What Are Tax Authorities Thinking Today? Calgary May 23, 2012 kpmg.ca 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 ©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 A Global Trends and Canadian Changes ©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 Why are Tax Authorities “Working Smarter”? Organisation for Economic Development and Cooperation (OECD) 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 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 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 ©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 “Working Smarter”: in structuring tax administration in compliance through legislation in service delivery (demand management) 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 ©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 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 ©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 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 as well or better in Court Potential impacts on taxpayers: - Various impacts on likelihood of achieving attractive resolution short of trial - Tax Court rule change welcome but limited in impact on prospects of settlement ©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 Tax Compliance - Statistics (Objections) Notice of Objection Statistics (income tax and GST/HST) Partial Period TP Successful Success No Change 2005-06 2006-07 2007-08 Average 46% 60% 47% 51% 33% 22% 29% 28% ©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 21% 18% 24% 21% Tax Compliance - Statistics (Tax Court or prior to Court) Tax Court of Canada Appeal result (additional success for taxpayers beyond Notice of Objection stage) Allowed in full All files 18% Allowed in part 35% Dismissed 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) ©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 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) ©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 10 The Three “Must Knows” About Dealing with the United States Revenue Authority Opportunities for alternative dispute resolutions have multiplied in recent years and can often produce much earlier technical and financial certainty 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 Substantial proposed penalties can accompany audit adjustments and failures to properly comply with a myriad of international information reporting requirements ©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 25 Other Information IRS has fundamentally redesigned its process for auditing international issues 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 Compliance Assurance Process (CAP) is a profound change in the audit dynamic 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 ©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 26 Brazil ©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 Top Three “Hot” Technical Issues 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; State VAT (ICMS): Local Tax Incentives: Brazilian states (26 in total) have been granting ICMS tax incentives regardless the approval of the other states; 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; ©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 28 The Three “Must Knows” About Dealing with the Brazilian Revenue Authority Brazilian tax authorities have few discretionary powers and act strictly according to the law However, due to the complexity of the Brazilian tax system, local tax authorities have no uniform treatment regarding controversial issues There is no advanced ruling mechanism in Brazil ©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 29 China ©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 Top Three “Hot” Technical Issues 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) Corporate restructuring relief rules Value Added Tax Reform (currently in Shanghai, to be extended nationwide) ©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 31 The Three “Must Knows” About Dealing with the China’s Tax Authority A clear understanding of structure and responsibilities of tax authorities at different levels is critical Be well-prepared for any consulting / discussion / negotiation with tax officials in terms of both technical and non-technical matters Effective tax internal control processes – good documentation and record keeping ©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 32 Tax Revenue Trends Tax revenue collected by tax inspection Unit: RMB 100 million Source: State Administration of Taxation ©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 33 India ©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 Top Three “Hot” Technical Issues Investment structures (Indirect transfer of shares) Permanent Establishment (liaison office and authority of local personnel) Transfer pricing (Cost plus mark-up, intangibles, attribution of global profits; R&D, etc.) ©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 35 The Three “Must Knows” About Dealing with the Indian Revenue Authority Wide powers of tax authorities (regular audits; survey, search, seizures) Robust documentation / information requirement (detailed paperwork and detailed scrutiny of underlying contracts) Well linked with Tax Authorities across the globe (regular interaction and deputation of officers / exchange of information) ©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 36 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 * Proposed by Union Budget 2012 – Yet to be enacted as law ©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 37 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") 39 [...]... International Cooperative (“KPMG International”), a Swiss entity All rights reserved 12 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... Cooperative (“KPMG International”), a Swiss entity All rights reserved 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” 2012 Moskowitz... International Cooperative (“KPMG International”), a Swiss entity All rights reserved 24 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... 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... provincial apportionment) 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 21 The Three “Must Knows” About Dealing with the Canada Revenue... 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 2012 Moskowitz & Meredith LLP is a Canadian limited liability... 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 2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership... of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved 11 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,... independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity All rights reserved CRA’s Risk-Based Audits Audit coverage High risk Medium risk Low risk • Compliance audit • Quick review • More indepth review • Shorter audit 2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership... Cooperative (“KPMG International”), a Swiss entity All rights reserved 22 United States 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 Top ... 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... 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... International Cooperative (“KPMG International”), a Swiss entity All rights reserved 12 Demand Management Tax Authorities are “improving service delivery by understanding drivers of demand to reduce