KPMG Ignite 10:30 am – 11:15 am Session 5: How To Win In Today's Tax World Wanda Rumball, Partner, KPMG Law LLP Gerald Grenon, Partner, KPMG Law LLP Agenda CRA Landscape Audit Trends and Initiatives Taxpayer Toolkit The Players and When To Play Your Cards Resolving Disputes in the Tax Court Recent Trends and Developments KPMG Ignite Canada Revenue Agency • Current Conditions • Audit Initiatives • Taxpayers’ Rx © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Current CRA Landscape External Forces • International backdrop • Federal fiscal reality • Budget constraints – shrinking resources Internal Responses • Enhanced efficiencies (for CRA) • Enhanced revenue raising objective © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Audit Trends and Initiatives General • Increasingly aggressive • Increasingly focused audit resources © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Audit Trends and Initiatives Specific • Large corporation audit strategy • Information requests • Risk-based audit approach © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite CRA’s Risk-Based Audits CRA’s Old Approach CRA’s New Approach Size Individual legal entities > $250 M revenue “Groups” with > $250 M revenue Certainty Audit Protocol Real-time audit assistance Audit cycle Perpetual None to regular visits Tax Governance & Taxpayer Behaviour Not relevant Can be very relevant © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite CRA’s Risk-Based Audits Audit coverage High risk Medium risk Low risk • Compliance audit • Quick review • More indepth review • Shorter audit © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. • Typical CRA audit KPMG Ignite CRA’s Risk-Based Audits CRA considers the following in evaluating risk: • • • • • • • • • Audit history Corporate governance (oversight) Corporate structure (controls) Openness and transparency Participation in aggressive tax planning Unusual or complex transactions Major acquisitions or disposals Industry issues International transactions © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite CRA’s Risk-Based Audits The 12 Questions 1. Provide information about your internal tax function: how many staff and what are their roles and responsibilities? 2. Do you have a formal framework for identifying and assessing tax risks associated with normal ongoing operations? If so, provide information on how risk is identified, managed, reported, monitored and mitigated. Provide names of those who oversee tax risk management. 3. Are tax risk review conducted? If so, how often and who gets the results? Can you provide us with the results? 4. What tax matters do the directors and senior management normally get involved in? Are they proactive or reactive? Please provide supporting documentation. 5. What tax intermediaries are used and what is their involvement in tax risk management? What are your expectations from these individuals? 6. Do you monitor the risk of non-compliance with tax obligations? If so, how do you do this and what do you do when you discover a potential issue? © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite CRA’s Risk-Based Audits The 12 Questions 7. What systems and processes does the company have to ensure that data and information for tax purposes are accurate, reliable and maintained in accordance with requisite legislation? 8. Has the company used external advisors for tax services within the last 2 years and does this happen on a regular basis? Have any of them been retained on a contingency fee basis? 9. Do you have a tax strategy that is consistent with your overall business strategy? If so, please provide details. 10. Do you have a risk management committee? If so, please identify the members and their roles and advise if you would be willing to give us access to the minutes of the meetings. 11. What are your top 5 priorities with respect to tax? 12. Do you have any other information regarding tax risk that you feel is relevant to assist us in understanding your business and which will allow us to better define your risk assessment? © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Audit Trends and Initiatives Top 10 List 1. 2. 3. 4. 5. 6. 7. Transfer Pricing & APAs – financial instruments, restructuring Interest deductibility – reasonableness Professional fees – transaction costs, personal Foreign Accrual Property Income (FAPI) and surplus pool computation Permanent establishment/residency – in Canada, in a province Withholding taxes – Regulation 102, 105, Part XIII Enterprise – payroll audits, penalties – 163(1), management fees, taxable benefits, aircraft 8. Surplus Stripping 9. Rollovers – T2057 (section 85) – valuation and compliance focus 10. Indirect Taxes and SR&ED © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Taxpayer Toolkit • Diligent compliance • Strong books and records • Tax planning • Dealing with the CRA © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Taxpayer Toolkit Dealing with the CRA Manage the relationship • Transparency • Educate auditors • Optimize risk assessment © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Taxpayer Toolkit Risk Assessment Optimization • • • • • Plan for meeting/request Document tax governance practices (policy statement) Invest in systems/controls Co-ordinate with risk management Strong in-house capability © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Taxpayer Toolkit Manage the Issues • Relationship v. Issue • Evaluate tolerance for aggressiveness • Large corporation strategies © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Life Cycle of Typical Contested Issue • Audit – CRA Audit Division • Objection – CRA Appeals Division • Filing of pleadings in Tax Court – brings Department of Justice on to file • Tax Court hearing • Federal Court of Appeal (Appeal as of Right) © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Typically Differing Approaches Re Documents and Oral Evidence • Auditors are auditors – they want to see documents to believe (and have audit powers) • Auditors and the value of a concise explanation (backed by documents) • Appeals Officers – should be more willing to consider all forms of evidence; experience varies • Crown lawyers and discovery © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Metrics Applied to CRA and Impact • No cradle to grave metrics; CRA’s branches measured separately • Audit “TEBA” – Tax Earned by Audit o Percentage of cases resulting in a change o 75% - small and medium enterprises – revenue of $1 million to $50 million 90% - large business – revenue of > $50 million • CRA Appeals – elapsed time to resolve dispute/quality assurance review © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Choosing When to Play Your Cards • Dealing with an auditor (or appeals officer) with a closed mind (and finding out whether you are dealing with a closed mind) • Opting to change the players (up the chain, or referrals to other departments in CRA) • Less use of “Designated Appeals Officers” as DOJ contact in litigation – increasingly Appeals Officer that reviewed objection remains involved • Especially if HQ Appeals involved in review of objection • Attempt to increase influence of DOJ in determining whether cases settle (Protocol – limited but intended to have more general influence – but will it succeed where same Appeals Officer?) © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Statistics Notice of Objection Statistics (income tax and GST/HST) Period TP Successful Partial Success No Change 2005-06 33% 21% 46% 2006-07 22% 18% 60% 2007-08 29% 24% 47% Average 28% 21% 51% © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Statistics Tax Court of Canada Appeal Result (additional success for taxpayers beyond Notice of Objection stage) All Files Allowed in Full Allowed in Part Dismissed 18% 35% 47% • Dragged down by Informal Procedure Statistics (2002-06) © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Resolving Disputes in the Tax Court Milestones Pleadings • Notice of Appeal • Reply • Answer List of Documents (Partial vs. Full Disclosure) Discoveries Pre-Trial Conferences Trial © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Matters Affecting Prospect of Resolution without Trial (Baseline) Need for Principled basis • Courts have refused to enforce settlements on basis CRA/DOJ could not agree to settlement not in accordance with law • How principled? • Pure saw-offs based on litigation risk not accepted • Some issues – e.g. allocation of purchase price are generally flexible – others all or nothing “Softsim Technologies” – Tax Court enforced settlement on basis “I could have reached the same findings in a judgment” and writes “If settlements are to be taken seriously, I fully agree that parties should be bound by them”. Hindrance and opportunity © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Matters Affecting Prospect of Resolution without Trial (Baseline) Consider possible attractive settlements in taking positions from early in dispute – especially for large corporations, given objection rules Arrange for right mix of issues to be before decision-makers at CRA / DOJ, or judge at pre-hearing conference or hearing • Year by year basis, but can pick year to file Notice of Appeal, and can combine years in Notice of Appeal © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Recent Trends and Developments • Budget Cuts • Tax Court rule designed to increase settlements – greatly increased recovery of costs if make settlement offer (that is rejected) and do as well or better in court • “Substantial indemnity” – 80% of real costs (solicitor client) from date of offer • Welcome but limited impact by virtue of need for principled basis. • CIBC World Markets – FCA reads in that cost rule can’t apply where settlement offer not principled. • Is the Rule now useless in litigation with single issues that have no obvious mid-points? • Is “I WIN, NO COSTS” a qualifying offer? (No) • Costs from Consolidated Revenue Fund © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite Exclusive Offer For KPMG IGNITE Attendees Personalized CRA risk-based assessment coaching session Receiving the risk-based evaluation letter from the CRA creates angst in any organization – the letter requests a meeting with non-tax executives and demands detailed description of the tax function and processes in your organization. Advance preparation is key to minimizing stress and maximizing the outcome for taxpayers. In a coaching session our experienced professionals would help you (i) evaluate your organization’s current preparedness for the request; (ii) identify specific actions / issues to address prior to receiving a request; and (iii) suggest strategies to help you plan for the day that the letter arrives. LET US HELP YOU BE PREPARED. © 2014 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. KPMG Ignite KPMG Ignite Thank you for coming. Wanda Rumball, Partner, KPMG Law LLP [email protected] Gerald Grenon, Partner, KPMG Law LLP [email protected]
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