Resolving Global Tax Conflicts

Transcription

1 2009 Asia Pacific Transfer Pricing Conference 10 February 2009, Korea Chambers of Commerce & Industry, Seoul Marc Levey, New York, B&M Monique van Herksen, Amsterdam, B&M Moises Curiel-Garcia, Mexico City, B&M Sai Ree Yun, Korea, Yulchon

2 Tax Controversy in the United States The Audit Process The team, team meetings and information document requests Notice of Proposed Adjustment (NOPA) 30 Day Letter Notice of Proposed Deficiency Each event triggers a strategic move for Taxpayers Resolving cases at Audit Appeals or Simultaneous Appeals & Competent Authority Fast Track Appeals Tax Court or Federal District Court 2009 All rights reserved. 2

3 Alternative Forums for Tax Controversies Audit/Notice of Proposed Adjustments Fast Track Settlement Early Referral Procedure ( ERP ) 30-Day Letter & RAR Competent Authority IRS Appeals Office Post-Appeals Mediation Post-Appeals Arbitration Notice of Deficiency Denial of Refund Claim Tax Court Refund Forums 2009 All rights reserved. 3

4 Taxpayer s Dispute Resolution Strategies Multiple Objectives Resolve controversy. What is success? Avoid penalties. Manage financial statement implications. Minimize potential double taxation. Control costs of dispute. No Guaranteed Route to Success 2009 All rights reserved. 4

5 IRS Appeals Examination Ex Parte Rules Opening Conference Appeals mission fair resolution based on litigation hazards Ground Rules for an Appeals Conference Exam may make oral presentation. Appeals may question Exam on specific adjustments. Appeals may request supplemental information Taxpayer may glean Appeals hazards assessment All rights reserved. 5

6 IRS Appeals Concerns Appeals Officers Quality, Negotiation Skills, Objectivity & Independence Vary. Influence of Appeals Economists. Slower Traditional Appeals Process. Threats to Independence: Increasing number of Emerging and Coordinated Issues. Joint Committee ( JCT ) review of >$2M overpayments All rights reserved. 6

7 Emerging & Coordinated Issues Emerging Issue = Issue Being Studied by National Office for Formal Guidance. Appeals settlement subject to oversight. Coordinated Issue = Issue Subject to LMSB or Appeals Coordination. Appeals settlement subject to Appeals Coordinated Issue Coordinator s ( CIC ) approval All rights reserved. 7

8 Tier I Issue Issues of High Strategic Importance Nonqualified Deferred Executive Compensation 409A Research & Experimentation ( R&E ) Credit Claims Transfer of Intangibles Offshore/Cost Sharing Tax Shelter Distressed Asset/Debt Tax Shelter Redemption Bogus Optional Basis Listed Abusive Tax Shelters and Transactions 2009 All rights reserved. 8

9 Tier II Issues Issues of Significant Compliance Risk Tier II issues are those involving areas of potential high non-compliance and/or significant compliance risk or an Industry. Tier II issues includes emerging issues a clarification, direction and guidance. Tier II issues require coordination with the Issue Owner Executive. Selected Tier II issues include: Casualty Loss: Single Identifiable Property/Capital vs. Repairs 2009 All rights reserved. 9

10 Tier II Issues Issues of Significant Compliance Risk (cont.) Cost-Sharing-Stock Based Compensation Extraterritorial Income Exclusion Effective Date and Transition Rules Accounting Issues: Contractual Allowance Non-Performing Loans Specified Liability Losses, IRC 172(f) Super Completed Contract Method Upfront Fees, Milestone Payments & Royalties in the Biotech & Pharmaceutical Industries 2009 All rights reserved. 10

11 Post Appeals Arbitration Arbitration Mediation. Available Only For Unagreed Factual Issues. Arbitration Conducted Before Mutually Agreed Appeals or Independent Arbitrator. Arbitration May Involve Evidentiary Hearing (and Presumably IRS Counsel). Arbitration Results in Binding Determination (discretionary or baseball style award) All rights reserved. 11

12 Post Appeals Mediation (PAM) PAM Represents Third Bite At Appeals Settlement. PAM Available at Taxpayer s Request if Settlement Negotiations Fail to Resolve Issue. Current Appeals practice is to acquiesce to Taxpayer s PAM request. PAM Envisions Two Professionally Trained Mediators Overseeing Nonbinding Settlement Mediation Between Taxpayer and Appeals Officer. Mediation = Compromise All rights reserved. 12

13 Litigation Tax Court or Federal Courts Multi-Year Marathon Pleadings. Discovery (i.e. Document production, Interrogatories, Depositions) Pretrial Motions. Stipulations. Trial. Briefing. Substantial Majority of Docketed Cases Settle Before Trial 2009 All rights reserved. 13

14 Fast-Track Settlement ( FTS ) Tool for Resolving Cases during Audit IRS Audit Team retains jurisdiction. Taxpayer can file Protest with Appeals if FTS is not successful. Background Rev. Proc FTS = Mediation/Compromise. 80%-85% FTS Settlement Rate. Approximates Appeals Settlement Rate All rights reserved. 14

15 Early Referral Procedure (ERP) Allows Taxpayer to Accelerate Appeals Consideration of Unagreed Adjustment During Audit. Requires Exam s issuance of NOPA. Requires Exam s and Appeals concurrence. Normal Appeals Rules Apply. No ex parte communications. Written brief required. If Audit Concludes While ERP Issue Still Under Appeals Discussion, Case Converts to Normal Appeals Case All rights reserved. 15

16 U.S. Competent Authority ( USCA ) Double Tax Cases Treaty Procedure Allows Taxpayer, USCA and Foreign Competent Authority to Agree On Arm's Length Price For U.S. & Foreign Tax Purposes. See Rev. Proc Based upon Mutual Assistance Provisions ( MAP ) of US Treaties. MAP is government-to-government ( G-to-G ) negotiation All rights reserved. 16

17 Optimize Privilege and Work Product Protection Attorney-client privilege. Work product doctrine. Listed transactions. FIN 48 What is an uncertain tax position and more likely than not Standard. Transfer Pricing is based on a lesser reasonableness standard Auditors require a more detailed review Textron What it means and does not mean to privileged communications. See also Regions Financial Corp. & Subs. v. U.S. Documents outside of the United States All rights reserved. 17

18 Mutual Agreement Procedure Pursuant to Article 25 OECD Model Convention Agreement between tax authorities Aim: avoidance of double taxation OECD February 2007 Report on improving resolution of tax treaty disputes Arbitration paragraph inclusion in Article 25 OECD Model Convention New MAP Decree Netherlands committing to arbitration and 2-years to resolve disputes Contained in U.S. Canadian, U.S. German, and US Belgium Tax Treaties 2009 All rights reserved. 18

19 Arbitration Pursuant to Article 25 OECD Model Convention; or Pursuant to EU Arbitration Convention Agreement between tax authorities Based on arbitration decision Aim: avoidance of double taxation 2009 All rights reserved. 19

20 Key Features Arbitration Convention For transfer pricing issues only Filing of MAP request must be within 3 years Advisory Commission to be implemented in case no resolution of MAP within 2 years Task of Advisory Commission is to issue opinion on elimination of double tax within 6 months Competent authorities must decide within 6 months thereafter, if they fail to reach a decision, the Advisory Commission decision becomes binding Great sensitivity regarding 2-year term to go to Advisory Commission: is all information received? 2009 All rights reserved. 20

21 Key Features Arbitration Convention (cont.) Extension if case is also submitted to court Waiver by agreement with taxpayer Serious penalty exclusion Triangular cases discussion Advisory Commission members: One chairman Two (or one) representative(s) of each Competent Authority Even number of (two) independent persons of standing (nationals and resident of Contracting State) Character of ultimate decision is a MAP agreement All rights reserved. 21

22 Advance Pricing Agreements In General Procedure by which taxpayer and tax authority agree upon correct transfer price for a specific transaction If unilateral, pursuant to domestic revenue procedures or decrees If bilateral or multilateral, pursuant to Article 25 OECD Model Convention Agreement on facts, transfer price and pricing method Goal: avoidance of adjustments and double taxation 2009 All rights reserved. 22

23 Key Features APAs Tool to obtain tax certainty in advance Potential tool to (assist) settle back years/audit disputes and minimize penalty exposure Process requires providing upfront information/disclosure and thus exposure. If bilateral: potentially increased exposure/exchange of information aspects Important to manage information flow and process well Usually entered into for 3-5 years, and as such great way to get certainty If bilateral: avoidance of double taxation 2009 All rights reserved. 23

24 Key Features APAs (cont.) If unilateral: audit simplification/reduced likelihood of domestic adjustments Often greater flexibility: i.e. possibility to include VAT/Customs issues Sometimes time-consuming process and unexpected demands (inclusion of more issues than preferred) If unilateral, character of ultimate agreement with taxpayer is (usually) a (binding) determination agreement or ruling If bilateral, character of ultimate agreement with taxpayer is a determination agreement or ruling and includes a MAP agreement between tax authorities 2009 All rights reserved. 24

25 Tax Controversy in Korea Audit Process Select Target Companies and Form Audit Teams Issue Advance Tax Audit Notice (10 Days before the Audit begins) Tax Audit Period (4 to 6 weeks, subject to extension) Issue Preliminary Tax Assessment Notice Issue Tax Assessment Notice Strategic Considerations for Taxpayers Pre-audit Exercise Dealing with the Field Audit Process Pre- Assessment Review Procedure Mutual Agreement Procedure 2009 All rights reserved. 25

26 Tax Controversy in Korea (cont.) Administrative Appeal Procedure through the National Tax Tribunal ( NTT ), etc. Judicial Review through Court System 2009 All rights reserved. 26

27 Overview of Domestic Tax Dispute Resolution National Tax Service (Request for examination) (**) (**) (**) Taxpayer (*) (**) Regional Tax Office (Appeal) Competent Court High Court Supreme Court (**) Within 14 days Within 14 days (**) National Tax Tribunal (Request for adjudication) ( **) (**) Board of Audit & Inspection (Request for examination) (**) *Pre-assessment review procedures can be made within 30 days ** Within 90 days 27

28 Cross-Border Disputes Between Korea and others Mutual Agreement Procedure (MAP) Where a result of a tax dispute between the Korean tax authorities and a taxpayer is expected to have impact on the tax authorities of another country with which Korea has an income tax treaty Competent Authority Process in the MAPs Exchange position paper Negotiate face to face Treaty analyst discusses MAP/APA cases Exchange closing MAP letters Pending MAP suspends domestic proceedings 2009 All rights reserved. 28

29 Cross-Border Disputes Between Korea and others (cont.) Korea-US MAP program On-going since the 1990s General issues: pricing, character, source, PE Administrative Appeal Procedure Appeal through the National Tax Service ( NTS ), the NTT, or the Board of Audit and Inspection ( BOAI ) A taxpayer may resort to the judicial review only after exhausting the administrative review procedure 2009 All rights reserved. 29

30 Cross-Border Disputes Between Korea and others (cont.) Judicial Review Procedure Appeal through the court system in Korea: 1. The Administrative Court or Competent District Court if outside of Seoul (1year and a half) 2. The High Court (6 months to 1 year) 3. The Supreme Court (6 months to 3 years) 2009 All rights reserved. 30

31 Advance Pricing Arrangements between Korea and others APA Process Pre-filing conference Submit the APA Application ( NTS International Cooperation Division) APA Review (Active participation by the taxpayer and its tax agent strongly recommended) Proceed with the MAP (if bilateral) APA Procedure and Effect Submit Annual Reports / Rescind APAs, etc All rights reserved. 31

32 Advance Pricing Arrangements between Korea and others (cont.) APA trend in Korea APA Applications/ APA s Concluded/ Applications Pending : Increasing trend 5/7/25 (2003) 10/16/31 (2004) 7/25/49 (2005) 24/24/49 (2006) 26/32/61 (2007) APA Processing Time : - Unilateral APA : 21 months on the average to 20 months in Bilateral APA : 33 months on the average to 17 months in 2007 Categories of the APAs concluded: Tangible Asset, Service, Intangible Asset and Financial Service (listed in the order of frequency) - Tangible assets accounted for 60% of the total Term of the APAs concluded : 3 to 6 years, but mostly 5 years Taxpayer s Home Country (Out of 61 Pending Cases as of end of 2007) : U.S.A. (20), Japan (11), Switzerland (7), France and U.K. (4 each), Singapore and Germany (3 each), Canada and Netherlands (2 each) 2009 All rights reserved. 32

33 Advance Pricing Arrangements between Korea and others (cont.) Experience with US (2002~2007) Between 15 and 20 completed cases Roughly half involve US parents Approximately 20 pending cases Wide variety of covered transactions, but mostly distribution, manufacturing/assembly, and/or services 2009 All rights reserved. 33

34 Tax Disputes in Mexico The Audit Process SAT requires the external auditor to submit the transfer pricing study and support for amounts in related-party transactions Order forwarded to taxpayer Taxpayer is notified of deficiencies found Taxpayer responds within following two months (additional one-month extension available) to offer support that its determination is correct Notice of proposed deficiency 2009 All rights reserved. 34

35 Audits Resolving Global Tax Conflicts Mexican Audit Cases 2004 June All rights reserved

36 Dispute Resolution Post-Audit Mexico Payment Administrative Appeal Tax Court Alternatives MAP APA Tax Court Circuit Courts Competent Authority Injunction Supreme Court 2009 All rights reserved. 36

37 Dispute Resolution Audit Mexico Setoffs They may be accepted in the course of an audit, in practice SAT do not accept them. Defenses against penalties: Show that you have been diligent in the preparation of the TP Study. Show that the Regulations prevented you from using a better method Application of the rules to the facts in the case study Technical discussion about the legal utilization of the secret comparables 2009 All rights reserved. 37

38 Dispute Resolution Audit Mexico (cont.) Headquarters Services expenses will not be subject to negotiation, if those correspond to a shareholder activity, it would not justify a charge to the recipient companies or those services are duplicate with the Mexican Company The SAT is flexible for the Arm s Length resolution, base on a technical criteria 2009 All rights reserved. 38

39 Dispute Resolution Post-Audit Mexico Administrative Appeal Involves filing a protest before the Appeals Office (the Central Tax Counsel) in the SAT, with arguments of form and/or substance. The term to file the appeal is 45 business days Action Before the Tax Court The taxpayer files a petition before the Tax Court (the Federal Court for Tax and Administrative Justice). The suit must be filed within 45 business days Competent Authority Procedure This procedure involves exercising the right provided in the treaties to avoid double taxation, entered into between Mexico and the countries of residence of related parties with whom the transactions giving rise to the Notice of Deficiency were carried on, to invoke the mechanism for negotiations between or among the tax authorities of the countries involved All rights reserved. 39

40 Competent Authority Mexico Goal: Avoidance of Double Taxation SAT have some experience with Japan, USA & Canada Limit on time for beginning competent authority proceedings 2009 All rights reserved. 40

41 Correlative Relief Mexico Article 217 MITL. This procedure involves exercising the right provided in the treaties to avoid double taxation No surcharges or interest under this procedure Primary allocations Here, reduction of deduction for cost of raw materials (assuming gross margin of 22 percent) equal to 8% of $500, or $40, results in additional income tax in Mexico Additional Consequences Characterization issue of the excess amount paid to USCorp If earnings of MexicoCo have been fully distributed, additional gross up would be required. Avoidance of Additional Consequences USCorp repays excess amount 2009 All rights reserved. 41

42 APAs Mexico Types of Advance Pricing Resolutions Unilateral: more than 1400 Bilateral: more than 120 Multilateral APR Team Time to complete Transfer Pricing Methods used in APRs 2009 All rights reserved. 42

43 2009 Asia Pacific Transfer Pricing Conference 10 February 2009, Korea Chambers of Commerce & Industry, Seoul Marc Levey, New York, B&M Monique van Herksen, Amsterdam, B&M Moises Curiel-Garcia, Mexico City, B&M Sai Ree Yun, Korea, Yulchon