22nd Annual Health SciencesTax ConferenceManaging global and domestic tax controversy:trends and leading practicesDecember...
DisclaimerAny US tax advice contained herein was not intended orwritten to be used, and cannot be used, for the purpose of...
DisclaimerErnst & Young refers to the global organization of member firms of Ernst & Young GlobalLimited, each of which is...
Presenters►   Stephen DelSordo                                  ►    Ned Connelly    Tax Director                         ...
Managing global tax risk
The economic climate change …and what does it mean for your business?► US debt crisis► Banking crisis► Tax reform► Financi...
The four engines of change are still runningat full speed …  Globalization       Shifting economy Changing models         ...
2011– 12 Tax risk and controversy surveyA new era of global risk and uncertainty►   Ernst & Young    surveyed stakeholders...
2011–12 Tax risk and controversy surveyA new era of global risk and uncertainty                                          ►...
What is the corporate tax community sayingabout tax risk and controversy?►   Tax administrations around the world become m...
A tax controversy “explosion” — what arewe observing►   More frequent controversies and key areas of focus are:    ►     T...
The global consequences are realand companies are paying the price Country        Example China          Manufacturer subj...
Potential business impacts andopportunities  Heightened tax risks mean unpleasant surprises:  ►   Unbudgeted costs  ►   In...
Assessing your global tax risk managementcapabilities … are you prepared?►   Do you understand Internal Revenue Service (I...
Five focus areas for an effective taxcontroversy management  Adopt a         Evaluate                  Address tax        ...
Effective and efficient management of globaltax controversy: five leading practices                                       ...
Global tax risk management — corporategovernance framework
Global interest in tax corporate governance “ I am suggesting that you, the leaders of your organizations, should have a m...
What should clients do?►   Develop a global tax corporate governance model that    includes:    ►     A board policy outli...
Benefits of global tax corporate governance►   Improves communication with the board on tax issues►   Standardizes procedu...
Short-term business travelers — a growingissue for global controversy management
Short-term business travelers (STBT)►   Globalization and centralized                           ►     Corporate tax perman...
STBT enforcement activity acrossthe Americas►   United States    ►     In June 2011, employment tax audit specialists were...
STBT enforcement activity across EMEIA►   France    ►     Increasingly aggressive Social Security authorities led to a rai...
STBT enforcement activity acrossAsia-Pacific►   Australia – enforcement activity in relation to    ►     withholding oblig...
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Managing global & domestic tax controversy

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Hear an in-depth discussion of emerging trends in the global and domestic tax controversy landscape, and learn leading practices for managing tax risks.

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Managing global & domestic tax controversy

  1. 1. 22nd Annual Health SciencesTax ConferenceManaging global and domestic tax controversy:trends and leading practicesDecember 3, 2012
  2. 2. DisclaimerAny US tax advice contained herein was not intended orwritten to be used, and cannot be used, for the purpose ofavoiding penalties that may be imposed under the InternalRevenue Code or applicable state or local tax lawprovisions.Page 2 Managing global and domestic tax controversy: trends and leading practices
  3. 3. DisclaimerErnst & Young refers to the global organization of member firms of Ernst & Young GlobalLimited, each of which is a separate legal entity. Ernst & Young LLP is a client-servingmember firm of Ernst & Young Global Limited operating in the US. For more informationabout our organization, please visit www.ey.com.This presentation is ©2012 Ernst & Young LLP. All rights reserved. No part of thisdocument may be reproduced, transmitted or otherwise distributed in any form or by anymeans, electronic or mechanical, including by photocopying, facsimile transmission,recording, rekeying, or using any information storage and retrieval system, without writtenpermission from Ernst & Young LLP. Any reproduction, transmission or distribution of thisform or any of the material herein is prohibited and is in violation of US and internationallaw. Ernst & Young LLP expressly disclaims any liability in connection with use of thispresentation or its contents by any third party.Views expressed in this presentation are not necessarily those of Ernst & Young LLP.Page 3 Managing global and domestic tax controversy: trends and leading practices
  4. 4. Presenters► Stephen DelSordo ► Ned Connelly Tax Director Ernst & Young LLP Johnson & Johnson Stamford, CT New Brunswick NJ +1 203 674 3006 ned.connelly@ey.com► Rob Hanson ► Frank Ng Ernst & Young LLP Ernst & Young LLP Washington, DC Washington, DC +1 202 327 5696 +1 202 327 7887 rob hanson@ey.com frank.ng@ey.comPage 4 Managing global and domestic tax controversy: trends and leading practices
  5. 5. Managing global tax risk
  6. 6. The economic climate change …and what does it mean for your business?► US debt crisis► Banking crisis► Tax reform► Financial crisis► Euro crisis► Sovereign debt crisis► Greek bankruptcy?► Rising unemployment► Austerity focusPage 6 Managing global and domestic tax controversy: trends and leading practices
  7. 7. The four engines of change are still runningat full speed … Globalization Shifting economy Changing models Legislative and of administration regulatory changePage 7 Managing global and domestic tax controversy: trends and leading practices
  8. 8. 2011– 12 Tax risk and controversy surveyA new era of global risk and uncertainty► Ernst & Young surveyed stakeholders in more than 541 companies in 18 countries, including tax directors, CFOs and 100 Audit committee members► In addition, we surveyed tax policy- makers and administrators around the globe► Download the survey from our webcast screen or at www.ey.com/taxrisksurveyPage 8 Managing global and domestic tax controversy: trends and leading practices
  9. 9. 2011–12 Tax risk and controversy surveyA new era of global risk and uncertainty ► 75% have experienced more aggressive tax audits. ► 85% have experienced an increase in international focus by tax authorities. ► 57% of tax administrators identified transfer pricing as their leading tax risk. ► 94% of tax policy-makers predict some or significant growth in General Anti- Avoidance Rules (GAAR) and anti- avoidance measures. ► 97% of tax administrators will increase their focus on international structures and cross-border transactions.Page 9 Managing global and domestic tax controversy: trends and leading practices
  10. 10. What is the corporate tax community sayingabout tax risk and controversy?► Tax administrations around the world become more aggressive and focused: ► 75% of companies say they have experienced a rise in volume or aggressiveness of tax audits. ► 85% of tax directors in companies with more than US$5 billion in revenues reported that they had experienced an increase in international focus by tax authorities in the last two years.► High pace of legislative change creates more risk and uncertainty: ► 75% of tax directors in the largest companies report heightened risk or uncertainty around tax legislation. This figure rises to 78% for Brazil, Russia, India and China (BRIC)-based companies and 83% for US-based companies. ► 81% of tax policy-makers see growth in GAAR and other anti-avoidance legislation in the next three years, while 94% see new legislation in the area of disclosure and transparency.► Disclosure and transparency requirements are growing: ► 78% report that they have experienced an increase in disclosure and transparency requirements made upon their company in the last two years. US-based companies report 83%, China respondents 85% and Brazil-based respondents 88%. ► 76% of tax administrators expect to focus on enforcing these requirements in the next three years, while 94% of tax policy-makers expect there to be either some or significant growth in transparency.► Expansion in emerging markets is creating tax risk and uncertainty: ► 92% of China-based companies and 62% of Brazil-based companies confirm that they have experienced a rise in the volume or aggressiveness of tax audits in the last three years. ► 78% of BRIC-headquartered companies reported greater risk or uncertainty around legislation, compared with 67% of all companies globally.Page 10 Managing global and domestic tax controversy: trends and leading practices
  11. 11. A tax controversy “explosion” — what arewe observing► More frequent controversies and key areas of focus are: ► Transfer pricing ► Indirect taxes ► Employment taxes — expatriate, domestic, short-term travelers ► Cross-border financing arrangements ► Focus on high-net-worth individuals ► Information reporting requirements and withholding taxes ► Business credits and tax incentives► More time being spent managing tax controversy and risk► Increased C-suite attention on managing global tax risk► Stiffer penalty regimes► Government collaboration — information exchanges and joint audits► Expectation to comply with both “spirit” and “letter” of the law► Heightened reputational, financial and personal risksPage 11 Managing global and domestic tax controversy: trends and leading practices
  12. 12. The global consequences are realand companies are paying the price Country Example China Manufacturer subjected to largest payroll audit ever in China resulting in the requirement for payment of $25m in back taxes and $8m in penalties. France Increasingly aggressive social security authorities led a raid and criminal investigation on multinational company resulting in $8m assessment of back social security tax and penalties, even though the company had an agreement with another EU country to protect its position in France. USA Oil company fined $20m for falsifying work permit applications. Japan Global financial services company had their entire foreign retirement plan retroactively disqualified for Japan tax purposes required payments of back tax of $8m and 1m in penalties. Germany SEC enquiry into related matter uncovers internal control breakdown requiring multinational company to re-state financial statements by Euro 100m to correctly report employer paid tax expense. UK Company pays ₤40m + in back taxes and penalties for failure to accurately report home paid income in the UK. Brazil Company unable to collect $1m in employee debt by not being able to enforce loan agreements not written in local language. India European multinational assessed Euro 5m in penalties for failing to report full home paid compensation for employees assigned to work in India. Indian authorities now open full 3-year investigation resulting in additional professional fees of over Euro 1m to respond. UK Of 407 immigration investigations in the UK, 72% resulted in prosecution and criminal sanctions, of which 46% included jail sentences of 7-12 months.Page 12 Managing global and domestic tax controversy: trends and leading practices
  13. 13. Potential business impacts andopportunities Heightened tax risks mean unpleasant surprises: ► Unbudgeted costs ► Increased compliance burden ► More penalties ► Diversion of personnel to controversy management ► Reputational risk — consumers and tax administrations ► External stakeholder concern A proactive approach that incorporates tax risk management into strategic decision-making can reap benefits: ► Creates greater certainty and ability to plan ► Releases significant amounts of cash from the provision ► Provides more timely resolution of issues ► Provides reduction of tax compliance costs ► Frees up best people from managing complex tax controversies and litigation ► Increases prospects of a lighter tax audit focus in the futurePage 13 Managing global and domestic tax controversy: trends and leading practices
  14. 14. Assessing your global tax risk managementcapabilities … are you prepared?► Do you understand Internal Revenue Service (IRS) and foreign enforcement priorities, audit practices and procedures?► Do you have organizational strategies and processes to manage tax risk and global tax audits?► Do you have management information systems to manage global tax audits and disputes?► Do you have a process to assess information-reporting compliance risks?► Is tax risk management and controversy embedded in corporate governance at all levels of the company?► Do you have a process to monitor global legislative and tax administration changes?Page 14 Managing global and domestic tax controversy: trends and leading practices
  15. 15. Five focus areas for an effective taxcontroversy management Adopt a Evaluate Address tax Make strong Stay global global risk and corporate connected approach to resources, controversy governance in with global tax risk and processes at a strategic tax a priority — legislative, controversy and systems level — and it is to tax regulatory management for tax risk execute well administrators, and tax management and it makes administration good business change sensePage 15 Managing global and domestic tax controversy: trends and leading practices
  16. 16. Effective and efficient management of globaltax controversy: five leading practices Evaluate your Manage your Include global Adopt a global Stay connected global systems ongoing and tax risk as a approach to with tax policy and resources potential tax corporate managing tax risk and legislative for tax risk controversies at governance and controversy changes management a strategic level issue Have you … Have you … Have you … How can you … How can you … ► Embedded “tax risk ► Conducted a global ► Help your board ► Ensure all major tax ► Established your global tax risk policy? thinking” in all aspects of assessment of current understand the tax areas of tax policy and ► Established your vision the tax life cycle? inventory based on key implications of business regulatory changes in key ► Ensured proper criteria? decisions? jurisdictions are and strategy? governance over global ► Identified appropriate ► Help your board integrated into tax risk ► Enhanced your relationships with global tax risk management? processes for managing understand the structure, planning? ► Understood tax risk controversies (centralized processes and policies ► Assess the implications tax policy and administration? implications of changing vs local)? related to tax controversy of the potential change ► Pursued a process to business models and ► Understood implications and risk management upon your business influence tax policy and transactions? of actions in other within the company? operations? ► Established an ongoing jurisdictions, entities and ► Ensure appropriate ► Develop clear lines of administration? process to identify, years? oversight of tax risks responsibility, lines of assess, monitor and ► Leveraged opportunities related to transactions? communication and mitigate risks? to use resolution tools ► Keep the board informed knowledge-sharing ► Obtained and retained and processes in of tax policy, legislative among responsible the right talent and countries to help facilitate and administration issues resources? resources? closure of disputes and that may impact your ► Actively engage with ► Understood financial issues? business? policy-makers on key accounting implications ► Understood multi-year issues? of resolved disputes? and multi-jurisdictional implications? ► Understood legislative and regulatory environment?Page 16 Managing global and domestic tax controversy: trends and leading practices
  17. 17. Global tax risk management — corporategovernance framework
  18. 18. Global interest in tax corporate governance “ I am suggesting that you, the leaders of your organizations, should have a mechanism to oversee tax risk as part of your governance process.” “…the audit committee needs to know and influence what tax posture the tax planners are taking.” Dave Hartnett, HMRC Permanent Secretary for Tax – United Kingdom “ Most of the material weaknesses and the business processes have to do with taxes…(the) result of this development is that tax is becoming increasingly important in the boardroom.” Theo Poolen, Deputy Director-General, Dutch Tax and Customs Administration — The Netherlands “ Tax legislation has long imposed tax compliance obligations on companies. While this is not new, what we are observing — both here and overseas — is an increasing focus by regulators on the need for robust risk management frameworks. My question for you as directors is: how well-placed are you to meet increased levels of scrutiny, both now and into the future?” Michael DAscenzo — Australian Tax Office Commissioner “ The board must oversee how management manages them (taxes). And that means some level of understanding, a set of policy principles and then a control system of review and reporting that assures the board that their policy is being carried out. My goal is to promote good corporate governance on tax issues and engage the corporate community in a dialogue about the appropriate role of the board of directors in tax risk oversight.” Douglas Shulman — Commissioner, Internal Revenue Service — United StatesPage 18 Managing global and domestic tax controversy: trends and leading practices
  19. 19. What should clients do?► Develop a global tax corporate governance model that includes: ► A board policy outlining the overarching approach to dealing with tax risk at a strategic level ► A Tax Charter defining the operational elements of tax corporate governance to ensure staff accountability ► A tax risk management reporting framework that supports Tax Charter guidelines► Embed tax risk governance throughout the organization► Establish board, management, tax and business unit roles and responsibilities► Implement mechanisms to identify and escalate significant tax risk to the boardPage 19 Managing global and domestic tax controversy: trends and leading practices
  20. 20. Benefits of global tax corporate governance► Improves communication with the board on tax issues► Standardizes procedures and operational elements of the tax function across the enterprise► Applies a consistent global approach to tax risk management► Encourages global issues to be escalated and considered by designated responsible person/office► Identifies early tax risks, with earlier opportunities to manage impact► Enhances global accountability related to tax risk managementPage 20 Managing global and domestic tax controversy: trends and leading practices
  21. 21. Short-term business travelers — a growingissue for global controversy management
  22. 22. Short-term business travelers (STBT)► Globalization and centralized ► Corporate tax permanent business models have led to establishment exposure an increase in STBT ► Personal income► Often unclear whether tax tax exposure issues are handled by HR or ► Social Security and fringe the Tax Department benefits taxes ► Withholding obligations ► Transfer pricing “This is a question too difficult for a mathematician. It should be asked of a philosopher.” ~Albert Einstein, about filling out his income tax form, 1944Page 22 Managing global and domestic tax controversy: trends and leading practices
  23. 23. STBT enforcement activity acrossthe Americas► United States ► In June 2011, employment tax audit specialists were given specific training on STBT issues ► Employment tax audit specialists are now specifically targeting foreign executive travellers, including requesting copies of visas and travel records ► Focus on Section 482 service charges ► IRS Outer Continental Shelf Initiative ► IRS is using Coast Guard GPS records to identify vessels► Canada ► Taxing authorities are now paying greater attention to board of directors ► New program makes it easier for companies to obtain tax deduction waivers ► Program is seen as possible prelude to crackdown on STBT ► Asking for list of employees who are not on the Canadian payroll is now a part of a routine audit ► Canadian Border Services agents are aggressively questioning STBT and making referrals to Immigration DepartmentPage 23 Managing global and domestic tax controversy: trends and leading practices
  24. 24. STBT enforcement activity across EMEIA► France ► Increasingly aggressive Social Security authorities led to a raid and criminal investigation on multinational corporations (MNCs), resulting in a US$8m assessment of back Social Security tax and penalties, even though the company had an agreement with another EU country to protect its position in France► Germany ► SEC enquiry into related matter uncovers internal control breakdown, requiring multinational enterprises to restate financial statements by Euro100m to correctly report employer-paid tax expense► United Kingdom ► Company paid £40m+ in back taxes and penalties for failure to accurately report home paid income in the UK ► Of 407 immigration investigations in the UK, 72% resulted in prosecution and criminal sanctions, of which 46% included jail sentences of 7-12 monthsPage 24 Managing global and domestic tax controversy: trends and leading practices
  25. 25. STBT enforcement activity acrossAsia-Pacific► Australia – enforcement activity in relation to ► withholding obligations of employers ► Value-added tax (VAT) obligations ► fringe benefit tax obligations and lodgement enforcement ► unintended creation of permanent establishments► China – enforcement activity in relation to STBT obligations, as well as difficulty in obtaining consistent treatment across regional SATs (revenue authorities)► India – increased focus change of to on of permanent establishments within India► Japan – audits in relation to withholding obligations for short-term travellers and creation of permanent establishments► Korea – very active in the exchange of information with other countries in relation to STBT► Taiwan – audits of STBT obligations and information-sharing with immigration authority, which has precluded some employees from re-entering the countryPage 25 Managing global and domestic tax controversy: trends and leading practices
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