with Australia enables automatic tax information exchange

In March 2015, representatives of the governments of Switzerland and Australia signed a joint declaration on the introduction of an automatic exchange of information in tax matters on a reciprocal basis. The information exchange will be based on the OECD’s common reporting standard.

Read the article

United Kingdom – HMRC opens consultations on closure rules for tax enquiries

On 18 December 2014, a consultation document titled ‘Tax Enquiries: Closure Rules’, which aims “to enable HM Revenue and Customs (HMRC) to refer matters to the Tribunal with a view to achieving early resolution of one or more aspects of an enquiry into a tax return”.

The consultation document sets out a proposed new process for income tax (including Class 2 and 4 National Insurance Contributions in certain circumstances), capital gains tax and corporation tax enquiries where a number of different issues are under enquiry. The intention is to enable HMRC to achieve early resolution and closure of one or more aspects of a tax enquiry, where it is not appropriate to close the whole tax enquiry. 

In summary, the self-assessment enquiry process would remain the same up to the point a joint referral of an issue to Tribunal could be considered. If a joint referral cannot be made, then HMRC would have a new option of ‘sole referral to Tribunal’. If this option were followed, HMRC would issue a Tribunal referral notice that could be appealed. Once the appeal on that particular matter is determined (there would be other matters under enquiry that would continue) HMRC could issue a ‘Tribunal referral closure notice’, against which there would be no right of appeal, with tax due within 30 days.

Unfortunately, the proposals appear to assume that delays in resolving enquiries are always caused by the taxpayer. A more equitable solution would be for a procedure that allows either party to the dispute to take individual issues to Tribunal. 

Comments have been requested by 12 March 2015 and readers are encouraged to consider the implications of these proposals and submit comments where appropriate.

Further information: Kevin Elliott 

United Kingdom – HMRC risk reviews increasingly favor evidence over trust

KPMG in the UK has recently seen HM Revenue and Customs (HMRC) subject a number of clients dealt with by Mid-size Business Directorate to in-depth cross-tax risk reviews. Concerns with this approach will be raised with the relevant HMRC Director.

Following initial risk profiling by specialist units within HMRC, businesses are selected for risk review covering all heads of tax. These reviews are initiated with formal enquiry notices and a request to inspect business records for periods of up to 4 years. HMRC is not prepared to confirm what risks concern them until after they have inspected the records.

This approach appears at odds with the way HMRC Large Business usually shares details of perceived risks before conducting in-depth reviews of supporting evidence. Nevertheless, there are signs that HMRC is increasingly testing evidence rather than trusting that businesses are managing their tax risk. For example, KPMG in the UK has have seen cases where some clients were subject to in-depth reviews across all taxes in order to maintain ‘low-risk status’ with HMRC. 

In this current environment, clients need assistance in managing rising numbers of HMRC requests for detailed evidence when reviewing tax risks.

Further information: Kevin Elliot

United Kingdom – UK government takes more action to tackle evasion and avoidance

The UK Government published measures to reduce opportunities and harshen consequences for those who avoid or evade tax and those who help them, following the Budget on 19 March 2015.

The outlined measures repeat previous announcements and set out some new measures:

  • Civil penalties on enablers of tax evasion. This measure would impose a penalty equal to the fine paid by the individual who has been helped to evade the tax. Criminal offences of facilitating or encouraging tax evasion are already in place.  This new measure is civil, rather than criminal – making it easier for HMRC to use.
  • A new criminal offence for corporates of failing to ‘prevent tax evasion or the facilitation of tax evasion’.  This measure would apply where, for example, a bank fails to have adequate controls in place to stop members of staff aiding clients to evade tax. The measure appears to be similar to current rules under the anti-bribery act, which require companies to have procedures in place preventing staff from giving bribes. Presumably the measure would also apply to partnerships and any other form of association. It is unclear whether organizations would be obliged to take proactive steps to prevent their clients evading tax. Such a rule might impose an unworkable administrative burden.

The UK government also announced a strict liability criminal offence for those who have not paid tax on offshore income, which would stop offshore evaders from claiming, for example, they didn’t understand the rules. Hopefully, however, a defense would be available for taxpayers who can demonstrate that they took adequate advice and made a genuine mistake.  Further, penalties would be amended so the penalty’s size could be linked to the value of the offshore asset, not just the taxable income.

Finally, it was confirmed that HMRC, the UK tax authority, plans to increase the number of Accelerated Payment Notices (requiring the upfront payment of disputed tax by users of avoidance schemes) from 43,000 to 64,000. It is estimated these will require payment of an additional 555 million British pounds (GBP) of tax by the end of 2016.

Read the outlined measures 

Further information: Chris Davidson

United States – A peek behind the curtain: LB&I International Practice Units

As part of an overall strategy to rethink and reorganize interactions with taxpayers, the IRS developed ‘Practice Units’ that aim to describe for agents leading practices for specific international and transfer pricing issues. A report from KPMG in the US provides an overview of this new material and explains how Practice Units may be informative for taxpayers preparing for examinations or structuring transactions.

Read the report

United States – Congress reacts to OECD BEPS project

Regarding base erosion and profit-shifting, "Congress is certainly not going to follow any OECD guidelines just because they're there," and because Congress and Treasury are deliberative, changes are likely to be incremental, Joint Committee on Taxation legislative counsel Viva Hammer said in remarks on 30 January 2015.

Regarding BEPS, Hammer said, “Most problems arise from the nature of OECD guidelines which are drafted in general language and private practitioners interpret the rules according to their own needs. What’s needed is detailed, prescriptive guidance for all participants in world trade and most urgently for less developed countries. But the OECD avoids that kind of drafting – they like general principles. There are 34 countries with different agendas and the way they fudge the differences is by writing vague principles that can be interpreted in whichever way you want".

Hammer suggested that US legislative change in response to the OECD’s work would likely be incremental, and only occur after “protracted discussion and a great deal of compromise”.

Further information: Sharon Katz-Pearlman

United States – Competent authorities debate sovereignty and arbitration

A panel of former and current competent authorities recently debated the merits of the argument made by some countries that adding a mandatory binding arbitration provision to their tax treaties would infringe their sovereign right to decide mutual agreement procedure (MAP) cases.

At a conference cosponsored by George Washington University Law School and the IRS, the deputy director of the OECD Centre for Tax Policy and Administration, discussed the Organization for Economic Co-operation and Development’s discussion draft under Action 14 of the base erosion and profit-shifting project, which calls for making dispute resolution mechanisms more effective.

The discussion draft lays out several options for improving the MAP process from both an administrative and policy perspective. According to the director, a major question to address is why more countries have not added arbitration provisions to their bilateral tax treaties.

Further information: Sharon Katz-Pearlman

United States – Final regulations on reporting foreign financial assets

The IRS has published final regulations on requirements for reporting specified foreign financial assets to the IRS for tax years beginning after March 18, 2010.

Effective December 12, 2014, the final regulations adopt, with some changes, proposed regulations (REG-130302-10) published in December 2011.

The final regulations do not adopt proposed regulation section 1.6038D-6 that specifies the conditions under which a domestic entity would be considered a specified domestic entity and thus, be required to report specified foreign financial assets in which it holds an interest. That provision will be adopted later. The corresponding temporary regulations (T.D. 9567) are removed.The final regulations provide guidance on the requirement that individuals attach a statement to their income tax return to provide required information regarding specified foreign financial assets in which they have an interest. The regulations affect individuals required to file Form 1040, 1040-EZ, 1040-NR or 1040NR-EZ income tax returns.

Among other things, the final regulations:

  • exempt some dual resident taxpayers who determine their U.S. tax liability as if they were non-resident aliens and claim treaty benefits as non-residents of the United States
  • clarify the reporting requirements for some interests in assets under reg. section 1.6038D-2(b) regarding non-vested property under section 83 and assets held by a disregarded entity
  • clarify aspects of the rules on joint owners of a specified foreign Page 1 financial asset
  • modify the definition of a financial account for purposes of section 6038D to require consistent reporting under that section for retirement and pension accounts and some nonretirement savings accounts regardless of whether the account is maintained in a jurisdiction treated as having in effect a Model 1 intergovernmental agreement (IGA) or a Model 2 IGA
  • clarify that specified foreign financial assets include stock, securities, financial instruments, and contracts that are held for investment and not held in an account maintained by a financial institution and are published by a person organized under the laws of a U.S. possession
  • clarify the valuation guidelines such that the maximum fair market value for a specified foreign financial asset with no positive value during the year is treated as zero
  • adopt two modifications to the valuation rules regarding foreign currency
  • make some clarifications for taxpayers who report assets on Form 8891 and for joint filers of Forms 5471 and 8865.

United States – IRS 2014–2015 Priority Guidance Plan updated

The IRS and Treasury Department have issued the second quarter update to the 2014–2015 Priority Guidance Plan. As originally released, the plan contains 317 guidance and regulatory projects that the IRS has identified as priorities and intends to work on from July 2014 through June 2015.

Read the article

United States – IRS budget cuts ‘devastating’, Taxpayer Advocate report says

IRS budget cuts over the past five years have “brought about a devastating erosion of taxpayer service” and taxpayer protections, and lawmakers should act to both support the IRS and improve its accountability, National Taxpayer Advocate Nina Olson said in her 2014 annual report to Congress.

Taxpayers as individuals and collectively have been harmed through the budget cuts, and weaknesses in IRS administration and congressional oversight combined with the failure to enact taxpayer rights legislation have caused diminished taxpayer protections, the report says. Without action by Congress to invest in the IRS, compliance and trust in the tax system may suffer.

The report lists the most serious problems taxpayers experience in the following categories:

  • quality service issues
  • complexity
  • lack of access to the IRS
  • inadequate explanations from the IRS
  • lack of fairness in tax system
  • administration. 

Specific complaints include offshore voluntary disclosure programs that lead taxpayers to pay disproportionately high penalties, and new lows in taxpayer service and a lack of local IRS presence, both of which the report says are harming voluntary compliance.

Olson recommended that Congress enact legislation that would codify the Taxpayer Bill of Rights, which would help restore public trust in the IRS. Congress should also hold regular hearings on tax administration and enact fundamental tax reform to improve clarity and reassure taxpayers.

Further information: Sharon Katz-Pearlman

United States – IRS releases user guide for FATCA-IDES system

The IRS has released a draft version of Publication 5190, FATCA IDES User Guide (1-2015). The FATCA International Data Exchange Service (IDES) system is a mechanism that financial institutions and host country tax authorities may use to transmit and exchange FATCA data with the IRS.

Read the article 

United States – New regulations on research credits for internal-use software

The US Treasury issued proposed regulations for determining when expenditures relating to the development of computer software by a taxpayer for its own internal use qualify for the section 41 research credit. 

The guidance narrows the rules for what constitutes software developed primarily for internal use, which generally does not qualify for the credit. The regulations focus on software developed for use in back-office general and administrative functions such as financial management, human resources management, and support services.

It also states that software “developed to enable a taxpayer to interact with third parties or allow third parties to initiate functions or review data on the taxpayer's system” is not internal use and therefore does not have to satisfy the 3-part high threshold of innovation test.

According to the preamble, Treasury views the new exclusion as appropriate because such software “does not solely benefit the taxpayer developing the software.”

United States – Taxpayers not ready for Transfer Pricing Roadmap

The revised transfer pricing audit procedures the IRS put in place to reduce potential profit shifting will require a re-engineering of resources, but neither the IRS nor taxpayers appear ready to use those procedures. 

In recent remarks at a luncheon the District of Columbia Bar Taxation Section, a former transfer pricing director in the IRS Large Business and International Division said the roadmap was “intended to be a best practices guideline, tool, not a prescription.” Rather, the roadmap is intended to encourage examiners "to communicate expectations to taxpayers," and to impose accountability on exam teams, mandating that they explain why they want a document and what their theory of the case is. 

The roadmap also encourages exam teams to keep an open mind and practice ‘strategic abandonment’: when information comes along that is inconsistent with the exam team's theory, the team should either adjust its theory or conclude the issue is not worth pursuing.

The former director also noted that taxpayers must also be proactive in their communications. Taxpayers will be expected to explain their business, he said. “Bring your operating personnel; don't bring your tax people,” he said, adding that taxpayers also should prepare an explanation of value drivers and transfer pricing methods.

Further information: Sharon Katz-Pearlman 

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