Calgary may 2012 lynchgrenon v may 21 v2

Structuring Tax AdministrationTax Authorities are redesigning and centralizing functions and “optimizing key business processes” Current and future initiatives in Canada: -.. Tax Complia

What Are Tax

A.Global Trends and Canadian Changes

B.CRA’s Risk Based Audits

C.More Aggressive Actions by the Tax Authorities

D.Selected Country Perspectives

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

“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

2 Tax Compliance

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

Current and future initiatives in Canada:

- 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 impacts on taxpayers:

- Potential for increased collaboration

- Increasing use of existing powers for information gathering

- Corporate Social Responsibility focus

2 Tax Compliance - Dispute Resolution

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

Current and future initiatives in Canada:

- 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

Potential impacts on taxpayers:

- Various impacts on likelihood of achieving attractive resolution short of trial

2 Tax Compliance - Statistics (Objections)

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

2 Tax Compliance - Statistics (Tax Court or prior

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

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

Current and future initiatives in Canada:

- DOJ “ILBD” Advisors Program

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

Potential impacts on taxpayers:

- 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

Tax Authorities are “facilitating compliance, audit strategies, collection

measures and dispute resolution” (con’t)

Current and future initiatives in Canada:

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

Potential impacts on taxpayers:

- 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”

Current and future initiatives in Canada:

- 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

Potential impacts on taxpayers:

- “Offensive” planning addressed much more quickly

- Guidance/comfort less likely to be provided

- Overreaching legislation to address unclear offenses – need to educate

4 Demand Management

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

Current and future initiatives in Canada:

- 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

Potential impacts on taxpayers:

- Future exchanges with CRA via email?

- Increasingly focused questions by CRA on data and analysis

- Need for industry/association/group collaboration to influence CRA

B CRA’s Risk Based Audits

CRA’s Risk-Based Audits

Low risk

Medium risk

High risk

• Compliance audit

• Quick review

• More depth review

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%)

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”

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)

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

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

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

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

Brazil

Top Three “Hot” Technical Issues

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;

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.

China

Top Three “Hot” Technical Issues

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)

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

Tax Revenue Trends

Tax revenue collected by tax inspection

Source: State Administration of Taxation

Unit: RMB

100 million

India

Top Three “Hot” Technical Issues

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.)

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)

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

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

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