Tax Audit Trends and Developments:
How taxpayers can achieve optimum
results
Panel Speakers
Eugene Lim, Partner, Baker & McKenzie (Singapore)
Chun Ying Ng, Associate, Baker & McKenzie (Singapore)
Jason Liang, Associate, Baker & McKenzie (Kuala Lumpur)
Amit Bhalla, Vice President, Tax & Customs APAC, Schneider Electric (Singapore)
Michael Palumbo, Director of Tax, Baker Hughes (Singapore)
Overview of the Audit Environment in
Developing Countries
Key Trends
Increased aggressiveness in tax audits
Audit focus areas:
• transfer pricing
• anti-avoidance
• generally, cross-border tax disputes
Driven by search for revenue
Expect increased transparency – BEPs country-by-country
reporting requirement; OECD Automatic Exchange of Information
Aggressive? Recent Areas of
Audit Focus
Statistics New Approaches/
Trends
China Yes • Entities engaged in
export tax refund,
gold transactions and
capital transactions
• Real estate and
construction industry
• High-income
individuals
• Commercial
educational training
institutions
Collections from tax
audit was RMB 172b for
2014, with a growth rate
of 21.45%
Extending the tax audit
to fapiao related
activities and anti-
avoidance
India Yes • Withholding tax
provisions and their
applicability to cross-
border deals
• Transfer pricing
Collections for direct
taxes for FY14/15 up by
19% compared to the
previous fiscal year
Bill providing for
separate taxation in
respect of undisclosed
foreign income and
assets. Non-compliance
will attract stiff penalties
including imprisonment
and fines.
Aggressive? Areas of audit
focus
Statistics New Approaches/
Trends
Malaysia Yes • Anti-avoidance
• Transfer pricing
• Tax incentives
Collections for corporate
income tax increased by
56% between 2011 and
2015
• Determination of Arm’s
Length Price
• Removal of time bar
Indonesia Expected to be
increasingly aggressive
– increase in audit
activity
• Abuse of tax treaties
• Foreign related party
transactions
• Mining, oil and gas
taxpayers
• Wholesale trading
taxpayers
• Professionals, middle
and high income
individual taxpayers
Collections for 2015
increased by 19% from
previous year
Tax audit revenue target
for 2015 increased by
206% compared to the
target for 2014
The Government issued
regulation number
60/PMK.03/2014
regarding exchange of
information. This
regulation stipulates the
procedure on the
exchange of information
between Indonesia and
its partner countries,
which can be done by
request, spontaneously
or automatically.
Vietnam Yes • Transfer pricing
• VAT credit
• Expense deductibility
• Frauds in small local
companies
Tax revenue budget for
2015 increased by
16.4%
• Transfer pricing
• Royalties
• VAT credit
Aggressive? Areas of audit focus Statistics New
Approaches/
Trends
Thailand Medium but tends to be
more aggressive due to
country’s lack of revenue
• Income fluctuation e.g.
significantly decreased or
underfiling
• Overclaiming expenses,
especially intercompany
charge
• Complex tax planning
transactions
• Operation in tax haven
countries
• Transfer pricing
• Export of goods and services
entitled to VAT at 0% or VAT-
exempt business
Target for 2015 is
75.1 billion bht
higher than actual
tax collected in
2014
Increasing and more
intense, including
Transfer Pricing
audits
Philippines Yes. Even business
closures which used to
be easy, are now audited
closely. Tax authority
obtains company
information from SEC,
and audit notices are
sent to directors and
officers. Uses media to
embarrass non-
compliant taxpayers.
• Withholding tax, VAT and
income tax.
• Use of information obtained
from third parties, e.g.,
suppliers, customers, and
other gov’t. agencies such as
the bureau of customs.
Tax collection
target for 2015
increased by 21%
from 2014 target
Fiscal Intelligence
Unit (FIU) of Dept. of
Finance, now tasked
to conduct post-entry
audits. Findings are
sent to Bureau of
Customs and Bureau
of Internal Revenue
for proper action.
New Era of Increased Transparency
BEPS – Country-by-Country Reporting Requirement
Multinational corporations will be required to report information to tax authorities on
a country-by-country basis:
Required Information
EBIT
Cash income tax paid
Tangible assets
Number of employees
Accumulated earnings
Stated capital
Current year income tax
accrued
Revenues (related/
unrelated)
Target on “hot” data points
- high profit, zero tax and low substance jurisdictions
- ring-fencing of preferential tax regimes
- no-where income
How to ensure consistency in the information provided in each
jurisdiction
How will data be used by authorities? For transfer pricing risk assessment or for making adjustments?
Endless audit queries?
Impact on the Management of
Audit / Controversies
Adopting a Strategic Approach in
Managing Audits and Controversies
Controversy
Audit
Planning
Holistic Approach
Planning Stage
• Risk assessment in light of BEPS –consider restructuring of structures considered aggressive
• Importance of documentation and alignment of facts –analyse ability to collect and process data (sources of data points, responsibilities, systems requirements)
• Awareness of local trends and developments –have “eyes and ears” on the grounds
• Consider privilege issues at an early stage
• Consider obtaining certainty:
• APA?
• Rulings?
Audit Stage
• Assign appropriate staff to handle the audit queries and seek professional advice
• Identify areas of risk and escalate issues appropriatelyAt the Beginning
• Conduct rigorous due diligence
• Develop consistent case theory and consider advocacy position
• Consider evidentiary issues (privilege, burden of proof, documentation)
Preparation
• Identify and manage risks in the provision of information and documents to authorities
• Ensure consistency in communications
• Adopt the right cooperative attitude and focus on effectiveness and efficiency in engaging the authorities
Communications with the Authorities
Controversy Stage
Engage suitable external advisers
Consider the appropriate dispute resolution forum:
• administrative
• litigation / judicial review
• MAP
Plan negotiation strategies with advisers
• best case scenario vs bottom line
• deal with issue in isolation or with other issues
Understand the procedural rules
• timelines
• processes
• evidentiary rules
Practical difficulties?
Risk management vs time and cost efficiency – a balancing act?
Tax v Legal – when should Legal be involved?
Best case scenario?
• Appropriate flagging of audit areas at risk from extensive audit
queries
• Rigorous and coordinated efforts with internal teams and
external advisors to strategise and prepare audit response
Reality?
• Demands on time and cost – limited resources
• Organisational challenges
Summary of Lessons Learnt
Malaysia
Audit Dispute Resolution Strategies
• Time consuming, granular, detailed
for TP
• Expect focus on SSF in particular
• Requirement, remoteness,
duplication of service
• Cost base, allocation key, mark
up
• Evidence of benefit
• Leasing, purchases / sales
• Non TP tax issues in focus,
withholding tax
• Document agreed issues
• Control the documents, copies, sign
for records
• Use of 3 year vs. 1 year results
• Propose a settlement, especially if
auditor leaving
• Errors, use as basis to settle in
lieu of issues
• Bring in advisors to help
negotiate
• Meeting at higher level
Indonesia
Audit Dispute Resolution Strategies
• TP handled by local office, no
expertise
• No consistency in issues
• Expect focus on SSF in particular
• Time sheets
• Evidence
• Leasing
• Withholding tax and VAT in
focus
• Interest Expense
• No guidelines on debt/equity
limit
• Resolve as many issues before
closing conference
• Document disagreements as basis
for appeal
• 99% of appeals rejected, ticket to
Tax Court
• Timeliness of decisions
• Leasing, use comps to reflect IRR
• DGT comps may form basis of
settlement
China
Audit Dispute Resolution Strategies
• Quick request for documentation
• Focus on “market” intangibles for
TP
• Focus on SSF, even in country
• Cost base, allocation key
match service, mark up
• 6 point test,
reasonableness, separate
agreements
• SAFE
• Interplay with PE, secondment,
Circular 19
• Focus on VAT Pilot vs. Business Tax
• Circular 146, Royalties paid in last
10 years
• Effective / efficient communication,
officer and bureau
• Negotiate dollar threshold,
percentage turnover
• Resolve disagreements early,
document
• Educate them on your business
• Educate Management about
Bureaus different opinions of same
issue
Vietnam
Audit Dispute Resolution Strategies
• Quick request for documentation
• 5 years of books in 2 weeks
• Presumption that taxpayers do not
keep VAS
• VAS will be relevant in audit in
many ways, way to deny
deductions
• Inconsistency in rulings and
applications, province
• Liberal usage of term “tax evader”
• All taxes in focus, emphasis more
on TP
• Minutes of meeting taken by Tax
Dept.
• Ensure proper items documented
and agreed before signing.
• Resolve as many issues in audit,
document differences in Minutes as
basis for appeal.
• Appeal to Tax Dept in Province,
Internal Audit Division.
• Treaty matters to MOF in Hanoi.
Mutual Agreement Procedures in Asia
MAPs in Asia: nascent but growing
Country New cases /
inventory
(2013)
Canada 127 / 235
France 216 / 618
Germany 267 / 858
UK 79 / 160
USA 403 / 732
Country New cases /
inventory
(2013)
Australia 8 / 23
Japan 36 / 65
Korea 23 / 80
China 23 / 43
New Zealand 14 / 13
• Average time to resolve MAP cases: 23.57 months (2013) vs. 25.46 (2012)
• Disputes themselves are more frequent, particularly in transfer pricing area
• Recognition of need for additional resources to deal with volume: trend to invest in programs
• Recognition of need to make processes more effective: BEPS take-up in APAC as a whole?
• Before going to MAP, recognise the difficulties and consider all dispute resolution options
Insights:
vs.
MAPs in Asia: an example case – best practices
Best practices Application to the case
Know the process, facts and the issues
involved, and ensure sufficient analysis and
documentation in place
Careful analysis and prepare contemporaneous
documentation in advance to review and justify
the possible positions to take
Robust functional and factual analysis key
Organise resources and carefully assemble
your support team
Senior client team and advisory team
appropriate to the issues at hand
Be realistic with facts on hand and know the
strengths and weaknesses of your position
Don’t expect to win on all points
Clearly understand the contradicting views of
the competent authorities
Up-front analysis is key
Invest time and energy to ensure position is
fully understood
Seek advice as early as possible Strategic advisor can help through the process
to fully analyse the key technical issues and
determine possible approaches early
MAPs in Asia: an example case
FMCG company
Master distributor in Singapore established as part of a restructuring program, as part of function as a Regional Principal
Master distributor remunerated as Regional Principal, earning residual profits
Japan distributor remunerated as an LRD on an operating margin using local comparables
Basis of disagreement
Did marketing intangibles exist in the Japan distributor?
Transferred as part of the restructuring?
If transferred, how to be remunerated?
If not, how would this affect the go-forward transfer pricing model?
Japan appeal route had been entered without agreement, options are court or MAP
JP court process possible but lengthy, no guarantee of relief in MAP or court
Key issues
Global HQHQ services Singapore
Master Distributor
Japan distributor
Customers
Suppliers
Raw materialsManufacturer
Products
MAPs in Asia: an example case (possible resolution)
MAP chosen
Agreement or no agreement between authorities that valuable marketing intangibles were transferred as a part of the restructuring
If yes, agreement that this should be valued as a transfer and subject to exit taxation
Agreement on the basis of valuation – a return of relevant total marketing costs plus a return on investment
Agreement or no agreement on the go-forward model on the basis of a Principal/LRD structure without further TP adjustment
To consider:
Domestic resolution through appeal/court is no longer possible after MAP route entered
Double taxation exposure remains if no resolution through MAP – and resolution is not mandatory
No mandatory binding arbitration
ConclusionsGlobal HQ
HQ services Singapore Master
Distributor
Japan distributor
Customers
Suppliers
Raw materialsManufacturer
Products
MAPs in Asia: is resolution likely?
Clear trend to invest further in programs, both in terms of
resources and capabilities – some limited impact in reducing
times to resolve
…but, even with greater investment, disputes are becoming
harder to resolve
technical disagreements are particularly common
few countries in Asia are fully OECD-aligned and/or share a
common interpretation of the arm’s length standard
Improved dispute resolution mechanisms are important, but
without mandatory binding arbitration double tax risks remain
As a consequence, there is an increase in litigation in the region,
where possible
BEPS?
Thank You
Q&A