Regulatory Briefing

Summary of key regulatory actions, initiatives and draft legislation affecting audit, capital markets, governance and tax Implications for companies and their auditors

July 2016

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Introduction

Welcome to the July 2016 issue of the Regulatory Briefing. In it we outline key current developments affecting audit, capital markets, governance and tax.

Some of these initiatives are on-going, however we also cover new developments.

We recommend you consider the following as you are reading this Briefing:

Where developments could affect you, here are some things you can do:

Respond directly to a consultation or proposal.

Meet with or write to the sponsors or lead organisations for the various initiatives.

Discuss proposals with other stakeholders.

Refer to the Additional Information section of this Briefing for how to register comments and/or participate in the debates.

To learn more:

You can access the previous issue of the Regulatory Briefing (April 2016) and additional points of view on audit and regulatory affairs here.

Visit http://www.pwc.com/regulatory-debate for points of view and other key information.

Further information is also available from your PwC relationship partner.

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Contents Introduction 3 Audit 6

European Union 6 ◊ Update on the implementation of the EU Audit Legislation by Member States 6

Global 8 ◊ International Auditing and Assurance Standards Board (IAASB) – Latest developments in

global audit standard setting 8 ◊ International Ethics Standards Board for Accountants (IESBA) – New standard regarding

responding to non-compliance with laws and regulations (NOCLAR) 8

Hong Kong 9 Hong Kong Institute of Certified Public Accountants (HKICPA) – “Long form” audit report

requirement for listed companies 9

Japan 9 Japanese government – Japan Revitalisation Strategy 2016 9

Russia 9 State Duma and Central Bank of Russia - Audit Law and Bank Law draft revisions proposed for

comments 9

Capital Markets 10

Australia 10 Federal Parliament – Report on the Statutory Review of the Anti-Money Laundering and Counter-

Terrorism Financing Act 2006 (AML/CTF Act) 10

China and Hong Kong 10 The People’s Bank of China (PBoC) – New cross border financing rules are issued 10 Hong Kong Securities and Futures Commission (SFC) and Financial Industry

Regulatory Authority of the United States (FINRA) – Memorandum of Understanding (MoU) to enhance supervision and oversight of cross-border regulated entities signed 11

European Union 11 ◊ European Commission (EC) - Latest developments on EU capital markets regulation (Capital

Markets Union, Shareholder Rights Directive) 11 Status report on the Capital Markets Union (CMU) 11 Simplified prospectus for SMEs briefing paper 11 ◊Shareholder Rights Directive and Corporate Governance Statement 11 ◊ Guidelines on non-financial information reporting 11 Directive protecting trade secrets adopted 12 ◊ European Securities and Markets Authority (ESMA) - Delays in the go-live date of certain

Markets in Financial Instruments Directive (MiFID) provisions 12

Governance 13

Global 13 International Organization of Securities Commissions (IOSCO) – Survey reveals increased

role of audit committees 13

Argentina 14 Comisión Nacional de Valores (CNV) – Revised MFR regulations and adoption of international

standards 14

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Georgia 14 Parliament of Georgia – New law aligns Georgia with EU mandatory rotation of audit firms 14

Hong Kong 14 Securities and Futures Commission (SFC) – New stewardship code encourages investor

engagement 14

Indonesia 14 Financial Services Authority (FSA) – draft regulation requiring audit firm rotation 14

Malaysia 15 Securities Commission Malaysia (SC) – Proposed corporate governance code released 15

Nigeria 15 Financial Reporting Council of Nigeria (FRCN) – Draft rule on audit committee chairman

qualifications sparks debate 15 ◊ Nigeria Securities and Exchange Commission (SECN) and Financial Reporting Council of

Nigeria (FRCN) - Proposed changes to National Code of Corporate Governance 15

Oman 15 Capital Markets Authority (CMA) – New corporate governance code takes effect 15

Singapore 16 Singapore Exchange (SGX) – SGX launches new Sustainability Indices 16

South Africa 16 ◊ Independent Regulatory Board for Auditors (IRBA) – IRBA comments on King IV published 16

United Kingdom 16 Financial Reporting Council (FRC) – FRC issues final draft updates for Corporate Governance

Code, Audit Committee Guidance 16

Tax 18

Australia 18 Australian Government – Discussion paper focuses on OECD mandatory disclosure rules 18

European Union 18 European Commission (EC) - Anti-Tax Avoidance Directive (ATA Directive) 18 ◊ European Commission (EC) – Public country-by-country reporting (CbCR) Directive 19 ◊ European Parliament (EP) – Inquiry Committee into Panama Papers 19 ◊ European Commission (EC) – State aid 19 ◊ European Parliament (EP) - TAXE II committee 19

Germany 20 Federal Ministry of Finance – Draft measures on information sharing and BEPS 20

Global 20 ◊ OECD – Additional BEPS publications 20

India 21 Finance Ministry (FM) – Union Budget 2016 reveals BEPS component 21

Additional Information 22

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Audit This section provides the latest developments in audit regulation affecting companies and their auditors.

The EU Audit Legislation became applicable on 17 June, 2016. Roughly half of the 28 EU Member States have adopted implementation legislation; others are in the final stages of doing so. Below we provide an overview on the state of implementation.

We also provide news from the global standard setters IAASB and IESBA, and report on developments in various markets including China, Hong Kong and Russia. We particularly focus on developments in Japan, where the Government launched the Japan Revitalisation Strategy 2016 in June covering key components on accounting, auditing and governance.

European Union

◊ Update on the implementation of the EU Audit Legislation by Member States

On 17 June, 2016 the EU Audit Legislation became applicable. The rules will apply to financial years starting on or after that date and are especially relevant for financial years starting on 1 January, 2017. Approximately half of the 28 Member States have adopted national implementing legislation and others are expected to do so in the next six months.

The following map shows the current status of the transposition into national law by Member State:

We now have a good sense of how countries are expected to use the Member State options:

Many will opt for the 10 year audit tenure period but fewer than expected will allow the extension

Stricter requirements for Financial Services apply in some Member States

The majority will allow tax services The PIE definition has been narrowed by many

Member States, resulting in fewer PIEs

More details are provided below.

PwC commentary

Some countries have not yet adopted implementation legislation. These legislative delays will be more difficult for public interest entities (PIEs) with a financial year (FY) that differs from the calendar year (e.g. a 30 June year-end). Companies with a FY that starts before these processes are completed will need to comply with the basic requirements outlined in the EU Regulation (i.e. without member state options) - unless the relevant member state has put temporary arrangements in place to enable these options.

In countries where there is no appetite for temporary measures to enable the member state options, compliance with the Regulation (without options) would be required from the start of the first financial year after 16 June, 2016 (in the above example this would be 1 July, 2016).

Member States are taking different directions on audit firm tenure/rotation rules, the restrictions on whether audit firms can provide tax and other non-

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audit services (NAS) and the scope of the PIE definition. A decision to broaden the definition of a PIE results in more entities being subject to mandatory rotation of audit firms and limitations on non-audit services. Our understanding of the positions which might be adopted by the Member States on key issues are illustrated below.

Further guidance

Several new resources are available providing further guidance on implementation of the EU Audit Legislation, including:

1. The EC published “questions and answers” on the new rules to help assist with implementation.

Companies may be particularly interested in the clarifications provided on the following issues:

Applying new rules to non-listed PIEs Entering into audit engagements after new rules

entered into force Extending the maximum duration of audit

engagements following a public tender Extending the maximum engagement period

following joint audit

Applying new cooling-off requirements for key audit partners

Applying the transitional regime

Composition of audit committees

2. The European Contact Group (ECG), comprised of the continent’s six largest professional services networks, is in the process of creating an implementation database. The database is designed to help companies understand the legislation, its interpretation and the approach adopted towards the options by each Member State. The ECG webpage also has a ‘Frequently

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Asked Questions’ document on the audit legislation.

3. The European Confederation of Directors Associations (ecoDa), together with PwC, published guidance for audit committees regarding new or updated corporate governance requirements resulting from the EU Audit Legislation.

Global

◊ International Auditing and Assurance Standards Board (IAASB) – Latest developments in global audit standard setting

◊ Auditor reporting ISAs series The IAASB’s Auditor Reporting Implementation Working Group issued a publication on what audit committees and financial executives need to know about the more informative auditor’s reports. The article explores the nine most common questions asked by audit committee members and finance executives about the new and enhanced auditor’s reports.

The IAASB also released a Comparison between the ISAs and the PCAOB's re-proposal on the new auditor's report.

◊ Invitation to Comment addressing professional scepticism, quality control and group audits

The comment period on the IAASB’s Invitation to Comment, “Enhancing Audit Quality in the Public Interest – A focus on professional scepticism, quality control and group audits”, closed on 16 May, 2016.

Next steps

The IAASB will reflect on comments received as it shapes the scope of its revision projects on quality control (ISQC 1 and ISA 220) and group audits (ISA 600). The IAASB will also consider how best to promote professional scepticism, in conjunction with IESBA and the International Accounting Education Standards Board (IAESB).

PwC commentary

We support the IAASB revisiting its group audit and quality control standards to ensure continuity in light of changes in business and audit environments.

Themes in the PwC network’s response to the consultation include:

Standards need to allow audits to be designed in the way that best delivers audit quality across the wide spectrum of organisational structures in companies

Standards should promote proactive, scalable and robust quality management

Standards should address the conditions under which audit evidence can be shared

We believe that it is important to audit quality that standards are adaptable to the circumstances of particular audit engagements. Principles-based standards are able to be “future-proofed” by avoiding undue prescription that may inhibit innovation.

Our response also includes the principles we used to evaluate whether changes to the ISAs/ISQC would be constructive and support audit quality and the specific changes we recommend.

◊ International Ethics Standards Board for Accountants (IESBA) – New standard regarding responding to non-compliance with laws and regulations (NOCLAR)

The new IESBA Standard on NOCLAR provides guidance for professional accountants on how to respond in situations where they become aware of or suspect non-compliance with laws or regulations (such as a suspected fraud).

The guidance sets out a professional accountant’s responsibilities and assists the professional accountant in assessing the implications of the matter and the possible courses of action in response. It does not address actions that professional accountants should take to identify such matters.

The provisions in the IESBA Code of Ethics for Professional Accountants (the Code) apply to audit services, non-audit services provided by professional accountants to their client and also to accountants in business.

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The Code makes it clear that it is the responsibility of the client’s management, with the oversight of those charged with governance, to ensure that the client’s business activities are conducted in accordance with laws and regulations.

Current position

At its March 2016 meeting, the IESBA agreed to the final provisions in Sections 225 and 360 of the Code. The IAASB confirmed related amendments to IAASB standards (e.g. ISA 250) in its June 2016 meeting.

Next steps

The Public Interest Oversight Board, an independent oversight body supported by the International Federation of Accountants, will complete a consideration of due process on the final provisions. The new requirements are likely to become effective by 1 July, 2017.

Hong Kong

Hong Kong Institute of Certified Public Accountants (HKICPA) – “Long form” audit report requirement for listed companies

In August 2015, the HKICPA adopted the requirement for “long form” audit report (based on the international standards (ISA) 720) for listed companies effective for the financial year ending after 15 December, 2016. As implementation is underway, individuals in governance capacities, as well as auditors, must familiarise themselves with key audit matters.

The Chinese Institute of Certified Public Accountants (CICPA) also issued exposure drafts on a “long form” report in January 2016.

Japan

Japanese government – Japan Revitalisation Strategy 2016

In June, the Japanese government announced the Japan Revitalization Strategy 2016. This is a growth initiative to encourage capital investment and updated business structures in Japan. One of its policy measures is further enhancement of corporate governance, with proposals for revisions to the current code. Regarding accounting and auditing, the Strategy proposes:

Requiring the preparation of an audit governance code

Requiring greater accountability for audit firms

Promoting dialogue between audit firms and regulatory agency

Most of the current developments in Japan are based on the Financial Services Agency’s (FSA) Advisory Council’s recommendations announced in March. It is expected that the FSA will continue its actions to promote confidence in audit.

Next steps

The FSA has indicated that it expects the institutional reforms proposed in the Japan Revitalization Strategy 2016 to be implemented by the first half of 2019.

Russia

State Duma and Central Bank of Russia - Audit Law and Bank Law draft revisions proposed for comments

New draft proposals of revisions to the Audit Law and the Banks and Bank Services Law have been released and are available for comment. The proposed revisions aim to require audit firms to inform the regulator (Central Bank of Russia) about issues identified in the course of the audit, including violations of bank regulations, significant deficiencies of internal control and modifications of the audit opinion.

Another proposal will impact both the Audit Law and the Law on Consolidated Financial Statements. The proposal requires that companies obliged to publish audited annual consolidated financial statements also issue interim audited consolidated financial statements.

PwC commentary

The proposed revisions reflect the intention of the regulator to improve the financial stability of the banking and financial services industry. However, the proposed requirements create concerns regarding client confidentiality and some seem inconsistent with the established role and responsibility of the auditor. PwC has provided comments on the proposed revisions and will monitor developments.

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Capital Markets Here are the latest regulatory developments that affect capital markets. We identify initiatives being implemented or under consideration to enhance requirements, especially for listed entities.

Some important updates to ongoing initiatives in the EU include:

The EC consultation on development of non-financial reporting guidelines

The Directive aiming to protect businesses against the unlawful acquisition, use and disclosure of trade secrets

Revisions to the Shareholders’ Rights Directive in the EU

We also update the status of the Capital Markets Union initiative and implementation of the MiFID II provisions. Elsewhere, the Attorney-General’s Department in Australia has recommended measures aimed at easing the burden of complying with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

Australia Federal Parliament – Report on the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act)

In April, the Australian Attorney-General’s Department, the government department charged with the maintenance and improvement of the legal and judicial system, published its Report on the Statutory Review of the AML/CTF Act. While the Department has concluded that Australia’s AML and CTF regime is both “relevant and appropriate”, it made several recommendations to improve the AML/CTF regime. These included responding to industry stakeholder requests for a clearer and simpler compliance process. Additional recommendations include:

Improving the accessibility and readability of the AML/CTF Act and Rules

Building partnerships between the public and private sector to share financial intelligence

Strengthening the audit, information-gathering and enforcement framework used by the Australian Transaction Reports and Analysis Centre

China and Hong Kong

The People’s Bank of China (PBoC) – New cross border financing rules are issued

The PBoC has issued a Circular on Implementing an Overall Macro-prudential Management System for Nationwide Cross-border Financing. This introduces a system (the MP System) to track financing provided to Chinese on-shore entities by offshore financiers in local currency (RMB) or foreign currencies. The Circular came into force on 3 May, 2016 and the MP System now applies to all enterprises incorporated in China, including both foreign invested enterprises and Chinese domestic companies, but excluding real estate enterprises and government financing platforms.

PwC commentary

The new Circular is part of measures by the Chinese government to liberalise cross-border financing activities. The option given to foreign invested enterprises and domestic Chinese companies to raise capital from domestic markets or offshore markets provides an opportunity to decrease financing costs.

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Hong Kong Securities and Futures Commission (SFC) and Financial Industry Regulatory Authority of the United States (FINRA) – Memorandum of Understanding (MoU) to enhance supervision and oversight of cross-border regulated entities signed

The SFC and FINRA have signed a MoU concerning mutual assistance in the supervision and oversight of regulated entities that operate on a cross-border basis in HK and the US. The MoU came into effect on 9 May, 2016.

PwC commentary

We believe the MoU will have a positive effect as the regulators work together on issues of investor protection, market and financial integrity, reduction of systemic risk and maintaining financial stability.

European Union ◊ European Commission (EC) - Latest developments on EU capital markets regulation (Capital Markets Union, Shareholder Rights Directive)

Status report on the Capital Markets Union (CMU)

In its first status report on the CMU Action Plan, the EC outlines the key actions it intends to take to achieve an integrated capital market in the EU by 2019. The report aims to assist national policymakers identify and act on specific measures and objectives. Measures highlighted include:

Revision of the rules on European Venture Capital Funds (EuVECA) and European Social Entrepreneurship Funds (EuSEF)

Follow-up on the call for evidence on the cumulative impact of the financial reform

Actions planned in 2017-2018 include:

Review of the EU corporate bond markets

Review of the macro-prudential framework

The status report is published twice a year. The next report will be presented in October 2016.

Simplified prospectus for SMEs briefing paper

In May, the CMU published a briefing paper, “Simplified prospectus for SMEs”. The paper adds a proposal to the EC’s efforts to establish a simplified prospectus regime for small- and medium- sized enterprises (SMEs) under the CMU. The paper is a joint effort from FEE, the ECG and the European Group of International Accounting Networks and Associations (EGIAN).

◊Shareholder Rights Directive and Corporate Governance Statement

To improve corporate governance within the EU, in 2014 the EC put forward proposals to revise the Shareholder Rights Directive.

Current position

The trilogue negotiations between the European Parliament, the Council and the EC are underway. They are considering whether public country-by-country reporting of the provisions introduced to the Shareholder Rights Directive proposal will be integrated in the final compromise package.

◊ Guidelines on non-financial information reporting

The EC consulted on non-binding guidelines for how large PIEs, such as listed companies and banks, should disclose social and environmental information. The consultation asked what the underpinning principles of such guidelines should be.

The new guidelines would apply to large PIEs with more than 500 employees.

Next steps

The EC intends to release the guidelines in December 2016.

PwC commentary

In our response, we state our belief that a framework of principles (as opposed to a more prescriptive set of guidelines) will allow companies the flexibility to innovate and will enable a natural evolution of new reporting. The materiality principle is key for good non-financial reporting. It enables undertakings to tell their own, truly relevant story and not be driven towards a standard tick box approach. The EC should consider how other principles, such as the comparability and

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reliability principles, are presented in the guidelines so they complement and do not detract from the materiality objective.

In the longer term, corporate reporting will need to adjust to a wider stakeholder group than the traditional shareholder audience of financial statements we see today. Non-financial information will become integral to mainstream reporting.

Directive protecting trade secrets adopted

The European Council formally adopted the Directive that aims to protect businesses against the unlawful acquisition, use and disclosure of their trade secrets. Each EU Member State must now implement the Directive into national law.

The Directive defines a trade secret as information which meets all of the following requirements:

Is secret in the sense that it is not, as a body or in the precise configuration and assembly of its components, generally known among or readily accessible to persons within the circles

that normally deal with the kind of information in question

Has commercial value because it is secret

Has been subject to reasonable steps under the circumstances, by the person lawfully in control of the information, to keep it secret.

The Directive also harmonises the circumstances in which the misappropriation of a trade secret will be unlawful and provides a common set of remedies.

◊ European Securities and Markets Authority (ESMA) - Delays in the go-live date of certain Markets in Financial Instruments Directive (MiFID) provisions

The application date for MiFID has been delayed until 3 July, 2018.

Under the MiFID II regime, ESMA has to collect data from about 300 trading venues on almost 15 million financial instruments. The delay will only impact banks and regulators and is “strictly limited” to allowing technical work to be finished.

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Governance Recent developments in governance demonstrate key trends that are shaping regulations and guidance across global markets. Examples of key issues and trends in the developments covered below include:

Mandatory rotation of audit firms (MFR) – this remains a key trend as regulators determine whether to reject (Argentina) or potentially implement (Indonesia, South Africa) MFR

Role of audit committees - the importance of independent audit committees is supported by a global survey (IOSCO) and by new guidance material in the UK

Environment, social and governance (ESG) - the launch of Singapore’s Sustainability Indices reveals a growing commitment to linking sustainability and long-term value

Growth of governance in emerging markets - a new governance code in Oman and proposed new codes in Malaysia and Nigeria demonstrate the continued rise of governance as a key issue in emerging markets

The range and scope of these measures, and their geographic coverage, show that legislators and regulators around the world are introducing new legislation, codes and guidance, and enforcement measures and sanctions to improve corporate governance.

Global

International Organization of Securities Commissions (IOSCO) – Survey reveals increased role of audit committees

In May, IOSCO released its “Survey Report on Audit Committee Oversight of Auditors”. The report summarises the results of a survey of IOSCO’s members regarding the existing requirements related to the audit process and the audit committee’s oversight of the auditor.

Among responding jurisdictions, the survey findings indicate:

Need for audit committees: 96% require publicly listed entities to establish an audit committee

Assessment of auditor independence: Over 90% require that the audit committee be explicitly responsible for assessing the auditor’s independence.

Assessment of auditor performance: 71% require a periodic assessment of auditor performance by the audit committee.

Transparency in reporting: Requirements that audit firms provide transparency reporting exist in 61% of countries within developed capital markets while 15% of emerging market jurisdictions have this requirement.

Compared to their previous survey in 2004, IOSCO noted large increases in the existence of audit committees, number of committee members required to be independent of the entity or the auditor and enhanced requirements for specific skills or experience of committee members.

PwC commentary

Independent and effective audit committees are key to ensuring financial reporting integrity and accountability. In addition to the need for audit committees, transparency in reporting is vital. An effective audit committee will provide reports that give investors and other stakeholders more insight into the audit committee’s oversight roles and activities.

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Argentina

Comisión Nacional de Valores (CNV) – Revised MFR regulations and adoption of international standards

In May, the CNV issued a resolution aligning Argentine rotation and independence regulations with international standards established by the International Ethics Standards Board for Accountants (IESBA). The resolution repealed mandatory firm rotation requirements and aligned auditor independence standards to those in the IESBA Code of Ethics for Professional Accountants. The previous standard required three-year audit firm rotation and contained complex restrictions on non-audit services provided by the external auditor.

Georgia

Parliament of Georgia – New law aligns Georgia with EU mandatory rotation of audit firms

In June, Georgia adopted a new law on accounting, reporting and auditing that contained requirements similar to those in the EU Audit Legislation. The law includes 10-year mandatory firm rotation and the establishment of a new auditor oversight body.

Hong Kong

Securities and Futures Commission (SFC) – New stewardship code encourages investor engagement

The SFC published “Principles of Responsible Ownership”, a stewardship code designed to help institutional investors determine how best to meet ownership responsibilities. Examples of institutional investors include banks, pension funds and insurance companies. The code is voluntary but encourages institutional investors to adopt the principles under an “apply or explain” approach. The code contains seven principles encouraging institutional investors to engage with the companies in which they invest, stating that investors should:

Establish and report to their stakeholders their policies for discharging their ownership responsibilities

Monitor and engage with their investee companies

Establish clear policies on when to escalate their engagement activities

Have clear policies on voting

Be willing to act collectively with other investors when appropriate

Report to their stakeholders on how they have discharged their ownership responsibilities; and

When investing on behalf of clients, have policies on managing conflicts of interests

PwC commentary

Stewardship codes can be an effective method to improve engagement between stakeholders and boards. This improved engagement can lead to a better alignment of the interests of stakeholders, boards and management and an increase in market confidence and stability.

Indonesia

Financial Services Authority (FSA) – draft regulation requiring audit firm rotation

In May, the FSA issued a draft regulation that would require listed companies and financial institutions under its supervision to rotate auditors every 10 years with a 2 year cooling off period.

The regulation would be applied retrospectively and any audit firm which provided continuous audit services prior to 31 December 2006 would have a one year extension (i.e. they can perform the audit for 31 December 2016 before the company would have to appoint a new auditor).

The scope of the proposals could also include foreign auditing organisations (OAA). For an OAA that changes its member firm the period of engagement is cumulative.

The proposals would also allow the FSA to ask for a re-audit from companies if the auditor has provided audit services or assurance services for more than

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10 years and for other violations such as using auditors that are not registered with FSA.

Next steps

The consultation period closed on 20 May. The FSA has not yet released a response to comments received.

Malaysia

Securities Commission Malaysia (SC) – Proposed corporate governance code released

In April, the SC released its proposed Malaysian Code on Corporate Governance 2016 (MCCG 2016) for public consultation. The proposed code features a new approach that divides corporate governance activities into two categories, ‘Core’ and ‘Core+’. Companies are expected to disclose adherence to the ‘Core’ practices on an ‘apply or explain an alternative’ basis. Companies opting to apply ‘Core+’ practices are encouraged to disclose in the annual report how the practices are being implemented.

Next steps

The public consultation period ended on 8 June. The SC response to comments is expected in the next 2–3 months.

Nigeria

Financial Reporting Council of Nigeria (FRCN) – Draft rule on audit committee chairman qualifications sparks debate

The FRCN issued a draft rule that would require audit committee chairs to be a professional accountant and a member of an accounting body established by Act of the Nigerian National Assembly.

The draft rule has been met with resistance from representatives of shareholder groups claiming the rule is not compatible with the Companies and Allied Matters Act (CAMA) and unfairly blocks non-accounting professionals from audit committees. The FRCN states the draft rule builds on the CAMA while strengthening audit committees and corporate governance. Consultations and debate are ongoing.

◊ Nigeria Securities and Exchange Commission (SECN) and Financial Reporting Council of Nigeria (FRCN) - Proposed changes to National Code of Corporate Governance

The SECN proposed additional revisions to its Code of Corporate Governance in April 2016.

Current significant proposed revisions include:

Applicability to all “regulated private companies” meaning those private companies that file returns to Financial Reporting Council or other sectoral regulators

A 10-year mandatory audit firm rotation requirement with a 7-year “cooling off” period (the SECN currently recommends rotation)

Listed and PIE companies shall engage Joint External Auditors for the statutory audit. If the existing first audit firm is an international firm, the second auditor shall be a national firm

Obligatory rotation of audit partners assigned every five years

Corporate and personal liabilities on companies and directors in the event of corporate governance failures

Majority non-executive independent membership for audit committees

The proposals also call for increased engagement with large shareholders.

PwC commentary

We support the efforts of regulatory authorities, such as the SECN and FRCN, to provide stability by harmonising governance requirements. We share concerns expressed by some stakeholders about some of the proposed restrictions.

Oman

Capital Markets Authority (CMA) – New corporate governance code takes effect

The CMA’s new corporate governance code will take effect on 22 July, 2016. The new code represents efforts by the CMA to increase transparency and accountability in the market, and includes:

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Enhanced definition of ‘independent’ as applied to potential board members

A requirement for the annual report to contain a separate chapter on corporate governance and code compliance

A requirement that all board members be non-executive directors

Development by the board of directors of a charter addressing social responsibility requirements

Singapore

Singapore Exchange (SGX) – SGX launches new Sustainability Indices

On May 30, the SGX launched the SGX Sustainability Indices, providing investors with new tools to assess the sustainability practices of SGX-listed companies. The indices will also allow investors to identify environmental, social and governance (ESG) leaders in Singapore. Companies identified on the indices must meet minimum sustainability reporting requirements and be considered leaders with established ESG practices. Four indices are included in the launch: Sustainability Leaders, Sustainability Leaders Enhanced, Sustainability Index, and Sustainability Enhanced Indices.

PwC commentary

Better ESG management is an opportunity for the private equity sector to generate more value – for investment firms’ portfolio companies, for their investors and for society at large. This has led to an increased focus on ESG considerations worldwide, particularly in developed markets. Determining how to report on ESG considerations and demonstrate their value is difficult. Efforts like those by the SGX will provide valuable insight on how to best quantify the benefits of ESG management.

South Africa

◊ Independent Regulatory Board for Auditors (IRBA) – IRBA comments on King IV published

The Institute of Directors in Southern Africa published the IRBA’s comments on the draft King IV Governance Code. The comments indicate that IRBA supports the responsibility of the independent audit committee to ensure the independence of the auditor and audit quality. The IRBA also recommends the draft Code strengthen independence of external auditors, citing mandatory audit firm rotation as an example.

Next steps

IRBA will reach a decision on mandatory firm rotation in South Africa on 29 July, 2016. The decision will be submitted to the IRBA Board for approval in October 2016.

United Kingdom

Financial Reporting Council (FRC) – FRC issues final draft updates for Corporate Governance Code, Audit Committee Guidance

The UK Financial Reporting Council (FRC) issued the final draft updates for the UK Corporate Governance Code and the Guidance on Audit Committees (GAC). In addition, the FRC issued final drafts of the revised Auditing and Ethical Standards, which took effect in June 2016.

Draft changes to the UK Corporate Governance Code include:

Requiring audit committee members have “competence in the sector”

Removing the audit tendering provision

Requiring companies to give ‘advance notice of any retendering plans’ in the audit committee section of the annual report

Draft changes to the GAC include:

Recommending increased transparency around conversations with the FRC

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Recommending a change to the conditions in which the audit committee may pre-approve certain types of non-audit services by the auditor. In contrast, the existing GAC (2012) states that: ‘Pre-approval of the use of the external auditor may be appropriate where the threats to auditor independence are considered low, for example if the engagement is: routine in nature and the fee is not significant in the context of the audit fee; or for an audit related service.’

Next steps

The FRC committed to avoid further updates to the Code until at least 2019.

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Tax This chapter focuses on multinational tax developments. It has updates on regional initiatives in the EU and global initiatives by the G20 and OECD. It also covers current activities in Australia, Germany and India.

Major initiatives in the EU include the Directive to implement OECD / G20 recommendations and other base erosion and profit shifting (BEPS) measures, proposals for public country-by-country reporting and the introduction of an inquiry committee into the leaked Panama Papers. There are also updates on the ongoing review of the European Parliament’s TAXE II committee and the European Commission’s views on State aid.

The OECD is in the midst of the second stage of its Action Plan on BEPS and is considering collaboration between tax administrations but has also turned its focus towards growth and the role that tax plays in helping the global economy.

Australia

Australian Government – Discussion paper focuses on OECD mandatory disclosure rules

The Australian Government issued a Discussion Paper on the best practices recommended by the OECD for Mandatory Disclosure Rules. These would require early disclosures of aggressive tax arrangements to provide tax authorities with timely information on arrangements potentially undermining the integrity of the income tax system.

In Australia the tax paid by multinational corporations (MNCs) continues to be a highly political issue. Recently, the debate triggered an inquiry by the Senate Economics Committee into ‘corporate tax avoidance’ which issued its most recent report in April 2016 after 20 months of work.

PwC Commentary

These proposals continue the Government’s actions, locally and globally, to target perceived base erosion and profit shifting BEPS by MNCs. The most significant measure is the 40 per cent ‘diverted profits tax’ to apply to income years commencing on or after 1 July, 2017. This measure is intended to ensure MNCs pay “an appropriate amount of tax on profits made in Australia” and provide greater powers to the Australian Taxation Office (ATO) for taxpayers “who do not co-operate with the ATO”. Our analysis of these measures is available here.

European Union

European Commission (EC) - Anti-Tax Avoidance Directive (ATA Directive)

The ATA Directive is one element of the Anti-Tax Avoidance Package (ATAP). The draft ATA Directive sets out proposals for implementing some of the OECD/ G20 recommendations on BEPS. It will also cover further reaching measures to address additional issues within the EU.

Current position

Political agreement was reached on the ATA Directive by Member States at the June 2016 Economic and Financial Affairs Council (ECOFIN) meeting.

The proposed directive includes provisions dealing with interest deductions, controlled foreign companies, exit taxation, hybrid mismatches and a general anti-abuse rule. A switchover clause, which was in the original EC proposal and which was designed to ensure a minimum effective tax on profits arising in low or no-tax countries, was dropped.

Next steps

Member States have until 31 December, 2018 to adopt and publish the necessary laws and regulations for most of these provisions to come into effect from 1 January, 2019.

Regulatory Briefing July 25, 2016

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PwC commentary

We support reducing compliance burdens and removing tax obstacles to the cross-border business activity that is essential to economic growth. These rules which will be applicable across the whole of the EU will require Member States to make significant changes to their tax systems. However, there will only be partial consistency of application of some of the OECD BEPS recommendations from these EU requirements.

◊ European Commission (EC) – Public country-by-country reporting (CbCR) Directive

The EC has proposed a Directive which will require public CbCR of tax and other financial data by large companies in the EU. The proposed Directive will affect the existing EU Accounting Directive.

Current position

This comes shortly after the Council’s formal adoption of CbCR to tax administrations, in line with the OECD/ G20 BEPS recommendations, via adjustment to the Directive on Administrative Co-operation on Tax (DAC4).

The proposals for public CbCR are not as far-reaching as DAC4. However, companies that exceed two of the following three criteria will be affected:

a balance sheet totalling EUR 20m ($22.4m)

net revenue of EUR 40m

an average of 250 employees throughout the financial year

This would affect an estimated 20,000 companies rather than the 2,000 companies that fall within the EC’s proposed threshold of annual gross revenue of EUR 750m, which is the BEPS-related standard.

Next steps

The draft Directive must be approved in the EP and by the Council.

PwC commentary

The proposals appear to be a move towards further transparency in tax matters by multinational enterprises. Enterprises need to consider carefully their response to further transparency and in particular to CbCR and the way it reflects the allocation of results across the value chain. You can read more in our online analysis of the proposals.

◊ European Parliament (EP) – Inquiry Committee into Panama Papers

The EP set up an inquiry committee to investigate the ‘Panama Papers’. The Papers revealed detailed information on off-shore companies and their ultimate beneficiaries.

The Committee will consist of 65 members who are tasked to investigate alleged contraventions and maladministration in the application of European Union law with respect to money laundering, tax avoidance and tax evasion by the Commission or Member States. The Committee will have 12 months to draw up a report.

◊ European Commission (EC) – State aid

The Working Paper on State Aid and Tax Rulings published in June provided an overview of DG Competition’s preliminary perspectives after review of Member States’ (MS) tax ruling practices. This coincided with a number of recent announcements:

appeals by Belgium (excess profits) and the Netherlands (in respect of recent EC decisions against them

publication of non-confidential versions of the decisions against Belgium (excess profits) and Luxembourg

an opening decision in the formal investigation into tow tax rulings obtained by a U.S.-based company in Luxembourg

Our series of EUDTG Newsalerts sets out summaries of all these developments as they took place.

◊ European Parliament (EP) - TAXE II committee

In July, the draft report of the TAXE II committee meeting was approved by plenary vote. A range of issues were identified in the report including:

increasing need for tax justice and tax transparency

non-effective exchange of information between jurisdictions

lack of consistency among countries regarding the registration of offshore companies

July 25, 2016 Regulatory Briefing

New Adopted ◊ Update

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Germany Federal Ministry of Finance – Draft measures on information sharing and BEPS

The draft rules specify mandatory CbCR for fiscal years beginning after 31 December, 2015. There will also be modification of existing statutory transfer pricing documentation obligations. Measures introduced include requirements to prepare country-specific (Local File) and global (Master File) documentation, and additional information reporting obligations are imposed on MNCs.

Numerous other provisions are affected by additional rules intended to apply ‘further measures to combat the reduction of profits and profit shifting’, as well as implementing some of the OECD’s BEPS recommendations to intensify transparency between tax administrations. The provisions may have a considerable impact on business.

Legislation will also be put in place to enable the sharing of advance cross-border rulings and advance pricing arrangements in line with the EU Directive which was adopted in December 2015.

Global

◊ OECD – Additional BEPS publications

Part of the second stage of the OECD’s BEPS project involves clarification of outstanding issues. For developing countries, this includes the creation and provision of practical toolkits that address the top priority issues they have identified.

Current position

To provide clarification on outstanding issues, discussion drafts are available on:

definition of ‘pension funds’

eligibility of other investment funds

Action 15 in relation to the multilateral instrument (MLI)

A public consultation hearing on the development of a multilateral instrument to implement the tax treaty-related BEPS measures was held 7 July.

Apart from proposals forming part of the annual Budgets of Australia and India, or the broad tax changes announced by Germany (all three a subject of this Briefing), a number of other countries have announced BEPS-specific measures.

In its TaxTalks webcast in June, the OECD pointed to clusters of country activity around three specific areas, including:

Hybrid arrangements: Chile, Liechtenstein, South Africa, UK

Preferential tax regimes, notably exchanges of tax ruling and patent boxes: Canada, Hungary, Italy, Liechtenstein, Luxembourg, Netherlands, New Zealand, Portugal, Sweden, Switzerland, UK

Transfer pricing documentation, including CbCR: Austria, Belgium, Bermuda, Canada, Denmark, Japan, Liechtenstein, Malaysia, Norway, Portugal, Russia, South Africa, Sweden, Switzerland and Turkey

Next steps

Three discussion drafts are expected to be published in July and August on:

“Elements of the design and operation of the group ratio rule”

“Branch mismatch arrangements”

“Approaches to address BEPS involving interest in the banking and insurance sectors”

The OECD’s response to submissions made for the treaty issues for pension funds and non-CIV funds is expected shortly.

The OECD is also expected to publish a second toolkit in July to deal with transfer pricing comparable transactions in developing countries.

Next steps

The multilateral instrument (MLI) is expected to be ready for signature by 31 December 2016. It has been suggested that negotiations involving 90 states has been progressing well. However, the latest discussion draft asks very open questions about potential technical issues rather than putting forward proposals and it has been suggested that a draft will not be made available for public consultation.

For more on this topic, see our BEPS specific web pages.

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India

Finance Ministry (FM) – Union Budget 2016 reveals BEPS component

The OECD’s BEPS agenda was mentioned in the 2016 Union Budget. Multinationals will need to better align their business activities with their transfer pricing policies. The three layers of transfer pricing documentation will be required, including CbCR. Controversially, an equalisation levy of 6% will be applied to various online/ digital advertising and similar services.

The Indian government is progressing towards a lower tax regime. Compliant taxpayers can expect a supportive interface with the tax department, while tax evasion would be countered strongly.

Our analysis of the 2016 Union Budget points out that the FM had a difficult task between phasing-out exemptions/ deductions and ensuring that businesses remain incentivised for further investments.

July 25, 2016 Regulatory Briefing

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Additional Information

PwC Points of View PwC commentaries on a number of key proposals and major areas of debate raised by commentators and stakeholders, and possible alternative proposals are available in more detail at: www.pwc.com/regulatory-debate

PwC EU audit legislation Fact Sheets PwC has produced a series of ‘Fact Sheets’ on the key measures included in the legislation which are available at: www.pwc.com/regulatory-debate and include:

Mandatory audit firm rotation for PIEs

New requirements for audit committees (or their equivalent) relating to their oversight of the performance of the audit

Additional restrictions on the provision of non-audit services by the statutory auditor to their PIE audit clients

New requirements regarding reporting by the statutory auditor

The definition of Public Interest Entities (PIEs)

EU audit legislation Briefings PwC has also produced a Briefing Note on potential, unintended, extra-territorial impacts of the EU audit legislation:

Consideration of potential unintended extraterritorial impacts

You may also find the material produced by the European Federation of Accountants (FEE) on the implementation of the EU audit legislation of value.

Corporate governance guidance PwC and ecoDa together produced guidance for audit committees regarding new or updated corporate governance requirements resulting from the EU Audit Legislation.

PwC International Tax News PwC has produced a series of international tax newsletters available at: https://www.pwc.com/gx/en/services/tax/newsletters/international-tax-services.html

How to participate in the debates? The best way to provide input on implementation of the EU audit legislation is to contact an appropriate official of a Member State government or the national audit regulator.

Contacts If you would like more information on any of the initiatives described in this briefing, please contact your PwC relationship partner.

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