Global Tax ControversyNavigating the future – facing the challenges

4 May 2017

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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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Disputes rising: Global trends

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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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UK Corporate Criminal Offence

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Disputes rising: Forming your response

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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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Thank you

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