document pitfalls in taxation - ongsimho.com · © 2016 ong sim ho advocates & solicitors 3 tax...

© 2016 ONG SIM HO Advocates & Solicitors 1

19 February 2016

Document Pitfalls in Taxation: A Tale of Two Impending Risks

Speaker: Ong Sim Ho, Counsel


Context of Discussion


Tax Documentation - Definition

Feasibility study, approval, legal, advisory, compliance, and post-‐repor7ng

Specifies tax objec7ves, analysis, condi7ons, expected outcome and jus7fica7ons for defined business opera7ons

Transac7onal Level


Documentation & Legal Dispute/Litigation •  Our focus is on the tax dispute /

litigation context: •  Documentation as a:

– Key cause / issue of disputes – Non-compliance issue – criminal risk – Hurdle (or, Advantage) in evidential

proof


Practice Objectives

•  Good knowledge and understanding: –  Protects documentation from undue disclosure

•  Ascertained categories of protected documents using legal privilege

–  Tax Opinions, Tax Transaction Analysis, Minutes of Meetings

–  Jurisdiction exposure

–  Embeds key evidential points essential for proof •  Relate and translate tax plan to documentation •  Specific advice of evidence required to defend •  But not the creation of fictitious or contrived

documents


Two Areas of taxation to overlay our discussion:

•  Permanent Establishment Risk

•  Transfer Pricing


The “Exposure Trinity” in Cross Border Trading Mul7-‐jurisdic7onal Transfer Pricing Cbc: Master File Business Process

Planning

Domes7c Transfer Pricing CbC: Local File

Double Taxa7on/

Adjustments Source Taxa7on

Permanent Establishment

Transfer Pricing

(Arm’s length Principle)


Documentation in PE Risk Management •  Revisiting the PE and Source taxation rules (see

handouts) •  Practically, the usual planning focus to avoid a

PE where there is no fixed place of business relies on: –  Establishing the agent as a broker, general

commission agent or other agent of independent status; AND

–  Removing authority from the agent to negotiate and conclude contracts (even though this is not strictly necessary in the case of independent agents or brokers).

•  But note the impending redefinition of PE concept under the OECD BEPS Action Plan


The Challenges •  Trading process driven by group structure,

commercial factors and differential resource allocation. For example: –  Group may dictate inventory off-take be

consolidated in one country (product resource) –  Trading expertise (human resource) may be in

international centre such as Singapore –  Yet, mid-offices may (though rare) may be in head

office in another country) –  Market intermediation (agents) located in various

market places globally. •  The non-tax parameters may result in trading

processes that create PE and source taxation exposure for the group.


Base Line Analysis

•  Business Process Analysis – Ascertain current business and trade

processes. – Reduce core parameters – Restructure processes to remove or

mitigate PE (and other identified) tax risk. •  Apply appropriate model – brokerage,

proprietary, hybrid •  Identify and articulate commercial justification •  Pricing •  Contractual documentation


The Documentation

•  Every global business / trader should have in place a Business Process Rules (“BPR”) –  Is it not in the TP Documentation already?

•  Possibly, but why should it be? –  Protection from disclosure –  Subtle (but important) distinction between multi-

jurisdiction TP and Domestic TP issues. See slide 7.

–  Legal nature of BPR: •  It is not a tax plan. •  It is a Mandate and thus a Governance instrument (tax

optimised). •  Risk is managed by dealing with the EXCEPTIONS


Business Process Rules and Litigation •  Our BPR coverage:

–  Transaction definitions –  Process rules – i.e:

•  The established trade flow (who is to sell and buy) •  The prices: fees, marked up •  The mandate – authority limitations, sign-off authority, trade

slips.

–  EXCEPTION procedure: •  this is a key protection as it insulates the tainting of all other

trades. •  In one case, we actually advised the use of a large physical

stamp “EXCEPTED TRADE” to be applied on trade slips for authorised departure from the BPR.

•  Follow-up at board level

–  Application of legal privilege to advisory elements


Benefits of BPR in tax disputes – Case Studies •  The issue of source taxation and/or

attribution of profits to PE is effectively isolated from any TP issue. –  “Jetty Group” faced TP inquiry in Japan. –  Japan provided group services to SGP. Fees

were also subject to inquiry. –  JPN insisted service fee cost base should have

been expanded. –  Separately (in the sense it was not part of MAP)

IRAS questioned tax source of certain trades. –  Responses to JPN on TP cast doubts on Jetty

Group’s position that SGP not a PE. –  How might having a BPR avoid the problem?


Transfer Pricing


TP Documentation – Multifaceted

•  Unlike other areas of tax documentation (eg. BPR), TP Documentation is largely a compliance requirement.

•  However, well thought out TP documentation serves multiple objectives: – Contemporaneous evidence of corporate

intention, rationale and purpose. –  Identify and explain explicit departures from

arms length pricing and/or the normal TP methodologies.


TP Documentation – Taking a Life on its own? •  Independent requirement?

– Singapore – legal basis for?

•  Relationship with underlying adjustment powers? – Section 34D – Section 33 – Tax treaties


TP Documentation – Missed Opportunities •  A failure to address the issues discussed

results in TP Documentation which: – Misses the forest (adjustment powers) for

the trees (methodologies). •  Example: “wrong” methodology but arms length

price? Is it oxymoron? •  Not arms length price but no incremental “but

for” profit accrual? – Over-emphasis on price prescription

(database) –  Inadequate “but for” analysis.


“But for” analysis

•  Section 34D (based on OECD):


OECD Guidance •  Country-by-

Country (“Cbc”) Reporting in the works


Country-by-country reporting •  Aggregate CbC data about entities (and

PEs) in every country to be accessible to all relevant tax authorities

•  Proposed CbC template includes: –  Revenues –  Profit (loss) before income tax; –  Income tax paid –  Income tax accrued – current year; –  Stated capital and accumulated earning; –  Number of employees; and –  Tangible assets


Country-by-country reporting

Name of the MNE Group Fiscal year concerned

Tax Jurisdic6on

Revenues Profit (Loss) Before Income Tax

Income Tax Paid (on cash basis)

Stated Capital

Accumulated Earnings Number of Employees

Tangible Assets other than Cash and Cash Equivalents

Unrelated Party

Related Party

Total

Annex III to Chapter V A model template for the Country-‐by-‐Country Report

Table 1. Overview of alloca6on of income, taxes and business ac6vi6es by tax jurisdic6on

GUIDANCE ON TRANSFER PRICING DOCUMENTATION AND COUNTRY-‐BY-‐COUNTRY REPORTING ©OECD 2014


Questions & Answers Session


Thank You

ONG SIM HO Advocates & Solicitors 1 Coleman St, #05-15, The Adelphi, Singapore 179803 T 6804 7560 | E [email protected] | www.ongsimho.com

document pitfalls in taxation - ongsimho.com · © 2016 ong sim ho advocates & solicitors 3 tax...

Documents