What Are Tax
Authorities
Thinking Today?
Calgary
May 23, 2012
kpmg.ca
Topics
A.Global Trends and Canadian Changes
B.CRA’s Risk Based Audits
C.More Aggressive Actions by the Tax Authorities
D.Selected Country Perspectives
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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A. Global Trends and Canadian
Changes
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
Why are Tax Authorities “Working Smarter”?
Organisation for Economic Development and Cooperation
(OECD)
1. The OECD’s Forum on Tax Administration (FTA) was created in
July 2002 by the Committee on Fiscal Affairs with the aim of
promoting dialogue between tax administrations and of identifying
good tax administration practices.
2. The FTA vision is to create a forum through which tax
administrators can identify, discuss and influence relevant global
trends and develop new ideas to enhance tax administration
around the world.
3. Revenue bodies in many countries have been set challenging cost
reduction targets while they are also required to maintain or even
improve their standards of service delivery and the effectiveness of
their compliance activities. Against this background, the Forum has
undertaken a project under the title of ‘Working Smarter’ to
examine measures taken by revenue bodies to reduce costs and
increase efficiency
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
“Working Smarter”:
1.
in structuring tax
administration
2.
in compliance
3.
through legislation
4.
in service delivery
(demand
management)
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1. Structuring Tax Administration
Tax Authorities are redesigning and centralizing functions and
“optimizing key business processes”
Current and future initiatives in Canada:
- Centralized workloads (Collections)
- National and regional intake centres (Appeals, VDP, Fairness)
- Standardized processes and policies
- Electronic self-service (My Business Account, My Payment)
Potential impacts on taxpayers:
- Less judgment, more strict application of policies and guidelines
- Difficulties in getting access to an individual to obtain assistance
- Importance of a good working relationship at some level
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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2. Tax Compliance
Tax Authorities are “facilitating compliance, audit strategies,
collection measures and dispute resolution”
Current and future initiatives in Canada:
- Tax Alert messaging/Outreach and education campaigns
- Mandatory use of electronic services
- Audit downloading through increased use of questionnaires
- Large file-risk based audit approach
Potential impacts on taxpayers:
- Potential for increased collaboration
- Increasing use of existing powers for information gathering
- Corporate Social Responsibility focus
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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2. Tax Compliance - Dispute Resolution
Tax Authorities are “facilitating compliance, audit strategies, collection
measures and dispute resolution” (con’t)
Current and future initiatives in Canada:
-Less use of “Designated Appeals Officers” as DOJ contact in litigation –
increasingly Appeals Officer that reviewed objection remains involved
- (Hopefully) increasing influence of DOJ in determining whether cases settle
- Change to Tax Court Rules to allow party to recover much greater Costs if make
settlement offer (that is rejected) and do as well or better in Court
Potential impacts on taxpayers:
- Various impacts on likelihood of achieving attractive resolution short of trial
- Tax Court rule change welcome but limited in impact on prospects of settlement
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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2. Tax Compliance - Statistics (Objections)
Notice of Objection Statistics (income tax and GST/HST)
Period
2005-06
2006-07
2007-08
Average
TP Successful
33%
22%
29%
28%
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
Partial
Success
No Change
21%
18%
24%
21%
46%
60%
47%
51%
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2. Tax Compliance - Statistics (Tax Court or prior
to Court)
Tax Court of Canada Appeal result (additional success for taxpayers beyond Notice
of Objection stage)
Allowed in full
All files
18%
Allowed in part
Dismissed
35%
47%
Only 1/3 of cases in which a Notice of Appeal was filed proceeded to hearing
Numbers include Informal Procedures and other smaller matters in which taxpayers
tend to be successful less frequently
(2002-06)
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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2. Tax Compliance - Audit Strategies
Tax Authorities are “facilitating compliance, audit strategies, collection
measures and dispute resolution” (con’t)
Current and future initiatives in Canada:
- DOJ “ILBD” Advisors Program
- Centralization of Oil and Gas Litigation in Ottawa office of DOJ
Potential impacts on taxpayers:
- DOJ’s ILBD program has facilitated auditors in early use of requirements,
threats of Compliance Orders
- ILBD program can also be opportunity (if taxpayer wishes DOJ opinion at
audit stage, or otherwise wants DOJ involved)
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
10
2. Tax Compliance - Dispute Resolution
Tax Authorities are “facilitating compliance, audit strategies, collection
measures and dispute resolution” (con’t)
Current and future initiatives in Canada:
- Proposed new Rule designed to allow determination of specific issues by Tax
Court without all issues in tax year
Potential impacts on taxpayers:
- New rule would still require agreement of the parties to put the single issue to
the Court. Usefulness will depend on DOJ/CRA mindset
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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3. Legislation
Tax Authorities are “more active in formulating administrative
legislation and influencing tax policy measures”
Current and future initiatives in Canada:
- Concerns raised at audit more quickly addressed in legislation (corporate
partnerships, packaged bumps, foreign affiliate dumping)
- “Whole of CRA” approach to issues
- Improved communications within CRA network and internationally
Potential impacts on taxpayers:
- “Offensive” planning addressed much more quickly
- Guidance/comfort less likely to be provided
- Overreaching legislation to address unclear offenses – need to educate
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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4. Demand Management
Tax Authorities are “improving service delivery by understanding
drivers of demand to reduce them or address them more effectively”
Current and future initiatives in Canada:
- Review of service channels (less in-person engagement)
- Shift to more electronic service delivery
- Greater investment in technology
- Increased engagement through intermediaries (industry groups,
professional firms) to provide feedback to CRA
Potential impacts on taxpayers:
- Future exchanges with CRA via email?
- Increasingly focused questions by CRA on data and analysis
- Need for industry/association/group collaboration to influence CRA
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
13
B. CRA’s Risk Based Audits
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
CRA’s Risk-Based Audits
Audit coverage
High risk
Medium risk
Low risk
• Compliance
audit
• Quick review
• More indepth
review
• Shorter
audit
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian 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
CRA’s Risk Based Audits - Statistics
Approximately 1100 “Large” file taxpayer groups – 24,000 files
40 - 50% of large taxpayers initially assessed high risk
Approximately 340 factors in CRA’s internal risk grading scorecard
89% of large file audit adjustments from 20% of files
Targeted annual adjustments per large file auditor - $2.7 million
(Results of last 5 years: $3.6, $4.0, $3.0, $3.5 & $2.9 million)
Targeted percentage of cases resulting in a change – 90%
(Results of last 5 years: 92%, 94%, 95%, 96%, 94%)
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
16
C. More Aggressive Actions by
the Tax Authorities
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
Sample commentary in the media
“Tax Authorities” referring to themselves as “Revenue Bodies”
“China, Hong Kong Continue Aggressive Tax Enforcement in 2012”
“International Tax Enforcement on the Rise”
“Aggressive Tax Positions of India’s Income Tax Department”
“Brazil's Government Proposes More Aggressive Tax Reform”
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
18
D. Selected Country
Perspectives
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
Canada
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
Top Three “Hot” Technical Issues
1. Transfer Pricing (management fees; “financial engineering” – e.g.
financing charges, interest rates, guarantee fees, hedging transactions,
swaps, factoring; transfers of intellectual property; business restructuring;
acceptability of comparables)
2. International Tax (financing structures, use of treaties, foreign tax
credits, compliance with reporting requirements)
3. Indirect Tax (use of statistical sampling for compliance, allocations of
input tax credits, provincial apportionment)
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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The Three “Must Knows” About Dealing
with the Canada Revenue Agency (CRA)
1. Can be an aggressive tax administration
2. Government pressure to reduce costs – audit coverage of large
corporates being reduced using a risk-based assessment
approach
3. Opportunities at every stage to deal effectively with CRA from
prior to filing (Rulings, APA), filing, audit, appeals, litigation
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
22
United States
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
Top “Hot” Technical Issues
1. Transfer Pricing – (in any form) broad range of intangibles
valuation issues; services; intercompany financing; tangibles
2. Research and Development Credits
3. Foreign Tax Credits
4. Cross-border payments
5. Debt vs. equity
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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The Three “Must Knows” About Dealing with
the United States Revenue Authority
1. Opportunities for alternative dispute resolutions have multiplied
in recent years and can often produce much earlier technical
and financial certainty
2.
The IRS substantive views on technical issues are often
reflected in materials available on a public website – sample
Information Document Requests (IDR), Industry Directives,
recommended audit techniques, etc.
3. Substantial proposed penalties can accompany audit
adjustments and failures to properly comply with a myriad of
international information reporting requirements
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
25
Other Information
1. IRS has fundamentally redesigned its process for auditing
international issues
2. Recent realignment of the Advance Pricing and Competent
Authority processes is designed to substantially improve the
management of a very large pipeline of aging APA requests and
growing demand
3. Compliance Assurance Process (CAP) is a profound change in the
audit dynamic
4. The new Uncertain Tax Position (UTP) regime was effective for the
2010 tax returns of the largest corporations – it is anticipated that
the disclosure results will soon begin to influence audit decisions
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
26
Brazil
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
Top Three “Hot” Technical Issues
1. IFRS Transitory Regime (RTT):
There are several issues regarding the application of the RTT due to
the incompatibility of the IFRS rules and the Brazilian tax legislation;
2. State VAT (ICMS):
Local Tax Incentives: Brazilian states (26 in total) have been granting
ICMS tax incentives regardless the approval of the other states;
3. Social Contributions Tax Credits (PIS/Cofins):
Tax Authorities are very strict about the kind of good and services
eligible to generate PIS/Cofins tax credits;
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
28
The Three “Must Knows” About Dealing with
the Brazilian Revenue Authority
1. Brazilian tax authorities have few discretionary powers and act
strictly according to the law.
2. However, due to the complexity of the Brazilian tax system, local
tax authorities have no uniform treatment regarding controversial
issues.
3. There is no advanced ruling mechanism in Brazil.
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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China
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
Top Three “Hot” Technical Issues
1. Taxation of non-residents
a. Offshore indirect disposal of shares (Circular 698)
b. Beneficial ownership (Circular 601)
c. Abusive use of corporate structures and tax haven entities
(General Anti-avoidance Rules)
2. Corporate restructuring relief rules
3. Value Added Tax Reform (currently in Shanghai, to be extended
nationwide)
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
31
The Three “Must Knows” About Dealing with
the China’s Tax Authority
1. A clear understanding of structure and responsibilities of tax
authorities at different levels is critical
2. Be well-prepared for any consulting / discussion / negotiation
with tax officials in terms of both technical and non-technical
matters
3. Effective tax internal control processes – good documentation
and record keeping
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
32
Tax Revenue Trends
Tax revenue collected by tax inspection
1200
Unit: RMB
100 million
1000
800
600
400
200
0
2006
2007
2008
2009
Source: State Administration of Taxation
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
33
India
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
Top Three “Hot” Technical Issues
1. Investment structures (Indirect transfer of shares)
2. Permanent Establishment (liaison office and authority of local
personnel)
3. Transfer pricing (Cost plus mark-up, intangibles, attribution of global
profits; R&D, etc.)
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and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
35
The Three “Must Knows” About Dealing with
the Indian Revenue Authority
1. Wide powers of tax authorities (regular audits; survey, search,
seizures)
2. Robust documentation / information requirement (detailed
paperwork and detailed scrutiny of underlying contracts)
3. Well linked with Tax Authorities across the globe (regular interaction
and deputation of officers / exchange of information)
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
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Other Information
Retrospective amendments overruling Court decisions
•
Indirect transfer of shares*
•
Definition of ‘royalty’ under domestic tax law – Ambit expanded to cover
software license / website hosting / transponder payments etc*
Introduction of General Anti Avoidance Rules (GAAR) from April 1,
2012*
•
Main purpose / one of the main purpose; to obtain tax benefit
•
Over-ride Treaty in specified situations / circumstances
Developing nation; subsidy programs
-
Huge pressure for revenue collection
-
Aggressive approach
* Proposed by Union Budget 2012 – Yet to be enacted as law
©2012 Moskowitz & Meredith LLP is a Canadian limited liability partnership affiliated with KPMG LLP, a limited liability partnership
and the Canadian member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative
(“KPMG International”), a Swiss entity. All rights reserved.
37
Thank you
Gerald Grenon
(403) 216-1833
Paul Lynch
(613) 212-3795
The information contained herein is of a general nature and is not intended to address the circumstances of any
particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no
guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the
future. No one should act on such information without appropriate professional advice after a thorough examination
of the particular situation.
© 2012 KPMG LLP, a limited liability partnership and the Canadian member firm of the KPMG network of
independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity.
All rights reserved.
The KPMG name, logo and "cutting through complexity" are registered trademarks or trademarks of KPMG
International Cooperative ("KPMG International").
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