Calgary May 2012 LynchGrenon v May 21_v2

What Are Tax Authorities Thinking Today?

Calgary

May 23, 2012

kpmg.ca

©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Topics

A.Global Trends and Canadian Changes

B.CRA’s Risk Based Audits

C.More Aggressive Actions by the Tax Authorities

D.Selected Country Perspectives

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A. Global Trends and Canadian Changes


Why are Tax Authorities “Working Smarter”?

Organisation for Economic Development and Cooperation (OECD)

1. The OECD’s Forum on Tax Administration (FTA) was created in July 2002 by the Committee on Fiscal Affairs with the aim of promoting dialogue between tax administrations and of identifying good tax administration practices.

2. The FTA vision is to create a forum through which tax administrators can identify, discuss and influence relevant global trends and develop new ideas to enhance tax administration around the world.

3. Revenue bodies in many countries have been set challenging cost reduction targets while they are also required to maintain or even improve their standards of service delivery and the effectiveness of their compliance activities. Against this background, the Forum has undertaken a project under the title of ‘Working Smarter’ to examine measures taken by revenue bodies to reduce costs and increase efficiency

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“Working Smarter”:

1. in structuring tax administration

2. in compliance

3. through legislation

4. in service delivery (demand management)


1. Structuring Tax Administration

Tax Authorities are redesigning and centralizing functions and “optimizing key business processes”

Current and future initiatives in Canada:

- Centralized workloads (Collections)- National and regional intake centres (Appeals, VDP, Fairness)- Standardized processes and policies- Electronic self-service (My Business Account, My Payment)

Potential impacts on taxpayers:

- Less judgment, more strict application of policies and guidelines- Difficulties in getting access to an individual to obtain assistance- Importance of a good working relationship at some level

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2. Tax Compliance

Tax Authorities are “facilitating compliance, audit strategies, collection measures and dispute resolution”


- Tax Alert messaging/Outreach and education campaigns- Mandatory use of electronic services- Audit downloading through increased use of questionnaires- Large file-risk based audit approach


- Potential for increased collaboration- Increasing use of existing powers for information gathering- Corporate Social Responsibility focus

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2. Tax Compliance - Dispute Resolution

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Tax Authorities are “facilitating compliance, audit strategies, collection measures and dispute resolution” (con’t)


-Less use of “Designated Appeals Officers” as DOJ contact in litigation – increasingly Appeals Officer that reviewed objection remains involved

- (Hopefully) increasing influence of DOJ in determining whether cases settle

- Change to Tax Court Rules to allow party to recover much greater Costs if make settlement offer (that is rejected) and do as well or better in Court


- Various impacts on likelihood of achieving attractive resolution short of trial - Tax Court rule change welcome but limited in impact on prospects of settlement


2. Tax Compliance - Statistics (Objections)

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Notice of Objection Statistics (income tax and GST/HST)

PartialPeriod TP Successful Success No Change

2005-06 33% 21% 46%2006-07 22% 18% 60%2007-08 29% 24% 47%Average 28% 21% 51%


2. Tax Compliance - Statistics (Tax Court or prior to Court)

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Tax Court of Canada Appeal result (additional success for taxpayers beyond Notice of Objection stage)

Allowed in full Allowed in partDismissed

All files 18% 35% 47%

Only 1/3 of cases in which a Notice of Appeal was filed proceeded to hearing

Numbers include Informal Procedures and other smaller matters in which taxpayers tend to be successful less frequently

(2002-06)


2. Tax Compliance - Audit Strategies

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- DOJ “ILBD” Advisors Program

- Centralization of Oil and Gas Litigation in Ottawa office of DOJ


- DOJ’s ILBD program has facilitated auditors in early use of requirements, threats of Compliance Orders

- ILBD program can also be opportunity (if taxpayer wishes DOJ opinion at audit stage, or otherwise wants DOJ involved)


2. Tax Compliance - Dispute Resolution

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- Proposed new Rule designed to allow determination of specific issues by Tax Court without all issues in tax year


- New rule would still require agreement of the parties to put the single issue to the Court. Usefulness will depend on DOJ/CRA mindset


3. Legislation

Tax Authorities are “more active in formulating administrative legislation and influencing tax policy measures”


- Concerns raised at audit more quickly addressed in legislation (corporate partnerships, packaged bumps, foreign affiliate dumping)- “Whole of CRA” approach to issues- Improved communications within CRA network and internationally


- “Offensive” planning addressed much more quickly- Guidance/comfort less likely to be provided- Overreaching legislation to address unclear offenses – need to educate

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4. Demand Management

Tax Authorities are “improving service delivery by understanding drivers of demand to reduce them or address them more effectively”


- Review of service channels (less in-person engagement)- Shift to more electronic service delivery- Greater investment in technology- Increased engagement through intermediaries (industry groups, professional firms) to provide feedback to CRA


- Future exchanges with CRA via email?- Increasingly focused questions by CRA on data and analysis- Need for industry/association/group collaboration to influence CRA 13


B. CRA’s Risk Based Audits


CRA’s Risk-Based Audits

Low risk

Medium risk

High risk

• Compliance audit

• Quick review

• More in-depth review

• Shorter audit

Aud

it co

vera

ge

• Typical CRA audit


CRA’s Risk Based Audits - Statistics

Approximately 1100 “Large” file taxpayer groups – 24,000 files

40 - 50% of large taxpayers initially assessed high risk

Approximately 340 factors in CRA’s internal risk grading scorecard

89% of large file audit adjustments from 20% of files

Targeted annual adjustments per large file auditor - $2.7 million

(Results of last 5 years: $3.6, $4.0, $3.0, $3.5 & $2.9 million)

Targeted percentage of cases resulting in a change – 90%

(Results of last 5 years: 92%, 94%, 95%, 96%, 94%)

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C. More Aggressive Actions by the Tax Authorities


Sample commentary in the media

“Tax Authorities” referring to themselves as “Revenue Bodies”

“China, Hong Kong Continue Aggressive Tax Enforcement in 2012”

“International Tax Enforcement on the Rise”

“Aggressive Tax Positions of India’s Income Tax Department”

“Brazil's Government Proposes More Aggressive Tax Reform”

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D. Selected Country Perspectives


Canada


Top Three “Hot” Technical Issues

1. Transfer Pricing (management fees; “financial engineering” – e.g. financing charges, interest rates, guarantee fees, hedging transactions, swaps, factoring; transfers of intellectual property; business restructuring; acceptability of comparables)

2. International Tax (financing structures, use of treaties, foreign tax credits, compliance with reporting requirements)

3. Indirect Tax (use of statistical sampling for compliance, allocations of input tax credits, provincial apportionment)

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The Three “Must Knows” About Dealing with the Canada Revenue Agency (CRA)

1. Can be an aggressive tax administration

2. Government pressure to reduce costs – audit coverage of large corporates being reduced using a risk-based assessment approach

3. Opportunities at every stage to deal effectively with CRA from prior to filing (Rulings, APA), filing, audit, appeals, litigation

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United States


Top “Hot” Technical Issues

1. Transfer Pricing – (in any form) broad range of intangibles valuation issues; services; intercompany financing; tangibles

2. Research and Development Credits

3. Foreign Tax Credits

4. Cross-border payments

5. Debt vs. equity

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The Three “Must Knows” About Dealing with the United States Revenue Authority

1. Opportunities for alternative dispute resolutions have multiplied in recent years and can often produce much earlier technical and financial certainty

2. The IRS substantive views on technical issues are often reflected in materials available on a public website – sample Information Document Requests (IDR), Industry Directives, recommended audit techniques, etc.

3. Substantial proposed penalties can accompany audit adjustments and failures to properly comply with a myriad of international information reporting requirements

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Other Information

1. IRS has fundamentally redesigned its process for auditing international issues

2. Recent realignment of the Advance Pricing and Competent Authority processes is designed to substantially improve the management of a very large pipeline of aging APA requests and growing demand

3. Compliance Assurance Process (CAP) is a profound change in the audit dynamic

4. The new Uncertain Tax Position (UTP) regime was effective for the 2010 tax returns of the largest corporations – it is anticipated that the disclosure results will soon begin to influence audit decisions

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Brazil



1. IFRS Transitory Regime (RTT): There are several issues regarding the application of the RTT due to the incompatibility of the IFRS rules and the Brazilian tax legislation;

2. State VAT (ICMS): Local Tax Incentives: Brazilian states (26 in total) have been granting ICMS tax incentives regardless the approval of the other states;

3. Social Contributions Tax Credits (PIS/Cofins): Tax Authorities are very strict about the kind of good and services eligible to generate PIS/Cofins tax credits;

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The Three “Must Knows” About Dealing with the Brazilian Revenue Authority

1. Brazilian tax authorities have few discretionary powers and act strictly according to the law.

2. However, due to the complexity of the Brazilian tax system, local tax authorities have no uniform treatment regarding controversial issues.

3. There is no advanced ruling mechanism in Brazil.

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China



1. Taxation of non-residents

a. Offshore indirect disposal of shares (Circular 698)

b. Beneficial ownership (Circular 601)

c. Abusive use of corporate structures and tax haven entities (General Anti-avoidance Rules)

2. Corporate restructuring relief rules

3. Value Added Tax Reform (currently in Shanghai, to be extended nationwide)

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The Three “Must Knows” About Dealing with the China’s Tax Authority

1. A clear understanding of structure and responsibilities of tax authorities at different levels is critical

2. Be well-prepared for any consulting / discussion / negotiation with tax officials in terms of both technical and non-technical matters

3. Effective tax internal control processes – good documentation and record keeping

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Tax Revenue Trends

Tax revenue collected by tax inspection

0

200

400

600

800

1000

1200

2006 2007 2008 2009

Source: State Administration of Taxation

Unit: RMB 100 million

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India



1. Investment structures (Indirect transfer of shares)

2. Permanent Establishment (liaison office and authority of local personnel)

3. Transfer pricing (Cost plus mark-up, intangibles, attribution of global profits; R&D, etc.)

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The Three “Must Knows” About Dealing with the Indian Revenue Authority

1. Wide powers of tax authorities (regular audits; survey, search, seizures)

2. Robust documentation / information requirement (detailed paperwork and detailed scrutiny of underlying contracts)

3. Well linked with Tax Authorities across the globe (regular interaction and deputation of officers / exchange of information)

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Other Information

Retrospective amendments overruling Court decisions• Indirect transfer of shares*

• Definition of ‘royalty’ under domestic tax law – Ambit expanded to cover software license / website hosting / transponder payments etc*

Introduction of General Anti Avoidance Rules (GAAR) from April 1, 2012*

• Main purpose / one of the main purpose; to obtain tax benefit

• Over-ride Treaty in specified situations / circumstances

Developing nation; subsidy programs

- Huge pressure for revenue collection

- Aggressive approach

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* Proposed by Union Budget 2012 – Yet to be enacted as law

Thank you

Gerald Grenon(403) 216-1833

Paul Lynch(613) 212-3795

The information contained herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

© 2012 KPMG LLP, a limited liability partnership and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG International Cooperative ("KPMG International").

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Calgary May 2012 LynchGrenon v May 21_v2

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