The changing tax world and company’s impact

The ‘enhanced relationship’ model in UK and new proposals will most likely be copied and implemented by other tax authorities. Penalties when the ‘tax rulings’ are considered State Aid exceed the external auditor’s materiality (5% of turnover: Apple penalty might exceed $ 2.5 bn), impact shareholders value and a company’s reputation.

Apple says EU probe of Irish tax policy could be ‘material’ on April 29, 2015: Apple Inc (AAPL.O) said the European Commission’s investigation into Ireland’s tax treatment of multinationals could have a “material” impact if it was determined that Dublin’s tax policies represented unfair state aid. Apple has warned investors that it could face “material” financial penalties from the European Commission’s investigation into its tax deals with Ireland — the first time it has disclosed the potential consequences of the probe. Under US securities rules, a material event is usually defined as 5 per cent of a company’s average pre-tax earnings for the past three years. For Apple, which reported the highest quarterly profit ever for a US company in January, that could exceed $2.5bn, according to FT calculations. Source: ft.com

Coke says tax assessment could be ‘material’ on September 18, 2015: “The Internal Revenue Service said on Friday that Coca-Cola owes them $3.3 billion. Coke disclosed that on Thursday it had received a notice from the IRS seeking $3.3 billion, plus interest, after the service completed a five-year audit of its tax years running from 2007 to 2009. Basically, the IRS is asserting that Coke should recognize some of this income in the US, rather than overseas, and now wants Coke to pay up.”

Tax assurance will become more and more important and included mandatory in the scope of work of an auditor. That will influence or have a direct impact on senior management’s KPIs and (reevaluation of) tax priorities set.

When a company does not publish its tax principles, notify the authorities of publication or voluntarily implement and execute a ‘Code of Practice on Taxation’ the tax authorities’ qualification of that company will be a ‘High Risk’ resulting in an increased risk of tax audits and/or litigation. Tax audits will likely be done via data analytics (OECD’s SAF-T) and review of the company’s Tax Control Framework. As the trend is global this would likely apply country by country. There is therefore not really a choice whether or not to participate. This is strengthened as an individual at board level has to sign off the tax strategy published.

It is not only about being in agreement but is focused on execution as well. That means a company should have a Tax Control Framework in place where tax material risks (amount much lower than external auditor’s materiality!) are properly managed and continuously monitored. Essential is the own testing of tax controls as its outcome should be disclosed to the tax authorities to actually prove that the company is ‘in control’.

Although tax audit outcome in the past could have been at an acceptable level, the above is about anticipating the future and shows besides ‘Tax Transparency’ and ‘sign off of Tax Strategy by the board’, etc. also a different way how a tax audit will likely be performed in every country in the near future. SAF-T originates as well from the OECD and is developed to make tax audits for the tax authorities more efficient and effective.

A monthly mandatory submission of electronic audit files is a step closer to ‘Big Brother is watching you’ than the current ‘as is’ in many countries.

Is a tax risk assessment needed prior to submission? It highly recommended as you leave an audit trail behind with potential unforeseen risks.

In the Netherlands we know that the authorities are reorganizing and recruiting 1,500 people with IT skills. We also know that knowledge and experiences – e.g on tax risk management – are shared between tax authorities and that the governments are in a real need to optimize their tax revenue.

Is it therefore still wise to continu in the same way or is reevaluation of the company’s overall ‘Audit Defense’ tax strategy in order? That is a question that an in-house tax function needs to answer first.

Triggers for substantial change and tone at the top

  • Tax Transparency and Code of Practice is high or should be high on the agenda of senior management / Head of Tax
  • Change management applies: business model change (e.g. due to State Aid discussion and risk), financial transformation, post merger integration or implementation of COSO ERM as business model, litigation due to aggressive tax planning or is or might be mentioned in public domain

Extraction from the article: Developing a common framework for disclosing tax information by Richard Cornelisse

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