Tax dispute resolution: a new chapter emerges. Tax administration without borders

Transcription

1 Tax dispute resolution: a new chapter emerges Tax administration without borders

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3 Contents Introduction 04 The road to Alternative Dispute Resolution 06 ADR processes 08 Factors to consider 22 Conclusion 25 ADR processes in country jurisdictions 26 Australia 27 Belgium 29 Brazil 30 Canada 31 China 32 European Union 33 France 34 Germany 35 Hong Kong 37 India 38 Italy 39 Japan 40 South Korea 41 Mexico 42 The Netherlands 43 Russia 45 Singapore 46 South Africa 48 Turkey 49 United Kingdom 50 United States 52

4 4 Introduction Tax authorities are adapting their enforcement strategies, focus and policies in response to the changing dynamics of business and the need to make sure that all due taxes are paid. They are developing better tools, processes and capabilities to help ensure that their limited resources are being applied to the right issues and taxpayers. They are also sharing more information with their foreign counterparts, growing more sophisticated, sharpening their enforcement focus and developing new legislation to help them collect every dollar due to them. The result has been more frequent and complex disputes between taxpayers and taxing authorities a trend that is only increasing as emerging markets gain in stature and influence and take a more sophisticated approach to taxation. As tax authorities sharpen their focus on compliance and enforcement, taxpayers must also adjust their strategy. Facing an onslaught of examinations being conducted simultaneously in jurisdictions around the world, companies needed to be positioned to proactively manage potential tax controversies by building efficient processes in the tax planning stage to avoid subsequent controversy, evaluating tax positions for possible risk areas, establishing protocols for responding to examination requests, developing specific response mechanisms for each jurisdiction, and building relationships with tax authorities. As we set out in our 2009 publication Tax administration without borders 1, one key to the success of proactive management of global tax controversy and risk is the knowledge of the existence of alternative dispute resolution tools, as well as the factors to be considered in their use. In the summer of 2010 we set out to understand the current state and recent trends in Alternative Dispute Resolution (ADR), an increasingly popular approach to resolving tax disputes before they reach litigation. Taxpayers are seeking, and expecting, that tools to resolve or avoid controversy be made available. Fortunately, tax administrations are also recognizing that costly litigation is not in the best interest of the government, taxpayers or the public at large, if it can be avoided. While it is acknowledged that there are circumstances that warrant litigation, there is also an acknowledgement that many cases that are initially on track for litigation are resolved in another venue, and efficiencies can be derived if the appropriate tools, practices and procedures are in place and used. As a result, ADR processes are showing high rates of growth around the world. The result of our analysis is a report in which we look at the key features of ADR and assess the factors for consideration for the tax executive who is responsible for the strategy and implementation of a plan to address global tax controversy and risk. We also provide summary information on the available ADR processes in more than 20 countries. Although often unavoidable, tax litigation is nonetheless usually a worst-case scenario for taxpayers and tax administrations, a costly and timeconsuming process that can often be fraught with uncertainty and mistrust. With companies and government increasingly seeking to reduce costs and streamline processes, tax litigation holds less and less appeal; there is a growing recognition on both sides that an alternative approach to resolving disputes is needed. Broadly speaking, ADR is a series of approaches that opens up a channel for taxpayers to interact with administrations, and resolve issues or disputes, without resorting to litigation. It also includes approaches to work with the tax administrator to obtain certainty on a potential issue before the tax return is filed. As such, ADR may allow more tax disputes to be resolved earlier, or avoided altogether, thereby giving both parties greater certainty and the ability to channel scarce resources into more productive activities ADR should not, however, be considered as a replacement for litigation in all cases. When the law is unclear, or where the ability to resolve an issue after administrative efforts fail, the legal route will be entirely appropriate. By providing the opportunity to resolve issues at an earlier stage through active engagement, ADR offers the prospect of a less confrontational and costly approach for both taxpayers and tax administrations. 1

5 5 In today s global environment and the context of what tax administration is today, taxpayers and the government have less appetite for litigation of issues because the costs and timeliness to come to resolution, and because of the complexity of tax law. ADR is a way for governments to open up a channel for taxpayers to interact with them, to resolve an issue and a dispute that may be done in a way that is quicker, less costly and more efficient in the long run. Frank Ng, former Commissioner of the IRS Large and Mid-size Business division and Ernst & Young Tax Controversy and Risk Management Services partner

6 6 The road to Alternative Dispute Resolution Although the ADR concept is still evolving worldwide, the past few years have seen a significant increase in the number of ADR processes around the world, as well as a growing similarity where successful processes in one country are rapidly adopted, either whole or in part, by others. In our survey of ADR, we found that the general trend is towards more widespread adoption of ADR processes although approaches vary from country to country, and are at differing stages of development. Not all countries, however, are following this approach. In some countries, there may be more of a view that the tax laws are clear and incontrovertible. This may mean that there is greater emphasis on litigation rather than ADR. Our survey suggests, however, that many other countries are likely to adopt similar processes, as heralded by recent ADR initiatives in India, Australia and the UK. I think that one of the by-products of countries needing more revenues to make up the gap in their finances brought about through stimulus is that we will see a tougher line from administrations. The other side of it, though, is that they will give those companies that they trust a lighter audit touch, and will be redeploy the experienced resources that they would otherwise use on those companies onto other firms that they perceive as being much higher risk. Bob Brown Global Controversy Leader , Ernst & Young

7 7 I do think there is a shared view on the parts of companies and tax administrations that we have to be more efficient. And that there are opportunities to achieve greater certainty, on both sides at a much lower cost and with much greater speed, provided that there is a better understanding of the key commercial factors that are driving decisions being made by the multinationals. 1 Alan McLean, Executive Vice President, Tax and Corporate Structure, Shell While these ADR tools and approaches have developed independently of each other, there are numerous trends at a global level that serve as a catalyst for tax administrations to pursue similar initiatives. The financial crisis, in particular, has been an important factor. An increased expectation on the part of large businesses, of a government that provides fairness, transparency, efficiency and consistency for similarly situated taxpayers is another factor. Achieving certainty and resolving or avoiding disputes can be approached in a pre-filing or post-filing state. They can also be taxpayer specific or apply to numerous taxpayers, through the use of broad guidance, for example. We have addressed both. For purposes of our survey, we also included Advance Pricing Agreements as a separate pre-filing segment, given the increasing significance of this tool to resolve potential transfer pricing disputes, and the added dimension of the mutual agreement processes with the competent authorities where tax treaties are in effect. Increased taxpayer disclosure and information reporting is one tool that tax administrations are using to maximize efficiencies and increase revenue, allowing them to put resource to risk. The recent proposal in the United States for taxpayers (include those foreign filers of Form 1120-F) to disclose uncertain tax positions on the tax return, will highlight the demand and need for efficient and timely tools for taxpayers to achieve certainty. 1 Ernst & Young Tax Policy & Controversy Quarterly Briefing, June

8 8 ADR processes ADR processes can essentially broken down into three main categories: advance pricing agreements, which specifically cover transfer pricing issues; pre-filing processes and post-filing processes.

9 9 Table 1: Quick reference guide Country name Pre-filing process Post-filing process Advance pricing agreements Australia ü ü ü Belgium ü ü ü Brazil ü Canada ü ü ü China ü ü ü European Union ü France ü ü Germany ü ü ü Hong Kong ü ü India ü ü Italy ü ü ü Japan ü Mexico ü ü ü Netherlands ü ü ü Russia ü South Africa ü ü South Korea ü ü Singapore ü ü Turkey ü ü United Kingdom ü ü ü United States ü ü ü Advance Pricing Agreements Advance pricing agreements (APAs) allow taxpayers and tax authorities to agree on an appropriate transfer pricing methodology in advance of a return being filed. This can be done on a unilateral basis, or a bilateral basis, provided there is tax treaty in place between the relevant authorities. As such, they provide assurance to taxpayers that, as long as the agreement is complied with, and that there are no changes in critical assumptions, there will be no further dispute with the tax authorities. By using APAs, companies can also reduce costs, minimize documentation requirements and mitigate the risk of penalties or double taxation. Many countries will allow for a multiyear agreement, either formally or through practical application. A recent Ernst & Young survey 1 found most large economies now have such arrangements in place and suggested that more jurisdictions are committing to the introduction of APA programs. India, for example, indicated that it is currently investigating such programs. The survey also suggested that jurisdictions with established APA programs are, however, finding them labor-intensive to administer. And some authorities are also increasing resources and training in the office of the their competent authority to deal with an expected increase in cross-border transfer pricing disputes, and the need for tax treaty administration and interpretation. 1 For more information on Transfer Pricing regulations around the world, please see Ernst & Young s Transfer Pricing Survey and Transfer Pricing Reference Guide at

10 10 Pre-filing processes Pre-filing processes enable taxpayers to resolve issues and disputes with tax administrations prior to filing their return. Although approaches vary between countries, the key concept is that pre-filing provides a mechanism to give taxpayers certainty that, once an issue has been resolved, the position will not be challenged by the tax administration during the audit process. Pre-filing processes can essentially be broken down into three main categories: Taxpayer-specific rulings on single issues (such as Pre-filing Agreements in the US): These allow individual companies to consult with authorities prior to filing their return on a specific issue or transaction. If agreement is reached, the company obtains certainty that this transaction will not be challenged. I am a firm believer in an APA strategy if you have strong facts and you have a similar business model throughout your operations. We actually have a number of foundation stones at the center of our tax risk management strategy. At its heart, we have APAs with the major countries in which we do business. To build on this, whenever we have the opportunity, we memorialize a tax audit into an APA, giving us greater predictability and financial statement precision. When we couple this with transparency, global consistency in our approach to tax risk and strong internal controls, we have a strategy that delivers more risk management certainty. Tim McDonald, Vice President, Finance Accounting, Global Taxes, Procter & Gamble Rulings or guidance that affects multiple taxpayers (such as Industry Issue Resolutions in the US): These allow groups of companies, such as industry bodies or associations, to consult with tax administrations on issues that affect multiple companies. Following the consultation period, the administration may release updated guidance that rules on how the tax position should be treated. Taxpayers in the United States, for example, can, request a private letter ruling, which will determine prior to filing the legal status for tax purposes or the tax effects of a particular transaction. Factually intensive and post-transactional issues can also be resolved prior to filing by means of the Pre-Filing Agreement Program (PFA), a process similar to the traditional audit process, albeit more collaborative and transparent. Issues that affect multiple taxpayers can be resolved in the US by means of the Industry Issue Resolution (IIR) Program where the IRS issues published guidance based on feedback from taxpayers, representatives and associations for the IIR Program. Enhanced relationship arrangements that cover the entire tax return (such as Horizontal Monitoring in the Netherlands or the Compliance Assurance Process [CAP] in the US): There are currently relatively few examples of enhanced relationship arrangements and most are pilot programs that have been adopted by a small number of multinational companies. These arrangements one of the areas we identified as demonstrating significant interest require transparency and cooperation on the behalf of taxpayers throughout the year, and a highly collaborative approach between the taxpayer and the tax administrator. The Netherlands is one country that has been at the forefront of the development of the enhanced Everyone in government recognizes that the resources applied to audit are costly, timeconsuming and burdensome. If they could begin to shift those resources from a post-compliance activity to a pre-filing one, then they achieve not only efficiency but also relationships and goodwill with your taxpayer base, which is the foundation of tax administration. Frank Ng, former Commissioner of the IRS Large and Mid-size Business division and Ernst & Young Tax Controversy and Risk Management Services partner. relationship with Horizontal Monitoring. This enables taxpayers to resolve issues between the company and the Dutch Tax Administration prior to filing. This process can be characterized as a form of voluntary disclosure: the taxpayer promises actively to notify the tax authorities of any issues with a possible or significant tax risk and to disclose all facts and circumstances regarding these issues without hesitation or reservation. In return for full disclosure of relevant issues, the tax authority undertakes to provide timely advice on significant reporting positions, taking into account real commercial deadlines when doing so. Our survey suggests that Horizontal Monitoring is generally perceived as being an effective and successful process among the Dutch business community, although such processes typically require some fairly sizeable changes to occur within the company if they are to be successful. We also understand that Horizontal Monitoringtype arrangements are likely to be broadened out over coming years, in the Netherlands, and indeed, in other parts of the world where the enhanced relationship provided for by the OECD Tax Intermediaries Study is adopted.

11 11 Pre-filing in the United States In the United States, taxpayers can request a private letter ruling, which will determine prior to filing the legal status for tax purposes or the tax effects of a particular transaction. The letter interprets the tax laws and applies them to the taxpayer s specific situation. Taxpayer-specific issues that are very factually intensive and posttransactional, which might otherwise be addressed during the audit process, can also be resolved prior to filing by means of the Pre-Filing Agreement Program (PFA). In this case, the issue would be reviewed in much the same way as it would during the audit process, but it is carried out in a far more collaborative and transparent way between the taxpayer and tax authorities. Issues that affect multiple taxpayers can be resolved in the US by means of the Industry Issue Resolution (IIR) Program. This is intended to resolve frequently disputed or burdensome tax issues that affect a significant number of business taxpayers through the issuance of published guidance. The IRS solicits suggestions for issues from taxpayers, representatives and associations for the IIR Program. For each issue selected, a resolution team of IRS representatives, Chief Counsel and Treasury personnel is assembled to gather and analyze relevant information. Based on this process, they then develop and recommend formal guidance. Since 2005, the Large and Mid-Size Business (LMSB) Division of the IRS (recently restructured into the Large Business and International unit) has also run a pilot program, called Compliance Assurance Process (CAP), which enables taxpayers and the IRS to resolve issues before tax returns are filed by means of near real-time auditing. Unlike PFAs, which relate to a specific issue, CAP requires extensive co-operation between the Service and participating taxpayers through an enhanced relationship. Throughout the tax year, taxpayers that have been invited to take part in the pilot are expected to engage in full disclosure of information concerning their completed business transactions and their proposed return treatment of all material issues. Taxpayers work together with an IRS Account Coordinator to identify and resolve issues. As issues are resolved, the Account Coordinator will document the resolution in an Issue Resolution Agreement, which the taxpayer will use to determine the tax return treatment of each issue. If all outstanding issues can be resolved prior to filing of the tax return, and if the return is filed in a way that is consistent with those resolutions, the taxpayer gains assurance that no postfiling examination will be required. If all issues cannot be resolved, either by collaboration between the Account Coordinator and taxpayer, or other existing IRS resolution processes, the remaining items will then revert to the more traditional examination process. Initially launched with 17 participating corporate taxpayers, the CAP program has grown rapidly. In 2010, 130 taxpayers participated. The rapid growth of the scheme, along with the continuing participation of taxpayers, suggests that the process is working well. The CAP program is generally perceived as yielding fair results, and gives taxpayers an efficient means of resolving issues as well as real-time certainty. In fact, the IRS, in materials accompanying the release of final Schedule UTP in September 2010, announced that the CAP program is to not only be expanded, but is also to be made permanent. Taxpayers who choose to participate in the scheme should be prepared, however, to allocate significant levels of resources to the scheme, particularly in the early stages. In the first year, the taxpayer must work simultaneously on audits of prior years, real-time audits of the current year and tax return preparation.

12 12 The new enhanced relationship An enhanced relationship offers benefits for everyone. Taxpayers who behave transparently can expect greater certainty and an early resolution of tax issues with less extensive audits and lower compliance costs. And an enhanced relationship between revenue bodies and tax intermediaries should also yield significant benefits. And it is also not just a way of maintaining compliance and low-risk behaviour it is about changing behaviour by ensuring there are hard-edged benefits to business occupying the lowrisk space. CFOs around the world told us that what matters to them above all is certainty no surprises from their tax departments, by disclosing potentially significant issues in real time and by revenue bodies responding proportionately. And tax administrations can t leave businesses engaged in an open relationship to fend for themselves in the tax jungle. This too is a matter of trust. Dave Hartnett, Permanent Secretary for Tax, HMRC, speaking at the Institute of Chartered Accountants in England and Wales Hardman Lecture, 12 November 2009 Timeliness is also an issue. It may be difficult for complex issues, particularly those with an international dimension, to be resolved in time for the filing deadline. Moreover, the broader success of CAP will depend on a shift in both taxpayer and government behavior and, in some instances, there is some way to go before that transition is complete. Entrenched ways of working mean that, sometimes, taxpayers or the IRS will resort back to the traditional audit process as opposed to working in a collaborative and transparent way to reach the right answer. Although CAP remains a pilot program, it is expected that it will soon be formalized by the IRS, particularly in light of the early 2010 proposals on Uncertain Tax Positions, which suggest a broader shift towards transparency and disclosure between taxpayers and the IRS. The Netherlands experience Horizontal Monitoring According to the traditional taxpayer-tax authority relationship, a company would file a tax return and the authorities would review it retrospectively. But this gives limited scope for engagement and dialog, and means that authorities are essentially looking in the rearview mirror. An enhanced relationship would enable tax administrations to gain a more up-to-date view of current taxpayer behavior. In theory, this means that they would be able to issue guidance either internally or externally in a more time-efficient way. In 2005, the Dutch Tax Administration introduced Horizontal Monitoring, which enables taxpayers to resolve issues prior to filing by means of an enhanced relationship between the company and the tax administration. The process can be characterized as a form of voluntary disclosure; the taxpayer promises actively to notify the tax authorities of any issues with a possible or significant tax risk and to disclose all facts and circumstances regarding these issues without hesitation or reservation. Horizontal monitoring is a process which needs continuous efforts from both parties, since it has to do with building and maintaining a relationship built on mutual trust, understanding and transparency, said Theo Poolen, a member of the management board of the Dutch Tax and Customs Administration in a recent interview with Ernst & Young. In return for full disclosure of relevant issues, the tax authority undertakes to provide timely advice on significant reporting positions, taking into account real commercial deadlines when doing so. In addition, the taxpayer files tax returns within an agreed timeframe and the tax authorities impose tax assessments as soon as possible after receipt of the return. This process means that, rather than looking retrospectively at past returns and transactions, both taxpayer and tax administration are focused on the present and the future. The Horizontal Monitoring regime is designed to provide companies with a higher level of compliance certainty. The most visible aspect of this is a reduction in the number and rigor of tax audits, since all relevant facts and circumstances are discussed in advance. Some of the advantages mentioned were the ability to work on a real-time basis, with no backlog of issues, says Mr. Poolen. Reduction of uncertainties was another theme, along with expediency of dealing with issues. My colleagues from the tax administration listed the same advantages and noted an increased transparency and mutual trust between us and the companies.

13 13 Taxpayers considering participation need buy-in from the most senior levels of the organization, believes Mr. Poolen. We acknowledge the importance of commitment at the highest level for this new approach, he says. Before entering this program, board-to-board meetings were called. And during these meetings the board of the tax administration asked for commitment on behalf of the company s board for this new way of co-operation. Horizontal Monitoring is generally perceived as being an effective and successful process among the Dutch business community. One important reason for this is that is has been created using frequent open collaboration among all relevant stakeholders. The design of horizontal monitoring is based upon inputs that we received from the business community, he explained. We really listened to criticism both from our staff and our external stakeholders and tried to use this to develop a new way of working. But as Mr. Poolen explained, the transition has demanded a change in culture and mindset on behalf of both taxpayer and administration. We have found that this new way of working sometimes demands a change in culture and behavior, he says. The skills required for working in this manner include both tax expertise as well as communication and co-operation skills what we call the soft skills. And our attitude needs to be about solving problems. I would say that in a couple of the major jurisdictions in which we do business we have entered into these enhanced relationships, which are delivering significantly greater certainty and I would say also significantly reduced cost. I do think there is a shared view on the parts of companies and tax administrations that we have to be more efficient. There are opportunities to achieve greater certainty, on both sides at a much lower cost and with much greater speed, provided that there is a better understanding of the key commercial factors that are driving decisions being made by the multinationals. Alan McLean, Executive Vice President, Tax and Corporate Structure, Shell We call this new approach the enhanced relationship. Its starting point is a mutual understanding of each party s needs and aspirations, the development of the tools and techniques most appropriate for achieving these, and a path to implementing what needs to be done. Fundamental, to the long-term success of the enhanced relationship is the establishment and maintenance of trust amongst all the parties. OECD Study into the Role of Tax Intermediaries,

14 14 Case study: TNT When the Horizontal Monitoring scheme was first launched in 2005, the logistics company TNT was one of 20 companies listed on the Dutch stock exchange that agreed to participate on a trial basis. For Bart Kuper, Group Tax Director at the company, board-level commitment was essential before committing to the pilot. The participation of TNT in the scheme required investment in personnel to clear a backlog of open issues and ensure that the tax function could manage the process on an annual basis. The board agreed to this and, in return, Mr. Kuper committed to providing a regular update to board members on the progress of participation in the scheme, which over time was widened in scope to include issues such as customs declarations. Clearing the backlog of open issues was extremely time-consuming, but has resulted in a far more efficient process of filing the tax return. Whereas before, we might have had three years worth of open issues with the tax authority, nowadays we are agreeing within the next financial year our previous corporate income tax return for the entire Dutch group, says Mr. Kuper. The scheme has given TNT greater clarity over its tax position and even facilitated the corporate planning process. Each year, if we plan our request to the authority properly, we generally have an answer before we close the books, says Mr. Kuper. That s an outstanding result for us because if I do something that is beneficial because it reduces the amount of tax we owe, it hits the P&L immediately. We need less provision for uncertain tax positions than we had before. More broadly, the transparency and sharing of information that are inherent to the scheme has benefits for industry as a whole, believes Mr. Kuper. Because TNT discloses details of how it has structured different transactions, the tax authority can better and more quickly understand the commercial aspects and work more effectively with other companies that have similar issues. This helps to create a more efficient tax administration that is better able to service taxpayers in a fair and consistent way. Five years of participation in the Horizontal Monitoring scheme have given Mr. Kuper, and TNT, rare insight into the benefits and drawbacks of the enhanced relationship process. Companies planning to enter a similar program need buy-in from the most senior levels of the organization, believes Mr. Kuper. Clearly you need internal commitment before you even start this, he says. If there is no internal commitment, it can be a way to get yourself in trouble. But if you do have the internal commitment lined up before you start and make sure you maintain that commitment and keep your board up to date with how things are going, then yes, I can really recommend going into this kind of process. Australia s Advance Compliance Arrangements The announcement by Michael D Ascenzo, the Australian Commissioner of Taxation, that his administration would in future look at a company s uncertain tax positions as part of its investigations, is a further sign of an international shift towards greater expectations of disclosure and transparency. Already, the Australian Taxation Office (ATO) has in place a pre-filing process, called the Annual Compliance Arrangement (ACA), which it launched in And although this scheme is relatively small, the statement on uncertain tax positions suggests that it is likely to grow considerably in the years ahead. The ACA process involves the taxpayer and ATO engaging in early dialog on tax risks. Taxpayers are expected to be open and disclose all potential issues so that risks can be mitigated. If a company has sound risk management processes and provides full and true disclosure, the ATO will sign off on low-risk matters. In the case of major transactions or tax positions that have a level of uncertainty, taxpayers engage in workshops and discussions with the ATO throughout the year, which allows both parties to assess tax risks jointly. Although still in its early stages, the process has brought benefits to both sides. Companies have been able to manage their compliance from a position of greater certainty and have little or no exposure to penalties and interest, while the ATO has benefited from a more efficient approach to its administration. I have seen some of those companies get significant compliance cost advantages, said Mr. D Ascenzo in a recent interview with Ernst & Young. For us, we have been able to resolve a range of litigation issues, we have narrowed the range of issues that we might get forward with and we have provided streamlined processes for resolving those issues. It s been a win-win situation for everybody.

15 15 Although the ACA is currently available only to the top 50 publically listed companies on the Australian Stock Exchange, progress so far suggests that there is an appetite to broaden the scheme to other businesses. If we are able to reduce the risk with the taxpayer upfront, we provide them with practical certainty, they get on with their business, [it s] good for the economy and we don t have disputes after the event, says Mr. D Ascenzo. So to me, it s a no-brainer it s a better way of doing things. An informal ADR process in China In China, tax laws and regulations generally only provide general principles, while their implementation is typically subject to local practice and interpretation. Nevertheless, there is an opportunity for taxpayers to discuss specific tax positions in advance, either by means of formal processes that are documented in law or, in certain instances, on a case-by-case basis. There are two formal pre-filing processes: advanced pricing agreements, which are generally valid for between three and five years; and Tax Collection on Deemed Basis (TCDB), which the tax authorities generally apply to small-scale taxpayers, representative offices and permanent establishments of foreign companies in China. Common TCDB options include deemed taxable revenue, deemed profit rate and deemed taxable income. In addition, the Chinese authorities are open to taxpayers request for discussions to clarify alternative tax treatments on certain issues in advance. But companies should be aware that this process does not usually result in binding rulings. The views received from the tax authorities by means of this advance negotiation process therefore carry a level of uncertainty and may be disputed by higher-level tax authorities or in other locations. The ACA is an opportunity, if you are willing to put in the work, to gain favor with the Revenue Authority and drive down your tax risk, but the downside for all this conciliatorily behaviour is that s it s very resource-heavy. You are constantly having to enter into dialog with the Revenue Authority, explaining everything to them and asking them to rule on every transaction that you go into. There is going to be a massive cultural shift in the market if this is to work. Howard Adams, Tax controversy partner, Ernst & Young, Sydney

16 16 Post-filing processes Not every company will want to or be able to resolve disputes prior to filing their return; not every tax administration embraces the approach. Although post-filing processes are conducted after a return is filed, the overall objective is similar to the prefiling approach. In cases where a dispute arises during the examination process, taxpayers can enter into a constructive dialogue with the tax authorities in an attempt to reach agreement without reverting directly to a legal process. Quite often, disputes are the result of differences of opinion or professional judgment related to factual determinations. Valuation or allocation issues are examples where there is much room for agreement within a range of acceptable answers. Sometimes the dispute is the result of different interpretation of the legal principles applied. Although approaches vary around the world, post-filing processes can essentially be broken down into two main categories: Where there is a factual dispute with well settled law, post filing processes that involve a direct dialogue between taxpayer and tax authorities, can often serve to resolve a dispute through negotiations to arrive at a resolution that both parties can agree as fair. This can be accomplished through discussion with the examination team, and is most efficient for both parties. Resolution (AIR) Process in the US, for example, enables an issue to be accelerated through the process to the Appeals function with authority to resolve issues based on a hazards settlement. Taxpayers can also make a request to use the Fast Track Settlement program, which uses the mediation skills and delegated settlement authority of Appeals to resolve issues while still under the jurisdiction of the examination team and can save almost two years in the process. In some jurisdictions taxpayers are allowed to appeal against disputed decisions. In China, for example, a taxpayer that disagrees with an act or decision of a tax authority has a right to seek an administrative review. Although this process is not performed by an independent third party and can require considerable procedures and paperwork to complete, it is nevertheless regarded as a less time-consuming process of dispute resolution compared with litigation. In other jurisdictions, there are processes in place that serve as a next step if attempts to negotiate a settlement between the two parties have failed. Where a resolution can only be based on hazards of litigation, processes can be used to bring the dispute to the appropriate authority within the tax administration, or delegate the authority to the examination team by way of a specifically provided delegation. The Accelerated Issue

17 17 Dave Hartnett, the Permanent Secretary for Tax has said that HMRC should be litigating less, which suggests that the pendulum could be swinging back in the other direction. In a late 2009 interview with Ernst & Young 3, Mr Hartnett confirmed this position and spoke in favor of having a review process prior to embarking on litigation. I m very attracted to the approach I ve seen in the US and one or two other countries of having an internal, independent review before the button is really pressed for litigation to start, he said. I think part of my role at HMRC is sometimes to say to all of our people: This issue is not really for litigation; we can t do it. Although the Litigation Settlement Strategy (LSS) model will remain in place, there is likely to be greater emphasis on the settlement aspects of the strategy. HMRC has said that it will introduce Collaborative Dispute Resolution (CDR), which will encourage inspectors, clients and advisors to settle apparently intractable disputes. This may include techniques such as the use of third-party mediators, joint instructions to Counsel and training of HMRC in negotiation and settlement skills. HMRC will operate a number of pilot schemes across their various business units to test CDR. It is anticipated that this change in emphasis will result in far fewer cases being automatically fed into the litigation process. In turn, this will ease the pressure on the tax tribunal as more disputes are resolved through a collaborative process. 3 Ernst & Young Tax Policy & Controversy Quarterly Briefing, February 2010,

18 18 Post filing processes that rely on independent third party mediation and can resolve disputes (such as Post-Appeals Mediation in the United States or independent mediation in the Netherlands): In some cases, it may not be possible to reach agreement between taxpayers and tax authorities alone. In these instances, independent mediation may be sought to help broker a dialogue and resolve conflict between the two parties. In the US, for example, the Post-Appeals Mediation process enables taxpayers to bring an issue before a mediator, whose role is to assist in defining the issues, and promote settlement negotiations between Appeals and the taxpayer. In the United Kingdom, HMRC recently established a small dispute resolution unit, which is looking at how to embed ADR approaches into the work of the organization, which will rely on facilitative mediation, rather than arbitration. Mutual Agreement Procedure as an ADR process Deborah M. Nolan and Frank Ng are Ernst & Young Tax Controversy and Risk Management partners and are both former Commissioners of the IRS Large and Medium-Sized Business (LMSB) unit. In this conversation, they discuss the shifting use of Competent Authority and the Mutual Agreement Procedure (MAP): Frank: I see an emerging trend where the nuances of the mutual agreement procedure can be applied as an alternative dispute resolution tools. Quite often clients do not understand the mutual agreement procedure and do not recognize that they can achieve resolution of a double tax matter while mitigating future controversy and achieveing global issue certainty. In many transfer pricing disputes, a taxpayer s strategy may be to seek early resolution via competent authority as opposed to trying to resolve the matter administratively before finally going to competent authority. I think that in the main we are going to see a growing demand for competent authority resolution because governments are beginning to significantly increase their scrutiny of transfer pricing issues. Debbie: Right. Companies are more and more concerned about their transfer pricing policies and methodologies in jurisdictions in which they operate because the tax administration practices and approaches are all different. And so while a company may believe that they could have one uniform policy that could be adapted globally, countries may not accept that policy. I think that s an emerging area of discussion and in the context of alternative dispute resolution, a very important one. Frank: And it can provides options for taxpayers; they may choose to resolve their dispute at the exam level or have the competent authority resolve it based on the best overall outcome for the taxpayer. Debbie: Exactly. What you might have I ll put it here in the US context is that a company may have a transfer pricing audit in the United States. They will seek to resolve the issue under US tax law with the IRS. They could settle it at the exam level or go to appeal and settle. If they choose to settle with the IRS, the foreign jurisdiction on the other side of the equation may not accept that settlement. And they may say well, we will only give you relief for a certain amount because you already settled. There is no more discussion on any further settlement. You agreed with the US and that s what we are accepting, we don t accept that here in our country. So, you may end up with a portion that is double taxed. As opposed to if you don t have that settlement, there is no binding agreement and the issue goes untainted to the two competent authorities to resolve. Frank: And issues like this highlight the importance of really understanding the mutual agreement procdure and how it should be incorporated into your tax controversy and risk management strategy. Understanding MAP is essential in today s global tax environment.

19 19 New post-filing ADR provides impetus for investment in India The introduction of an Alternative Dispute Resolution mechanism, announced as part of the Indian government s 2009 budget, has attracted widespread interest from multinationals with business interests in India not least since the new rules, which are designed to improve India s investment climate, are particularly significant given India s reputation as of one of the most litigious countries in the world. Under the previous appeals process, an order passed by a Tax Officer could be appealed to the Commissioner of Income Tax (Appeals), and thereafter, the Income Tax Appellate Tribunal (ITAT), a process which could ordinarily take a considerable number of years to pass through the courts and which would require the taxpayer to deposit some portion of the disputed tax amount upfront. Alternatively, foreign companies could choose the enter approach the Authority for Advance Rulings (AAR) or the Competent Authority under the Mutual Agreement Procedure (MAP). The 2009 budget announcement saw the unveiling of plans for a series of Dispute Resolution Panels (DRP) around the country which aim to resolve disputes particularly those deriving from transfer pricing issues - at the pre-assessment stage. The new proposals, introduced to the Government by a Coalition of international investors who were supported by Ernst & Young focused on the introduction of a new process under which taxpayers will have the option to have an assessment order reviewed by an independent panel made up of three Commissioner or Directors of Income Tax prior to its confirmation. The panel must decide on each case within eight months of the case proceeding. The panel has the ability to vary the assessment order and its decisions will be binding on the Indian tax administration, but in an announcement made on 20 February 2010, the Central Board of Direct Taxation (CBDT) clarified that following the DRP process was optional to the assessee, and that the assessee can opt out of the DRP process at any time and appeal before the Commissioner of Income Tax (appeals) as per the standard appeal route. There is some concern that taxpayers may try and abuse the ADR process in order to weaken the tax authority s litigation position, as opposed to using it as a genuine method to resolve a dispute and it remains to be seen whether this eventuality will occur. It is expected that the new mechanism will help to resolve disputes a considerable shorter period reducing the time taken to achieve resolutions from three to four years under present structure to about one and half years under the ADRM process. Interestingly, in the period between launch in early January 2010 and late February, the DRP panels received close to 800 transfer pricing-related applications and nearly 600 applications concerning other international tax issues 4. Indeed, the original DRP process was launched with 8 such panels around the country (with two panels each in Mumbai and Delhi), but in letters of 10th and 17th February 2010, the CBDT increased the number of panels to 11. As with the introduction of any major new process, however, the implementation of the DRP mechanism has not been completely plain sailing. The DRP sponsors have found that embedding such a significant initiative all the way through a large organization has been a challenge. Besides putting in place the enabling legislation, it requires a change in attitudes of the assessing authorities, and many business processes relating to appeals and enforcement. Some companies entering the DRP mechanism have questioned the independence of the panel, while others have noted that, in the early months of operation in particular, there may have been a tendency for the DRP to simply rubber stamp existing assessments. With the Indian government reiterating it s objective of reducing litigation in all areas, the Finance Minister has constituted a special task force to develop an action plan to reduce tax disputes and litigation. In this context, announcements concerning improvements to the functioning of DRP are likely to be seen in the near future. The Coalition of companies who originally worked with the India government to bring the DRP scheme to life plans to engage in a dialogue with the special task force to explore ways of making the DRP system more effective. 4 Disputes leave a revenue hole Financial Express (India) February

20 20 Australia: a new dispute resolution shift to bear in mind It seems likely that 2010 will be a watershed year in the approach of the Australian Taxation Office to dispute resolution. In June 2010, the ATO published its Large Business and Tax Compliance Booklet 5, which signalled both a more rigorous approach to the risk assessment of taxpayers and the greater use of alternative dispute resolution. In the same month, the Federal Parliament passed the Civil Disputes Resolution Bill 6, which aims to improve access to justice by requiring prospective litigants to attempt to resolve disputes before they reach the courts. Taken together, these developments highlight a radical change in mindset for the authorities that could herald a sharp reduction in the number of disputes that are brought before the courts. The new Bill will require taxpayers and the ATO to compile a genuine steps statement for the courts that describes the efforts made to resolve the dispute or explains why no such steps were taken. These steps could include agreeing to participate in direct negotiations before entering into litigation, bringing the matter before a mediator or arbitrator, or exchanging information between the two parties so that the dispute is more clearly understood. The law now specifies that the ATO must consider these ADR approaches at three specific hotspots in the process. Previously, there were only two hotspots and disputes were generally resolved via settlement with an ATO officer, rather than through other forms of ADR that enable the use of third-party mediation. Passing such ADR processes as this into law represents a significant and important step by Australia, and its success or otherwise will be closely monitored by other jurisdictions pdf/10133b01.pdf;filetype%3dapplication%2fpdf

21 21 HMRC s Collaborative Dispute Resolution signals a change of tactic The announcement in 2007 that HMRC would move to a Litigation Settlement Strategy (LSS) marked a significant departure for the UK tax authorities. Prior to the establishment of the LSS, senior tax inspectors were encouraged to manage disputes autonomously with little input from either policy or any central technical co-ordination. Although this inevitably led to a degree of inconsistency of treatment, it did ensure that formal litigation was kept to a minimum. The LSS effectively turned this approach on its head. According to the new model, advice would be sought on every significant issue from technical specialists and, ultimately, the HMRC legal support in their Solicitor s Office. Where the likelihood of success by litigation was considered to be greater than 50%, the issue was duly litigated. HMRC also reserved the right to litigate even when the chance of success was deemed to be less than 50%, if it found the arrangement particularly offensive. This new model brought greater consistency of treatment, but it led to a dramatic increase in litigation. After just three years, the current backlog of cases in the Solicitor s Office is now estimated to be between 10 and 20 man years of work, with more than 150,000 HMRC enquiries being open for more than 18 months. Recognizing that this approach will not be sustainable over the longer term, the view within HMRC is changing. Dave Hartnett, the Permanent Secretary for Tax has said that HMRC should be litigating less, which suggests that the pendulum could be swinging back in the other direction. In a late 2009 interview with Ernst & Young, Mr Hartnett confirmed this position and spoke in favor of having a review process prior to embarking on litigation. I m very attracted to the approach I ve seen in the US and one or two other countries of having an internal, independent review before the button is really pressed for litigation to start, he said. I think part of my role at HMRC is sometimes to say to all of our people: This issue is not really for litigation; we can t do it. Although the LSS model will remain in place, there is likely to be greater emphasis on the settlement aspects of the strategy. HMRC has said that it will introduce Collaborative Dispute Resolution (CDR), which will encourage inspectors, clients and advisors to settle apparently intractable disputes. This may include techniques such as the use of third-party mediators, joint instructions to Counsel and training of HMRC in negotiation and settlement skills. HMRC will operate a number of pilot schemes across their various business units to test CDR. It is anticipated that this change in emphasis will result in far fewer cases being automatically fed into the litigation process. In turn, this will ease the pressure on the tax tribunal as more disputes are resolved through a collaborative process. HMRC s approach to its large business customers in recent years has been to focus on outcomes designed to improve the attractiveness of the UK business tax administrative environment. This has taken in the four themes that business told us would make a difference: certainty, risk management, speedy resolution of issues and clarify through effective consultation. An expansion of our service in providing advance agreements and clearances has been a key element of meeting businesses need for greater certainty. In addition to our universally available clearance services relating to recent legislation, and various statutory clearances provided in particular areas of the tax code, since April 2008 we now aim to provide clearances on any areas of material uncertainty around the tax outcome of a real issue of commercial significance to businesses, and to do that within 28 days as the norm. Already in its first year of operation, the vast majority of business customers were satisfied with the extended clearance service, and since then we have introduced operational improvements to make the service even more user friendly. We see our clearance services as making a key contribution to upstream dispute resolution which both delivers greater certainty for our customers and helps us to focus our post-return efforts on dealing with the greatest tax and compliance risks and on resolving disputes as efficiently and effectively as possible. Geoff Lloyd HMRC, speaking to Ernst & Young

22 22 Factors to consider A well designed strategy which uses ADR tools to achieve business objectives can reap significant benefits for taxpayers and tax administrations alike. ADR is a growing phenomenon around the world, with significant changes continuing to unfold at a fast pace in both the pre- and post-filing environments. Costly litigation can be avoided, resources can be deployed to more productive activities and both taxpayers and tax administrations can benefit from greater certainty and the resolution of disputes or open issues at an earlier stage. This reduces the compliance burden on both sides and leads to a more constructive, open relationship. The strategy that says that most taxpayers want to pay the right tax at the right time involves a certain leap of faith, certainly a leap of faith for HMRC employees, and here s a question mark as to whether or not all perceive the benefits of a trusting relationship. But where we ve invested in that and I m thinking in particular of large business and the relationship that we hold with large business customers, where we differentiate on the basis of risk the benefits of a trusting relationship are absolutely clear. Geoff Lloyd, HMRC

23 23 Laying out an ADR strategy and executing it well, however, is neither simple nor easy. Several factors should be considered in determining how (and to what level of commitment) an ADR strategy is developed and executed: Proactive management of tax risk Aligned with the increased focus on corporate governance related to tax risk management, a solid ADR strategy can provide more opportunities to manage risk proactively and strategically. Using ADR to better manage increased disclosure requirements Taxpayers can achieve a higher level of certainty, sooner, by using ADR processes. With the implications of financial accounting for uncertain tax positions and the emphasis on disclosure and transparency by tax administrators around the world, this factor becomes increasingly important to consider as a core driver of an ADR strategy. Highest and best use of resources Time-consuming and costly litigation can be avoided. A shift to ADR processes can be more efficient in terms of time and resources. Skilled professionals can be diverted away from longstanding disputes, and backlogs of open issues can be cleared. Relationship improvement In many cases, the ADR can enable taxpayers to establish a more productive and collaborative relationship with tax administrations that can transcend the immediate issue at hand. Leading tax administrations, following the post-crisis tone set by the OECD, are increasingly looking to improved relationships with large taxpayers as the way forward. Fairness and transparency Taxpayers need assurance that they will get a fair result and confidence that there will be a genuine attempt to resolve issues by the tax administrator in order to make the necessary investment and provide a level of transparency. Cultural shift The successful execution of an ADR strategy relies firmly on a shift in thinking and behavior on the part of both parties to seek resolution to issues, whether on a one-off or ongoing basis. This cultural shift needs to occur not just in the minds of the tax function leaders; in those cases where a decision to enter full enhanced relationship processes (such as Horizontal Monitoring) is taken, the cultural shift may need to be managed right from the board level down to all tax function team members. Both the taxpayer and the tax administration must be resolutionminded and be willing to work collaboratively to seek an appropriate result. They must recognize that complexity and ambiguity can often lead to uncertainty and that the appropriate result can often fall within a range. Multiyear impacts Some issues have potential multiyear impact, which may affect the approach to resolution. This includes opportunities to spread agreements over multiple years. Multilateral impacts Some issues may also have multijurisdictional impact which could affect the resolution approach. As ADR processes become more widespread around the world and tax administrators work more collaboratively with one another, increased opportunities to leverage a bilateral or multilateral approach to dispute resolution may become possible.

24 24 Leading practices for tax directors to consider Develop an overall tax risk management strategy Companies should develop and assess overall tax controversy and risk management strategy, of which an ADR strategy is one core component. All activities within the strategy should be planned from a global perspective, because this is how tax administrations are increasingly viewing them. Understand your current state Assess your inventory of current and future issues across the dimensions of tax types, years and jurisdictions. Understand the implications of placing each issue within your ADR strategy, paying close attention to the multiyear and multilateral implications. Group and prioritize the issues according to where the best cost-benefit can be gained. Understand the local processes, cultural approach and willingness of tax administrations to engage with you Developing intelligence on the range of options available to you in each key jurisdiction is imperative in developing your dispute resolution strategy. Alongside understanding the physical processes in each jurisdiction, ensure that you develop your tax administration intelligence regarding the cultural approach, level of openness and overall level of confidence in the ability of each key taxing jurisdiction to meet your objectives. Ensure that systems, processes and documentation are all in order With a marked increase in information-sharing among tax administrations, data relating to a position disclosed in one jurisdiction as part of a ruling or other pre-filing agreement may be shared with another tax administration elsewhere. Systems, processes and documentation all need to take this into account before information is readily disclosed. Ensure that appropriate local resources, competencies are in place Across all jurisdictions requiring action, ensure that you have appropriately skilled resources in place who understand the processes, their operation, their strengths and weaknesses and the cultural approach of the taxing authority. Assess any immediate opportunities Consider how pre-filing processes may be a useful mechanism to help reduce your overall level of tax risk as it relates to urgent issues, such as the new Uncertain Tax Positions schedule in the United States. Secure support, if necessary, at board level If the ADR strategy includes entering into a wider, enhanced relationship process with a tax administration, this typically includes disclosing tax positions through the course of the year to gain clearance on each issue. Gaining support of the board can be a time-consuming, complex, but very necessary step in the process. Develop your action plan Using your prioritized inventory of issues and local intelligence of ADR processes and cultural mindsets, create a multiyear action plan which includes resource planning, milestones, reporting and key performance indicators.

25 25 Conclusion Companies that are successful in managing their tax controversy and risk efficiently and effectively, do so by developing a strategy and executing it well. They can leverage opportunities to use resolution tools and processes in countries to help facilitate closure of disputes and the resolution of issues, often without costly and time-consuming litigation. As it becomes increasingly important to build tax risk management thinking into the planning and compliance processes, the knowledge and availability of the pre-filing tools to resolve disputes become increasingly important as well. For global companies, the challenge of handling varied issues for different years in different stages of controversy using different resolution processes across multiple jurisdictions can be overwhelming. The forecast for the future is only more complex. With an in-depth knowledge of successful, country-specific taxpayer advocacy techniques and alternative dispute resolution tools, businesses can anticipate, address and resolve issues in the most timely, efficient and cost-effective manner. Tax administrators are exchanging information and collaborating with their foreign counterparts, looking at global companies through a global lens. Companies must manage their risk and controversy from a global standpoint. Knowing the relationships and what dispute resolution tools are in place for each country, where their risks lie and how to mitigate them have become essential requirements. Deborah M. Nolan Former commissioner of the IRS Large and Mid-size Business Division

26 26 ADR processes in country jurisdictions Australia European Union Belgium France Brazil Canada Germany China Hong Kong India Italy Japan South Korea Mexico 43 The Netherlands Singapore South Africa 48 Turkey Russia United Kingdom United States 52

27 27 Australia Ernst & Young contact Howard Adams Brief description of available Alternative Dispute Resolution processes Australia has a number of Alternative Dispute Resolution processes. Description of the processes Process 1 Process 2 Process 3 Process 4 What is the process called? Annual Compliance Agreements Informal settlement as set out by the ATO s Code of Settlement Practice Alternative Dispute Resolution in the Administrative Appeals Tribunal including: Alternative Dispute Resolution in the Federal Court of Australia including: Conferencing Mediation Mediation and Arbitration Conciliation Case appraisal and Neutral evaluation When was it introduced? Is the process settled in law? Is the process fully documented? No it is not settled in law. This is a relatively new process which the ATO is still being refined. No official process is documented however a speech outlined by the Commissioner of Taxation has set out the requirements at a high level. gov.au/print.asp?doc=/ content/ htm The ATO must follow this code, pursuant to Law Administration Practice Statement PS LA 2007/6 Guidelines for settlement of widely-based tax disputes Yes it is contained in the Administrative Appeals Tribunal Act 1975 (Cth). Pre-filing or post-filing? Pre-filing Post-filing Post-filing Post-filing How does the process work? The ACA process is pre-filing in nature, and involves the taxpayer and ATO engaging in early dialogue on tax risks with a view to identifying high-risk matters requiring resolution and providing sign-off on low risk matters, thus ensuring greater certainty to the taxpayer in a real-time manner. The ATO must first determine if a matter is appropriate for settlement. If the matter is deemed appropriate, the settlement process will usually involve a negotiation forum, where the ATO is always represented by two officers. These negotiations are conducted on a without prejudice basis. If an agreement is reached, the terms are always captured in a deed of settlement. One of the above ADR processes may be conducted by a member or officer of the Administrative Appeals Tribunal. Information provided at ADR cannot be used at a later hearing unless parties agree. Where agreement is reached between the parties during ADR, the Tribunal will allow the parties seven days to reconsider and withdraw from the agreement if they choose. Yes it is contained in the Federal Court of Australia Act 1976 (Cth) The Act states that any proceedings may be referred to the Court to mediation or arbitration; however the Court will not refer a matter to arbitration without the consent of the parties. Most mediations are conducted by registrars, but occasionally the Court will refer the case to an external lawyer to conduct the mediation. What transpires during mediation is confidential.

28 28 Description of the processes Process 1 Process 2 Process 3 Process 4 Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) These characteristics were emphasised by comments provided by Michael D Ascenzo, the Australian Commissioner of Taxation in an interview with Ernst & Young 1, where he said If we are able to reduce the risk with the taxpayer upfront, we provide them with practical certainty, they get on with their business, [it s] good for the economy and we don t have disputes after the event. So to me it s a no-brainer it s a better way of doing things. No No No, unless an external ADR practitioner is engaged. Corporate Income Tax and Goods and Services Tax The Code is not restrictive Not restrictive No, unless an external lawyer is engaged. Not restrictive Advance Pricing Agreements in Australia Australia has a formal APA program, which is accessible to taxpayers subject to the ATO s discretion. The APA team receives approximately 20 to 30 APA requests from taxpayers per year. Bilateral or multilateral APAs represent 35% of the current case load. The average duration of the APA process is approximately 8 months in the case of unilateral APAs and 16 months in the case of bilateral APAs. Top treaty partners that have concluded bilateral APAs with Australia are Japan, the United States, the United Kingdom and New Zealand. 1 Ernst & Young Tax Policy & Controversy Briefing, November See

29 29 Belgium Ernst & Young contact An Meheus +32 (0) Koen Marsoul +32 (0) Brief description of available Alternative Dispute Resolution processes Belgium has two main ADR processes available; A Ruling Procedure involves the upfront agreement of an issue prior to a transaction occurring, while mediation in tax matters provides a mechanism for resolution of existing disputes. Description of the processes Process 1 Process 2 What is the process called? Ruling procedure Mediation procedure for tax matters When was it introduced? Is the process settled in law? Is the process fully documented? Yes Pre-filing or post-filing? Pre-filing Post-filling How does the process work? In principle a pre-filing meeting can be obtained within 2/3 weeks by . A memo is typically drafted which explains the envisaged transaction and is sent to the Belgian Ruling Commission one week before the pre-filing meeting. The meeting with the Belgian Ruling Commission that can be held on a no names basis in order to obtain their thoughts on the envisaged transaction. The meeting is not mandatory, however as the Belgian Ruling Commission will likel have still some additional questions after the pre-filing meeting, it is preferable to send them a draft ruling in advance to be sure that all issues are covered in the ruling. Normally it takes one or two weeks to obtain their feedback. The formal ruling should be send by registered mail and by to the Belgian Ruling Commission. In principle it takes three to four months for the delivery of the formal ruling. Is there a user fee to use the process? No No What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) Personal income tax, corporate income tax, transactions, transfer pricing Yes The taxpayer should file a mediation request with the Belgian tax authority, which can be done by mail, , fax. Within 15 days, the mediation service communicates to the taxpayer if the request is admissible or not. As an example for income taxes, a mediation request can only be filed when an objection has been filed against the tax assessment by the taxpayer. Moreover, the mediation will end if the Regional Director has taken a decision or if a procedure before Court has been filed (please note that there are exceptions as a mediation request can be filed in the phase of the collection of the taxes). No appeal is possible against the conclusions or recommendations of the mediation service. Please note that the mediation service was operational as of June-July 2010 and it is therefore it is too early to say how the process will work in practice. All taxes levied by the federal government and also regional taxes that are collected by the federal government (e.g. registration duties). No mediation request can be filed for local taxes (e.g. from the provinces and communes). Advance Pricing Agreements in Belgium The 2003 corporate tax reform introduced a general ruling practice under Belgian tax law. Additional guidance in this respect is provided through various Royal Decrees. As a result of the law of 21 June 2004, the Service for Advance Decisions became an autonomous department (led by a committee of four) as of 1 January More than 100 specialists in various domains of taxation, including transfer pricing, assist the committee. This service has increased flexibility in the ruling process and shortened the decision period (usually less than three months from the filing date for unilateral APAs). This committee is also able to rule prospectively on corresponding downward profit adjustments under Article 185, 2, thus offering significant transfer pricing planning opportunities.

30 30 Brazil Ernst & Young contact Romero J.S. Tavares Júlio C. Assis Brief description of available Alternative Dispute Resolution processes Brazil has a number of Alternative Dispute Resolution processes. These include Binding Rulings, Administrative Litigation, and Tax Amnesty Programs. The Binding Ruling and Administrative Litigation processes are very mature, and have existed in Brazil for decades, while Tax Amnesty Programs are have been enacted for specific periods of time repeatedly over the course of the last decade. Binding rulings can only provide resolution for future circumstances, and are often not practical for effectively resolving matters of material relevance/over the last decade, the Administrative Litigation process has been perceived to work very well, while the Tax Amnesty Programs have also been shown to be effective. Description of the processes What is the process called? When was it introduced? Is the process settled in law? Is the process fully documented? Pre-filing or post-filing? How does the process work? Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) Process 1 Process 2 Process 3 Consulta (General Binding Ruling) At the Federal Level: with the Brazilian National Tax Code of 1966 (Law 5.172/66) and subject to further regulation in 1972 under Decree Processo Administrativo Fiscal (Administrative Tax Litigation) distinguished from Judicial litigation which must involve an attorney. At the Federal Level: with the Brazilian National Tax Code of 1966 (Law 5.172/66), and Law 9.784/99, and subject to further regulation in 1972 under Decree (as amended). Similar administrative litigation proceedings are available at the State level. Yes Yes Yes Pre-filing and strictly limited to unrealized facts It works whenever a doubt in the application of the tax law is raised. The taxpayer is required to describe detailed facts that he is considering to realize in the future and the rules he believes are applicable to such facts. Post-filing At the Federal level: Within 30 days after a Tax Infraction Notice is served (or after a Notice of Inconsistency is served), the taxpayer has 30 days to submit a Protest Letter to the competent branch of the Federal Revenue Authority (SRF). A Decision is rendered by the competent Delegate of the Federal Revenue Authority. If the infraction or inconsistency is confirmed by the Authority, the Taxpayer may file a Voluntary Appeal to the Administrative Council of Tax Appeals (Conselho Administrativo de Recursos Fiscais) which is an agency of the Ministry of Finance, sister to the Federal Revenue Secretariat, and the Office of the Federal Tax Attorney. Representatives of the SRF as well as Representatives of the SRF have specified terms as Councilmembers of CARF. CARF is divided in multiple chambers and sessions, presided by representatives of the SRF. A final instance of Administrative Dispute is embodied in the Superior Chamber of Tax Appeals (CSRF), which comprises key representatives from CARF. No No No Tax treatment of future facts. All infra-legal issues under Tax Law and all technical issues under Tax Law (and related Corporate of Civil Law). The process does not cover Constitutional Tax Law or matters of Conflicts of Law. Tax Amnesty Programs (multiple instances) The programs were enacted at the Federal, State and Municipal levels and remained in force for specified periods of time. Post-filing The process varies in accordance with the Program, but in general it requires voluntary disclosure and a formal declaration by the taxpayer to cease and desist of any administrative or judicial litigation of an asserted tax claim. It typically includes the reduction or forgiveness of interest and penalty charges, and it may also include other incentives for the settlement. Varies in accordance with the program. Advanced Pricing Agreements in Brazil Brazil does not have a formal APA program. The authorities consider that the implementation of the statutory margin system has helped minimize subjective judgments in the auditing phase and avoids the need for a complex and expensive APA structure.

31 31 Canada Ernst & Young contact Gary Zed Brief description of available Alternative Dispute Resolution processes Alongside Advance Pricing Agreements, Canada provides Advance Tax Rulings as well as a rarely-used arbitration process. These processes are fairly mature and both APAs and advanced rulings are considered to work well. Description of the processes Process 1 Process 2 Process 3 What is the process called? Advance Tax Rulings Settlement process for Appeals Mediation process for Appeals When was it introduced? Circa 1972 Longstanding policy Longstanding policy Is the process settled in law? Is the process fully documented? This is an administrative process no legislation and guidance by the Canada Revenue Agency (CRA) is provided in Information Circular IC 70-6R5 This is an administrative process, not set out in law Pre-filing or post-filing? Pre-filing (pre-transaction) Post-filing (post assessment at Notice of Objection stage) How does the process work? Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) Briefly, the taxpayer must provide all the facts about a proposed transaction(s), the purpose of the proposed transaction(s), rulings requested, analysis in support of the rulings, and must pay a fee. The CRA will then review the request and dialogue with the taxpayer as necessary to clarify aspects of the ruling request. Yes, based on the time spent by CRA. A deposit of $500 is required to be included with the ruling request. Any tax issues only questions of law, not fact. Not applicable to valuation issues. Taxpayer has legal right to object to any assessment. CRA Appeals has legislative authority to review objection and confirm, vacate or vary any assessment of tax. The taxpayer may enter into settlement discussions; these are without prejudice. If successful, a settlement agreement is reached. The taxpayer waives subsequent right of appeal to the Tax Court of Canada. No More appropriate for factual than interpretive disputes This is an administrative process, not set out in law Post-filing (post assessment at Notice of Objection stage) Taxpayer applies to CRA s Appeals Branch for mediation. An agreement is entered into outlining the issues to be mediated. A neutral third party is selected as mediator. The process is non-binding. If successful, a settlement is reached. If not, the assessment is confirmed or varied. The taxpayer may appeal that decision to the Tax Court of Canada. No; costs are usually shared on a 50/50 basis More appropriate for factual than interpretive disputes Advanced Pricing Agreements in Canada The CRA launched its APA program in July As set out in its Information Circular 94-4R, it offers taxpayers the opportunity to pursue unilateral, bilateral or multilateral APAs. In addition, the CRA has made a small business APA program available to Canadian taxpayers under certain conditions. The CRA charges taxpayers only travel costs it incurs in the completion of an APA. On 20 August 2008, the CRA issued TPM 11, which discussed the CRA policy with respect to rolling an APA back to prior years. The main limitation imposed by TPM 11 is that APAs may not be rolled back to years for which a request for contemporaneous documentation has been issued. Effectively, this means that APAs cannot be rolled back to taxation years under transfer pricing audit. An updated version of IC94-4R is expected to be released soon.

32 32 China Ernst & Young contact Lynn Wang Brief description of available Alternative Dispute Resolution processes China has multiple Alternative Dispute Resolution processes, including tax collection on deemed basis (TCDB), Advanced Pricing Agreement (APA), and Administrative Review (AR). The processes are documented in law and regulation, with TCDB and AR being more mature than APAs. In practice, the Chinese tax authorities may agree to negotiate with taxpayers in advance on the tax treatments on certain transactions on a case- bycase basis. Description of the processes Process 1 Process 2 Process 3 What is the process called? Advance negotiation (no official Tax collection on deemed basis Administrative Review (AR) name) (TCDB) When was it introduced? Case-by-case basis Is the process settled in law? Is the process fully documented? No Yes Yes Pre-filing or post-filing? Pre-filing Pre-filing Post-filing How does the process work? Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) As Chinese tax laws and regulations basically only provide general principles, their implementation is typically subject to local practice and interpretation. Chinese tax authorities are open to taxpayers requests for discussions to clarify alternative tax treatments on certain issues in advance. However, such discussion usually will not result in written rulings issued by the tax authorities. The views received from the tax authorities therefore carry uncertainties and may be disputed by higher level tax authorities or other locations. China tax authority applies TCDB on certain taxpayers, in particular small-scale taxpayers, representative offices (RO) and permanent establishments (PE) of foreign companies in China. The common TCDB options include deemed taxable revenue, deemed profit rate and deemed taxable income. No No No All issues Entities with insufficient accounting records or accounting records kept outside of China A taxpayer who disagrees with an act or decision of a tax authority has a right to seek an administrative review. The reviewing body is not independent from the tax authority, but rather an internal department/ committee. All issues Advance Pricing Agreements in China APAs are available in China. Guidance regarding the APA process and procedures is provided in Articles 46 through 63 of Guoshuifa (2009) No. 2. The validity of an APA is generally between three and five years. Enterprises no longer need to have ten years of operating history before applying for an APA and the ban on enterprises with major tax evasion history has been lifted as well. Annual related-party transaction volumes must only be greater than or equal to RMB 40m, rather than the previously required RMB 100m. Applications for APAs involving more than one in-charge province can be submitted directly to the SAT in Beijing.

33 33 European Union Ernst & Young contact An Meheus +32 (0) Koen Marsoul +32 (0) Brief description of available Alternative Dispute Resolution processes EU arbitration procedure, designed to be used where a dispute has commenced. Description of the processes Process 1 What is the process called? When was it introduced? 1990 Is the process settled in law? Is the process fully documented? Pre-filing or post-filing? How does the process work? Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) EU arbitration convention Yes it is an EU convention Post-filling There is a mutual agreement procedure in order to reach consent to eliminate double taxation. If no agreement is reached, there is the advisory commission procedure that can deliver an opinion on how the double taxation should be eliminated. This opinion can be binding. No Elimination of double taxation arising from profit adjustment

34 34 France Ernst & Young contact Charles Menard Brief description of available Alternative Dispute Resolution processes A range of ADR processes are available in France, with a distinct focus of pre-filing mechanisms Description of the processes Process 1 Process 2 Process 3 Process 4 What is the process called? Rescrit établissement stable ( permanent establishment ruling ) Rescrit valeur («valuation ruling») Rescrit «abus de droit» («abuse of law ruling ) When was it introduced? Is the process settled in law? Is the process fully documented? Yes Yes Yes Yes Pre-filing or post-filing? Pre-filing Pre-filing Pre-filling Pre-filling How does the process work? Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) On the company s initiative. The company files a ruling request which describes the foreign entity, the activity in France (nature, human and material resources, nature of the clientele, nature of the French establishment, information about French employees, functional job analysis), role of the French company within the group. On the shareholder s initiative. The shareholder files a ruling request including: gift s act, nature of the given shares/assets, description of the company justifying the valuation, description of the valuation methods. On the company s initiative. The company files a ruling request describing the contract, the act, the legal situation at stake and explaining the aim of the situation No No No No Opposable administrative opinion whether a PE exists in France Valuation Opposable administrative opinion about the tax legality of contracts, transactions. Rescrit crédit d impôt recherche ( tax research credit ) On the company s initiative. The company files a ruling request describing the research and development operation at stake vs. other research and development operations already performed by the company; expected aim and results; complete description of the operation; estimated costs (including staff). Opposable administration opinion about the eligibility of research expenses to the tax research credit Advance Pricing Agreements in France Bilateral and, under certain circumstances, unilateral APAs, are available (Article L 80 B 7 of the French Procedural Tax Code). This section was provided by the Finance Amendment Act for 2004 and has come into force since 1 January It incorporates existing procedures as described by the French administrative guideline #4 A-8-99 dated 7 September A specific procedure also exists for certain activities (e.g. HQ profile). On 28 November 2006, the FTA released a new administrative guideline (#4 A-13-06), adding a simplified APA procedure for small and medium enterprises, and presenting an online guide pertaining to transfer pricing methods. The process requires that, in theory, the submission has to be performed at the latest 6 months before the beginning of the first fiscal year covered. It has also to be noted that there is no roll-back possibility. Besides and following a tax reassessment, taxpayers can request the introduction of a mutual agreement procedure (on the ground of tax treaty or the European Arbitration Convention) in order to avoid double taxation resulting from the reassessment. On 23 February 2006, the FTA published administrative guidelines (#14 F-1-06) specifying the scope and the conditions to be met for the introduction of such procedure.

35 35 Germany Ernst & Young contact Dr. Jürgen Schimmele Brief description of available Alternative Dispute Resolution processes Germany has a number of ADR processes in place, and APAs are also available. The ADR processes are relatively mature, especially binding rulings which have been in existence for many decades. Description of the processes Process 1 Process 2 Process 3 Process 4 What is the process called? Verbindliche Auskunft (General Binding Ruling) When was it introduced? Is the process settled in law? Is the process fully documented? Pre-filing or post-filing? How does the process work? Is there a user fee to use the process? General binding rulings used to be based on case law since They became part of the German Fiscal Code in September 2006 and are subject to charges since December Anrufungsauskunft (Binding Ruling for Wage Tax Purposes) Verbindliche Zusage im Anschluss an eine Außenprüfung (Binding Ruling after Closure of a Tax Audit) Tatsächliche Verständigung (Final Settlement in form of a mutually binding agreement) The term final settlement refers to a legal institute developed by case law Yes Yes Yes No, however it is documented by numerous Federal Tax Court decisions and acknowledged by the Federal Ministry of Finance in a detailed decree in 2008 Pre-filing and strictly limited to unrealized facts. Taxpayer is required to describe detailed unrealized facts that he is considering to realize in the future. He has to refer in detail to an uncertainty of tax law how to treat the planned facts. Yes, based on the economic value the question has for the taxpayer (in general difference of taxes). In case the economic value cannot be assessed, the tax authority charges based on time spent with 100 EUR per hour. Pre-filing Pre-filling Post-filing Upon application, the tax office has to rule about the wage tax (withholding tax) treatment of facts stated in the application. After the closure of a tax audit, the taxpayer can apply for a binding ruling regarding the future tax treatment of facts that were subject to the tax audit. No No No If the facts underlying the taxation can only be determined with disproportionate efforts, the involved parties can settle the factual uncertainty by reaching a mutual agreement

36 36 Description of the processes Process 1 Process 2 Process 3 Process 4 What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) Tax treatment of future facts, that are not covered by other ADR processes Wage tax issues (withholding tax) See above. Settlement relates only to past circumstances. If circumstances agreed upon show continuity and relate to the future, the binding effect may also have an impact on the future tax handling if intended by the parties. Advance Pricing Agreements in Germany APAs are generally available. The German Ministry of Finance issued an APA circular on 5 October 2006 which defines the APA procedures and provides guidance with regard to the negotiation of APAs. Additionally, the Annual Tax Act 2007 introduced fees for APAs. The administrative competence for APAs is centralized in the Federal Central Tax Office. The APA process typically takes from one and a half years to several years from application to conclusion. An agreement reached between two competent authorities will be made conditional in two regards: the taxpayer must consent to the intergovernmental agreement, and must waive its right to appeal against tax assessments to the extent they are in line with the contents of the APA.

37 37 Hong Kong Ernst & Young contact Joe Chan Brief description of available Alternative Dispute Resolution processes In Hong Kong, there are Alternative Dispute Resolution processes, namely Advance Ruling and Appeal to the Board of Review ( BOR ): (i) Advance Ruling a taxpayer may request for a ruling in advance from the Hong Kong Inland Revenue Department ( IRD ) on how any provisions of the Inland Revenue Ordinance ( IRO ) apply to him or to the arrangement described in the application. (ii) Appeal to the BOR a taxpayer may lodge an appeal to the BOR if he is dissatisfied with the decision of the Commissioner of Inland Revenue ( CIR ). Description of the processes Process 1 Process 2 What is the process called? Advance Ruling service Appeal to the Board of Review When was it introduced? Is the process settled in law? Is the process fully documented? Yes Pre-filing or post-filing? Pre-filing Post-filling How does the process work? Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) A taxpayer may apply in writing to the Inland Revenue Department ( IRD ) for a ruling on a seriously contemplated transaction. The ruling will only apply for the period specified in the ruling. The Commissioner may withdraw the ruling anytime by notifying the applicant in writing with the reason for the withdrawal. If a taxpayer does not agree with the ruling, he may lodge an objection when the assessment is raised. Yes. Depending on the nature of the issue to be ruled, a fee of HK$10,000 to HK$30,000 has to be paid in submitting the application. An additional fee may be charged if the time spent in considering the application exceeds the budgeted hours. The additional fee is calculated based on the extra hours spent by the officers involved at their respective charge out rate. All issues except those matters which are primarily a question of fact e.g. capital gain Yes A taxpayer may lodge an appeal to the BOR if he is not satisfied with the CIR s formal determination on his objection. The BOR is independent from the IRD, and consists of a chairman who has legal training and experience and two members from all walks of life. After hearing the appeal, the BOR may confirm, annul, reduce or increase the assessment. No, but the BOR may order the taxpayer to pay HK$5,000 as a cost if it considers that the appeal is frivolous. All issues Advance Pricing Agreements in Hong Kong Hong Kong does not provide for Advance Pricing Agreements. Although the Hong Kong Inland Revenue Departmental Interpretation Practice Note ("DIPN") 46 released in December 2009 provided welcome details on their interpretation and practices on a range of transfer pricing methodologies and issues, it did not provide any further insight into whether Hong Kong may adopt an APA strategy at some point in the future.

38 38 India Ernst & Young contact Rajan Vora + (91) Brief description of available Alternative Dispute Resolution processes India does have ADR processes in place. Advance Rulings have been available during the course of the last decade, while the introduction of a Dispute Resolution Panel in 2009 was a significant step forward. Description of the processes Process 1 Process 2 What is the process called? Advance Rulings. Dispute Resolution Panel. When was it introduced? Is the process settled in law? Is the process fully documented? Pre-filing or post-filing? How does the process work? These have been introduced over the last decade. Yes relevant legislation in the Income-tax Act, 1961, Authority for Advance Rulings Rules. Pre-filing and post-filing in certain cases in respect of questions pending before Tax Authority The Taxpayer specified by Income-tax Act (non-resident and resident having transaction with non-resident) can apply for the determination of income or the tax treatment of the income of non-resident arising from the proposed transaction with non-resident. Also Public sector undertakings can apply for ruling with respect to computation of income. Is there a user fee to use the process? Yes INR 2,500 No What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) All the tax issues relating to the tax liability of non-resident, except valuation, transfer pricing etc Yes relevant legislation was introduced in the Income-tax Act, 1961 during the year 2009, and Dispute Resolution Rules, Post-filing The Taxpayer can file objections against the draft assessment order passed by Tax Officer before the Dispute Resolution Panel (collegium of three Commissioners) without paying any demand. The tax issues relating to foreign company and transfer pricing. Advance Pricing Agreements in India Section 118 of the proposed Direct Tax Code, 2010 introduced first time the legislation on APAs which shall be applicable from 1 April In this connection, the CBDT (highest administrative body) will notify the scheme of APA for the international transaction.

39 39 Italy Ernst & Young contact Maria Antonietta Biscozzi Enrico Ceriana Brief description of available Alternative Dispute Resolution processes Italy has various Alternative Dispute Resolution processes, designed to settle tax audit reports, tax assessments and litigation. It is also possible to ask for the position of Italian tax authorities on a peculiar situation regarding the taxpayer. The processes are relatively mature. Description of the processes What is the process called? Ruling Acquiescence to the tax audit report Process 1 Process 2 Process 3 Process 4 Settlement Procedure When was it introduced? Is the process settled in law? Is the process fully documented? Yes Yes Yes Yes Judicial Settlement Procedure Pre-filing or post-filing? Pre-filing Post-filing Post-filing Post-filing How does the process work? A Ruling consists of a request to the Italian tax authorities concerning a specific case regarding the taxpayer. In this way it is possible to know the position of the Italian tax authorities before the filing a tax return. The answer should be available within 120 days from the filing of the request, but that term is interrupted if Italian tax authorities ask for further documentation. In this case the term of 120 day stars again once the documentation is filed. A company may accept all the challenges arising from the tax audit report. In this case the Company should file a formal request before the relevant Tax Office within thirty days dating from the notification of the tax audit report. Afterwards the Tax Office will notify the final assessment claiming for the total amount of taxes with the related interest and claiming for penalties reduced to 1/8 of the minimum applicable amount. Settlement Procedure consists onf an agreement on the higher taxes due between the taxpayer and the Tax Office. If the company reaches such agreement, an official motivated report would be drawn up, showing the amount of taxes, interest and penalties due. The penalties due are reduced to 1/4 of the minimum applicable amount. Judicial Settlement Procedure consists of an agreement on the higher taxes due between the taxpayer and the Tax Office. If company reaches such agreement the litigation is settled. The penalties due are reduced to 1/3 of the applicable amount. Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) If there is no official answer within 120 days the solution proposed by the taxpayer is considered as accepted. No No No No In principle all items concerning corporation tax and VAT are covered. In principle all items concerning corporation tax and VAT are covered. In principle all items concerning corporation tax and VAT are covered. Any items concerning tax litigation. Advance Pricing Agreements in Italy The Italian government introduced a unilateral ruling system mainly relating to transfer pricing, dividends and royalties. The law has been enacted with the Provvedimento del Direttore dell agenzia delle entrate, dated 23 July This document provides a number of practical guidelines to apply and conduct the ruling program. Since Italy provides a variety of tax rulings, the interactions between the APA and the other tax rulings should be evaluated on a case-by-case.

40 40 Japan Ernst & Young contact Taichi Haraguchi Brief description of available Alternative Dispute Resolution processes Japan does not have an ADR process, except Advanced Pricing Agreements (APAs). In Japan, entering into a written agreement with a tax authority regarding taxpayer s tax liability is not permitted because tax law is recognized as the complete and ultimate provision. Consequently, the tax authority strongly recommends the taxpayer file an amended return, and if no amended return is filed, the tax authority will correct the original return. In a tax lawsuit, the court will not allow a settlement report to be made between the parties. Therefore, virtual settlement between the tax authority and taxpayer frequently occurs by combining cancellation or modification of assessment by the tax authority, and withdrawal of the action by the taxpayer. That said, the Japanese tax authorities do provide for some form of Taxpayer Advance Inquiries. If a tax authority receives a written query from a taxpayer which satisfies certain conditions (eg tax treatment of a certain transaction is not made clear under the tax law), the tax authority will respond to the query in writing. Advance Pricing Agreements in Japan Unilateral and bilateral APAs are available, though the NTA prefers bilateral. APA guidelines are included in the Administrative Guidelines. The NTA has recently shown a willingness to accept profit-based methods, such as the TNMM. The NTA amended the filing deadline for APA applications on 22 October Previous guidance required that the APA application be filed by the tax return filing deadline of the first year to be covered by the APA. The new NTA guidance sets the APA filing deadline as the day preceding the first day of the first fiscal year to be covered by the proposed APA. However, the new guidance does allow for a transition period. If the first covered year starts between 1 November 2008 and 1 November 2009, the transition rule applies. The transition rule indicates that the APA application is due eight months after the due date of the tax return for the last year before the covered period. In practice, this means the application is due eleven months after the first day of the covered period.

41 41 South Korea Ernst & Young contact Dong Chul Kim Brief description of available Alternative Dispute Resolution processes Recently the Korean tax authorities (National Tax Service, "NTS") introduced "advanced tax ruling system" which is very similar to US IRS private letter rulings that apply to specific case and taxpayer. Description of the processes Process 1 What is the process called? Advanced Tax Ruling System ( ATRS ) When was it introduced? Effective from October 1, 2008 Is the process settled in law? Is the process fully documented? Pre-filing or post-filing? How does the process work? Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) ATRS is documented not in tax law, but within NTS s instruction (i.e., it is a directive). The process may be followed for both pre-filing and post-filing issues. Advanced tax rulings may be made on specific transactions that are either ongoing or planned in the near future. A taxpayer submits a written advanced tax ruling request to NTS along with verified by supporting facts and documents and NTS provides its written opinion on the interpretation of tax laws to the taxpayer. No There is no specific limitation. Advance Pricing Agreements in Korea Unilateral and bilateral APAs are available under the LCITA. In order to encourage the application of APAs, the NTS does not require an application fee, and the LCITA guarantees the confidentiality of the data submitted to the NTS with regard to an APA. In addition, the Korean tax authority is making all efforts to shorten the time being taken to process the APA. Furthermore, the Korean tax authority released its first Annual Report on APAs which includes information such as statistics on the type of APAs being concluded, the countries that are counterparties to APAs, time taken to process APA cases, etc.

42 42 Mexico Ernst & Young contact Santiago Chacon Jorge Libreros Brief description of available Alternative Dispute Resolution processes Mexican Tax legislation provides for a range of Alternative Dispute Resolution processes including non-binding rulings, Administrative appeal, and the Advanced Pricing Agreements. In addition to the above mentioned, treaties signed by Mexico provide the mutual agreement procedure as an alternative to dispute a resolution, as well as the arbitration method in case of the Mexico-Canada treaty. Furthermore, the Netherlands, treaty which has been recently renegotiated, provide that if a new tax treaty executed by Mexico contains any disposition related to the Arbitration Procedure, and if such provision is significantly similar to the one established by the OECD Model of Tax treaty, then such provision would be automatically applicable to the treaty. A Mexico-Switzerland treaty (signed, but not currently in force) provides a similar condition. Description of the processes Process 1 Process 2 Process 3 What is the process called? Rulings/Administrative Appeals Advanced Pricing Agreements (Transfer Pricing) When was it introduced? Is the process settled in law? Is the process fully documented? Rulings and Administrative Appeals exist in Mexican law at least since December 31 st December 30 th Treaty s Mutual Agreement Procedure/ Arbitration Mutual agreements since April 8th 1991 (First treaty signed by Mexico), arbitration since/ Arbitration since September 12th, Yes Yes These processes are provided by treaties. Pre-filing or post-filing? Pre-filing Pre-filing Pre-filing and/or post-filing How does the process work? Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) Ruling requests are filed at any time. The request should be made stating the background, facts and circumstances and should be made before the tax authorities start an audit on the topics contained in the ruling request. Rulings will cease to be valid if the circumstances change or if the law change. The tax authorities need to issue an answer within 3 months/ Administrative appeals should be filed within the 45 days following a notification or an assessment. The appeal ruling should be issued within 3 5 months following the date of the filing. The interested party requests an advanced pricing agreement filing for these purposes all the necessary documentation, data, and information. By this Advanced Pricing Agreement the taxpayer can agree and justify the prices that will correspond to operations with foreign related parties. No Yes No Rulings can be requested only to the extent these refer to real facts and circumstances on any tax law matter/administrative appeals cover any tax law and tax procedural issues. Transfer Pricing This process is regulated by the tax treaties agreed by Mexico and thus the process may differ depending on the treaty that is being applied. However typically in this process the tax authorities of the countries involved in the disputed resolution engage in negotiations to solve the referred dispute./currently, arbitration has only been agreed and is in force on the Mexico-Canada and the Mexico- Netherlands treaty, however some of the most recently negotiated or renegotiated treaties provide that when Mexico agrees an arbitration disposition in the future, this will automatically apply to these treaties as well. These procedures are used for cases in which double taxation may be occurring. Advance Pricing Agreements in Mexico Unilateral and bilateral APAs are available under Article 34-A of the Federal Fiscal Code and Mexico s tax treaties. Unilateral APAs can cover the fiscal year of the application, the three subsequent fiscal years and a one-year rollback.

43 43 The Netherlands Ernst & Young contact Arjo van Eijsden Brief description of available Alternative Dispute Resolution processes The Netherlands has multiple Alternative Dispute Resolution processes, including Horizontal Monitoring and Mediation. In April 2005 the Dutch Tax Authorities commenced a pilot named Horizontal Monitoring involving 20 of the largest corporate taxpayers in the Netherlands after which it became official policy of the Dutch tax authorities. Mediation has been introduced by means of a pilot in 2004 by the Dutch Tax Authorities. In January 2005 the Dutch lower Chamber accepted mediation as part of the tax procedures. Since April 2007 every court offers parties the opportunity to solve tax disputes by means of mediation. At the end of 2005 also the Dutch Tax Authorities offered mediation as a way of alternative dispute resolution. The mediators are employees of the Dutch Tax Authority, but they are in practice totally independent. Description of the processes Process 1 Process 2 What is the process called? Horizontal Monitoring Mediation When was it introduced? April 2005 January 2005 Is the process settled in law? Is the process fully documented? Pre-filing or post-filing? How does the process work? Participating tax payers usually formalize their and the Tax Authorities responsibilities and obligations by entering into a so called Compliance Agreement ( handhavingsconvenant ). This agreement is a voluntary agreement and either party can withdraw from it at any time. Pre-filing (Since the Compliance Agreement is forward-looking it generally applies as of the date of signing, however usually concluding a Compliance Agreement is combined with a settlement agreement covering previous fiscal years to allow a catch-up and a start with clean sights) The Horizontal Monitoring regime can be characterized as a form of voluntary disclosure. Under this regime the taxpayer promises to actively notify the Tax Authorities of any issues with a possible and significant tax risk and to disclose all facts and circumstances regarding these issues without hesitation or reservation. In turn, the Tax Authorities promise, having received such disclosure, to provide timely advice on disclosed significant reporting positions, taking into account real commercial deadlines when doing so. In addition, the tax payer files tax returns within an agreed time frame and the Tax Authorities impose tax assessments as soon as possible after receipt of the return and where possible in consultation with the tax payer. As such both tax payer and the Tax Authorities will focus on the present in stead of focusing on the past. In January 2005 the Dutch lower Courts accepted mediation as part of the tax procedures. Since April 2007 every court (not the Supreme Court) offers parties the opportunity to solve tax disputes by means of mediation. At the end of 2005 also the Dutch Tax Authorities offered mediation as a method of Alternative Dispute Resolution. Post-filing Mediation is a way of conflict mediation in which concerned parties try to solve their dispute their selves without judgment of a judge. A mediator will help with the conflict mediation but will not give a judgment on the tax content of the dispute. If parties come to an agreement, this agreement will be documented in a settlement agreement which will be signed by both parties.

44 44 Description of the processes Process 1 Process 2 Is there a user fee to use the process? No No, however if a court refers the parties to mediation the first two and a half hours are free. After this time, the costs are split amongst the parties. Mediation is offered by the Dutch Tax Authorities without charge. What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) The Compliance Agreement typically covers all tax types. Mediation typically covers all tax types. Advance Pricing Agreements in the Netherlands Unilateral, bilateral and multilateral APAs with rollback features are available. The APA process currently operates well in the Netherlands, despite earlier criticism regarding the uncertainty of obtaining APAs for financial service entities (see below). Pre-filing meetings with taxpayers to discuss the case before a formal APA request is made, support for small taxpayer APAs and case management plans have been introduced and processing time has been reduced. Financial services entities consist of both financing (mere receipt and payment of intercompany interest) and licensing (mere receipt and payment of intercompany royalties) companies. For license companies, the first APA under the new regime was granted by the Dutch tax authority in For finance companies, the APA process had been functioning successfully for a number of years already by A number of substantial improvements for Dutch financial services entities were introduced in 2005, which mainly relate to a reduction in the applicable transfer pricing documentation requirements.

45 45 Russia Ernst & Young contact Alexei Nesterenko Alexandra Lobova Brief description of available Alternative Dispute Resolution processes While there are pre-filing Alternative Dispute Resolution processes available in the Russian Federation, there are no formalized post-filing processes. That said, there are two mechanisms for pre-trial dispute resolution. Description of the processes Process 1 Process 2 What is the process called? Filing written disagreements to the tax Administrative appeal to the higher tax authority which issued an act authority When was it introduced? Is the process settled in law? Is the process fully documented? Yes. The process is described in the Tax Code of the Russian Federation Pre-filing or post-filing? Pre-filing Pre-filing How does the process work? If a taxpayer disagrees with statements made in the tax audit report, he could present to the appropriate tax authority written disagreements relating to the report as a whole or to individual points therein. A tax audit report and other materials relating to a tax audit in the course of which violations of tax and levy legislation were found, and written objections presented by the audited taxpayer in relation to that report are examined by the director (deputy director) of the tax authority which performed the tax audit. The taxpayer has the right to participate in the process of the examination of the materials. However, the process is not a kind of negotiation with tax authority. It is just the way to file an objection. Upon the results of processing of the abovementioned materials and objections the director (deputy director) of the tax authority adopts a decision. Is there a user fee to use the process? No No What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) All types Yes. The process is described in the Tax Code of the Russian Federation In cases where the director (or deputy director) of the tax authority adopts a decision on the imposition of sanctions for the commission of a tax offence or a decision on the non-imposition of tax sanctions for the commission of a tax offence the taxpayer has the right to appeal that decision to the higher tax authority. A judicial appeal against a decision on the imposition of sanctions for the commission of a tax offence or a decision on the non-imposition of tax sanctions for the commission of a tax offence may be lodged only after an appeal against that decision has been lodged with a higher tax authority. All types Advance Pricing Agreements in Russia APAs are not allowed under the current legislation, but it is included in the draft law. The APA program would be available from 1 January 2012 and at the initial stage it might be available only for major taxpayers. Both unilateral and bilateral APAs are expected to be available.

46 46 Singapore Ernst & Young contact Lim Gek Khim Jesper Solgaard Brief description of available Alternative Dispute Resolution processes Advance rulings are available and provide greater clarity and certainty to taxpayers on the interpretation of provisions in the Income Tax Act and the Goods & Services Tax Act. For transfer pricing issues, an Advance Pricing Agreement (APA) process is also available. Description of the processes Process 1 Process 2 What is the process called? Income Tax Advance Ruling Goods & Services Tax Advance Ruling When was it introduced? 1 January July 2007 Is the process settled in law? Is the process fully documented? Yes (Section 108 and Seventh Schedule of the Income Tax Act (ITA)); Inland Revenue Authority of Singapore (IRAS) circular dated 1 April 2009 (fifth revision) Pre-filing or post-filing? Pre-filing Pre-filing How does the process work? Submission of an application form together with payment of an application fee and a written ruling in a prescribed format not later than 2 months before the date of the proposed arrangement (except in the case of an express advance ruling). Singapore tax authorities review application and the ruling request is acceptable, it will write to seek additional information if applicable and usually upon receipt of the information it will issue a letter of offer to set out the terms under which the ruling will be issued. The terms include the expected timeline and the additional ruling fee payable. Yes (Section 90A and Fifth Schedule of the Goods & Services Tax (GST) Act); IRAS circular dated 11 January 2010 (sixth edition) Submission of an application form together with payment of an application fee not later than 1 month before the filing deadline of the relevant GST return or 1 month before the transaction date, whichever is applicable. Different timeline applies for an express ruling. Singapore tax authorities review application and the ruling request is acceptable, it will write to seek additional information if applicable and usually upon receipt of the information it will issue a letter of offer to set out the terms under which the ruling will be issued. The terms include the expected timeline and the additional ruling fee payable. Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) Taxpayers who accept the terms has to formally submit a letter of acceptance to the Singapore tax authorities to acknowledge acceptance within 7 days. In addition to a non-refundable application fee of S$525 (plus GST),a time-based fee is charged for the time taken to provide the ruling, as well as any costs and disbursements incurred in connection with the ruling. An additional fee is charged if the CIT agrees to give an express advance ruling. Corporate and individual income tax issues (not concerning what the law clearly provides, and not involving the interpretation of a foreign law or any DTAs) Taxpayers who accept the terms has to formally submit a letter of acceptance to the Singapore tax authorities to acknowledge acceptance within 3 days. In addition to a non-refundable application fee of S$525 (plus GST),a time-based fee is charged for the time taken to provide the ruling, as well as any costs and disbursements incurred in connection with the ruling. An additional fee is charged if the CIT agrees to give an express advance ruling. If the Comptroller of GST requires the advice of an external adviser with the relevant expertise or professional knowledge, the applicant will be informed of such a need before hand and the fees (if any). The applicant may then decide whether to withdraw or proceed with his request. GST issues relating to a particular business arrangement or a specific transaction (but not involving the interpretation of any foreign law)

47 47 Advance Pricing Agreements in Singapore Unilateral, bilateral and multilateral APAs are available in Singapore and were introduced in February However, for bilateral and multilateral APAs, there must be a double tax agreement between Singapore and the other involved country or countries. The Singapore Transfer Pricing Guidelines outline the procedures for applying for an APA. Further procedural guidance on the APA process has been provided in the IRAS circular Supplementary Administrative Guidance on Advance Pricing Arrangements issued in October The circular applies to APA requests made after 20 October 2008 and includes guidance on the following: Suggested timing for the overall APA process The circumstances where the IRAS may reject a taxpayer s APA request The nature of taxpayer resources and commitments that should be made when an APA is requested That roll-backs are limited to bilateral and multilateral APAs

48 48 South Africa Ernst & Young contact Brigitte Keirby-Smith Brief description of available Alternative Dispute Resolution processes South Africa has two forms of Alternate Dispute Resolution. The first is the Advanced Tax Ruling ( ATR ) process and the second is the ADR process. The ATR (binding general, class and private rulings) provides resolutions for future transactions while the ADR process is aimed at resolving disputed tax positions with the South African Revenue Service ( SARS ). Both the ADR and the ATR process are relatively new in SA (ADR approx 6 years and ATR 4 years). In my experience, the ADR and ATR processes are used quite extensively by SARS and taxpayers to resolve disputes. As both are relatively new there have been some criticisms around application. Description of the processes Process 1 Process 2 What is the process called? Advanced Tax Rulings ( ATR ). This includes Binding Private Rulings, Binding Class Rulings and Binding General Rulings. Alternate Dispute Resolution ( ADR ) When was it introduced? First introduced in 2006 First introduced in 2003 Is the process settled in law? Is the process fully documented? Pre-filing or post-filing? How does the process work? Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) Yes For Private and Class rulings this process is a pre-filing one. The General rulings are issued by the SARS and apply to all taxpayers. For Private and Class rulings, the taxpayer makes an application to the SARS for a ruling on a prospective transaction. The taxpayer is required to detail the proposed transaction, document the relevant legislation and determine an applied outcome which will form the basis of the required ruling. Yes. There is an application fee and a cost recovery fee. The latter fee is determined with reference to the complexity of the matter and is charged on an hourly basis. Technically all taxes are covered but there are certain tax issues that have been scoped out of the ATR process. These exclusions include, inter alia, transfer pricing, valuations, issues currently under dispute with the SARS and classification of a taxpayer as a personal service provider, labour broker or independent contractor. Yes Post-filing and aimed at resolving disputed assessments. Where a taxpayer is aggrieved by an assessment and wishes to appeal the SARS decision it may request the ADR process to either agree or settle the dispute. SARS has the discretion to decline this request but is required to give reasons for such which the taxpayer can also contest. No Technically any disputed matter can be taken to ADR. However, the SARS does have the discretion to decline this request where it is of the opinion that the matter is not appropriate for ADR. The taxpayer may context this view of the SARS. Advance Pricing Agreements in South Africa South Africa does not offer Advance Pricing Agreements.

49 49 Turkey Ernst & Young contact Erdal Çalıkoğlu Brief description of available Alternative Dispute Resolution processes Turkey has multiple Alternative Dispute Resolution processes, including Tax Settlement (Reconciliation), Advance Pricing Agreement (APA) and Tax Return with Reservation. The Tax Settlement and Reservation process are relatively mature, however Advance Pricing Agreements were only introduced into Turkey with the New Corporate Tax Code No.5520 dated 2006 and became applicable starting from the year Description of the processes Process 1 Process 2 What is the process called? Tax Settlement Tax return with reservation (followed by tax court case) When was it introduced? Is the process settled in law? Is the process fully documented? Yes well documented with the Tax Procedures Code No.213 and the Regulations on Tax Settlement. There are two types of settlement Tax Settlement Before Assessment and Tax Settlement After Assessment Yes regulated in the Tax Procedure Code No.213 and Law on the Procedure of the Administrative Judicial No.2577 Pre-filing or post-filing? Post-filing Post-filing, as the tax return and the tax assessment accordingly would be followed by a court case How does the process work? There are different types of tax settlement. Tax Settlement Before Assessment application is made during the tax inspection and the settlement meeting is held at the tax inspectors level. Tax Settlement After Assessment is made within 30 days following the notification of the tax assessment receipts. The meeting is held at the Tax Settlement Committees (within the tax office or at the Ministry of Finance level). In both types the taxpayer may apply to court case within 15 days following the notification of the minutes of the meeting where no settlement is achieved. The tax return is submitted to the tax office with reservation and in most cases the tax office would not act in accordance with the reservation of the taxpayer. Following the assessment, against the reservation of the tax payer, a court case should be initiated at the tax court within 30 days. Then there would be a tax litigation procedure, which would end-up at the Council of State level. Is there a user fee to use the process? No There are fees to be paid at the court level, which would be minimal during the filing of the court case What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions) All tax issues All tax issues Tax court case may include hearing, however principally the judgment would be made through the documents presented within the files Advance Pricing Agreements in Turkey An APA is possible upon the demand of the taxpayer. In principle, the agreed-upon method would be binding through the period determined; however, it cannot exceed three years. APA applications were allowed for Grand Taxpayers Tax Office corporate taxpayers as of 1 January 2008 for their foreign transactions. Other taxpayers were able to apply for APAs as of 1 January 2009.

50 50 United Kingdom Ernst & Young contact Chris Oates +44 (0) Brief description of available Alternative Dispute Resolution processes The United Kingdom has a number of Alternative Dispute Resolution processes, covering both pre- and post-filing timescales. As noted within the main body of this document, HMRC in the UK are in the process of piloting a Collaborative Dispute Resolution process, covering post-filing disputes. Description of the processes Process 1 Process 2 Process 3 What is the process called? There are a number of pre-filing Alternative Dispute Resolutions processes in the UK. These include; ATCA, Statutory Clearances (COP10), and Non Statutory Clearances, etc. The High Risk Corporate Programme seeks to address issues relevant to companies HMRC consider to be high risk. Post-filing Alternative Dispute Resolution/Collaborative Dispute Resolution. When was it introduced? Is the process settled in law? Is the process fully documented? These have been introduced over the last decade. Yes relevant legislation and in the HMRC International Manual 2007 Not yet in operation. To be introduced in 2010/2011 Documented not settled in law Pre-filing or post-filing? Pre-filing Post-filing Post-filing How does the process work? Under all clearances the process involves the tax payer notifying HMRC of the proposed transaction and then either obtaining a clearance for a tax treatment or clearance being denied. ATCA (Advanced Thin Capitalization Agreement) A company can seek to enter into a forward agreement with HMRC setting out the terms on which HMRC will accept that the company's interest payments represent an arm's length cost of borrowing. Agreements are usually binding for periods of three to five years, Although an agreement may not specifically related to an earlier period it may be applied in some cases where facts and circumstances are materially consistent. A process by which disputes are resolved for a small number of large corporate businesses that are deemed to be high risk. In general HRCP focuses on ways by which UK tax authorities and taxpayers can achieve certainty on a number of open issues. This process is undertaken at board level. Both sides commit to a mutually agreed target date for resolution of the enquiry and negotiation process. All open issues are identified, their status logged and a time tabled action plan is agreed. Documented not settled in law UK tax authorities are introducing the Collaborative Dispute Resolution scheme to focus on ways by which they and tax payers can agree settlement to enquiries. There may be common issues across a range of tax payers and it may be easier to deal with UK tax authorities on a group basis to ensure consistency and to increase efficiency in the resolution. This is likely to be introduced in 2010/2011.

51 51 Description of the processes Process 1 Process 2 Process 3 Non Statutory Clearances include what were known as COP10 clearances and are available to both businesses and non businesses. A non-statutory clearance is written confirmation of UK tax authorities view of the application of tax law to a specific transaction or event that the taxpayer can rely on in most circumstances, as our view of the tax consequences of your transaction. Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) Statutory Clearance a process by which disputes are resolved or clearance from UK tax authorities is obtained by the taxpayers before filing. No No No Most of the key tax issues are covered, including valuation, timing, transfer pricing, transactions etc. Most of the key tax issues are covered, including valuation, timing, transfer pricing, transactions etc. Most of the key tax issues are covered, including valuation, timing, transfer pricing, transactions etc. Advance Pricing Agreements in the United Kingdom Section of the Finance Act of 1999 introduced legislation on APAs. A Statement of Practice published in September 1999 supplements this legislation. Bilateral and unilateral APAs are available, but bilateral APAs are preferred. For APAs to be admitted to the program there needs to be sufficient doubt or difficulty in approaching compliance with the arm s length standard. Limited resources limit the UK to around new admissions to the program each year.

52 52 United States Ernst & Young contacts Debbie Nolan Elvin Hedgpeth Frank Ng David Canale Brief description of available Alternative Dispute Resolution processes The United States has a number of Alternative Dispute Resolution processes, most of which are relatively mature. Description of the processes Process 1 Process 2 Process 3 What is the process called? Pre-Filing Agreement (PFA) Compliance Assurance Process Industry Issue Resolution (IIR) Program (CAP) Program When was it introduced? Is the process documented? Yes Rev. Proc Yes Announcement Yes Rev. Proc Pre-filing or post-filing? Pre-filing Pre-filing Pre-filing How does the process work? The PFA program enables the taxpayer and the IRS to resolve, before the filing of a return, the treatment of an issue otherwise likely to be disputed in post-filing examinations. An eligible taxpayer may request a PFA for the current taxable year, any prior taxable year for which the original return is not yet due, and up to four taxable years beyond the current taxable year. A PFA that makes determinations for the current taxable year (and any prior taxable year for which a return is not yet due) is a closing agreement under section A PFA that includes a determination for one or more future taxable years is a non-statutory agreement a binding contract between the Service and the taxpayer. CAP allows taxpayers and the IRS to resolve issues before tax returns are filed, through near-real-time auditing. CAP requires extensive cooperation between the Service and participating taxpayers. Throughout the tax year, these taxpayers are expected to engage in full disclosure of information concerning their completed business transactions and their proposed return treatment of all material issues. Participating taxpayers that resolve all material issues will be assured, prior to the filing of the tax return, that the Service will accept their tax return, if filed consistent with the resolutions, and that no post-filing examination will be required. If all issues cannot be resolved prior to the filing of the return, the program will identify the remaining items that will need to be resolved through traditional examination processes. A post filing review and attestation by the taxpayer that any material issue for which there is a reserve has been disclosed and discussed assures the tax administrator of substantial compliance. The IIR Program is intended to resolve frequently disputed or burdensome tax issues that affect a significant number of business taxpayers through the issuance of published guidance. IRS solicits suggestions for issues from taxpayers, representatives and associations for the IIR Program. For each issue selected for the program, a resolution team of IRS (examination and Appeals), Chief Counsel and Treasury personnel is assembled to gather and analyze relevant information for the issue and then develop and recommend guidance.

53 53 Description of the processes Process 1 Process 2 Process 3 Is there a user fee to use the process? Yes US $50,000, payable within 15 days of acceptance of the PFA application. No No What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) The IRS will consider entering into a PFA on any issue that requires either a determination of facts or the application of well-established legal principles to known facts. The Service also will, in general, consider entering into a PFA regarding a methodology used by a taxpayer to determine the appropriate amount of an item of income, allowance, deduction, or credit. Certain enumerated issues, such as transfer pricing or a change in method of accounting, are not eligible for the PFA program. Taxpayers participating in CAP may seek to resolve all material issues concerning completed business transactions and the proposed return treatment thereof for the current year. Business tax issues appropriate for the program will generally have at least two of these characteristics: The proper tax treatment of a common factual situation is uncertain. The uncertainty results in frequent, and often repetitive, examinations of the same issue. The uncertainty results in taxpayer burden. The issue is significant and impacts a large number of taxpayers, either within an industry or across industry lines. The issue requires extensive factual development, and an understanding of industry practices and views concerning the issue would assist the Service in determining the proper tax treatment.

54 54 United States Ernst & Young contacts Debbie Nolan Elvin Hedgpeth Frank Ng David Canale Brief description of available Alternative Dispute Resolution processes The United States has a number of Alternative Dispute Resolution processes, most of which are relatively mature. Description of the processes Process 4 Process 5 Process 6 What is the process called? Accelerated Issue Resolution (AIR) Early Referral to Appeals Fast Track Settlement (FTS) Process Program When was it introduced? Is the process documented? Yes Rev. Proc Yes Rev. Proc Yes Rev. Proc Pre-filing or post-filing? Post-filing Post-Filing Post-Filing How does the process work? AIR is a process to advance the resolution of issues arising from an audit of a taxpayer from one or more tax periods to other tax periods. An eligible taxpayer and the IRS may enter into an AIR agreement with respect to an issue arising from an audit for the years under examination and apply that result via a closing agreement to all filed years containing that issue up to the date the closing agreement is signed. Where one or more developed, unagreed issues exist during the course of an examination, eligible taxpayers may request that the examination team refer such issues to Appeals, while the examination team continues to audit other issues. Established Appeals procedures apply to Early Referral issues. If an agreement is reached with respect to an Early Referral, a closing agreement is generally prepared. The closing agreement is used to compute the corrected tax as a partial agreement prior to or concurrently with the resolution of any other issues in the case. The Fast Track Settlement program uses the mediation skills and delegated settlement authority of Appeals to resolve issues while still under the jurisdiction of the Large Business and International division (previously the LMSB). Whereas a formal written protest must generally be prepared by the taxpayer in order to send an issue to Appeals, the Fast Track program requires only a one-page application and the taxpayer s response to the Form 5701 containing the issue(s) in dispute. Once the case is accepted into the FTS program, an Appeals official will serve as a facilitator to arrive at and execute a resolution or settlement that is mutually agreeable to all parties. If an agreement is reached, the Appeals official may use delegated settlement authority to enter into and approve the agreement, or LMSB and the taxpayer may resolve the issue using LMSB resolution authority and include it as an agreed issue in the revenue agent s report. If the parties are unable to resolve the issue, the taxpayer retains the option of requesting that the issue be heard through the traditional Appeals process. Ex parte is waived by the taxpayer.

55 55 Description of the processes Process 4 Process 5 Process 6 Is there a user fee to use the No No No process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) An AIR agreement may generally be entered into with respect to any issue arising from an audit of a large corporate taxpayer and related specific items affecting other taxable periods. However, certain issues are excluded or require approval of other offices or functions. Generally, any issue arising during the examination that has been fully developed, but on which the taxpayer and examination team do not agree. FTS is generally available for all issues under the jurisdiction of LMSB. However, certain issues are specifically excluded, including issues for which the taxpayer has submitted a request for competent authority assistance or issues in a taxpayer s case designated for litigation. Advanced Pricing Agreements in the United States The IRS has an APA Program Office dedicated to analyzing and negotiating unilateral APAs, as well as bilateral and multilateral APAs with competent authority, as provided in Rev. Proc The revenue procedure has strict case management procedures, disclosure requirements, and detailed guidance for taxpayers and the IRS in submitting APA requests and processing the analyses. Competent authority guidance is provided in Rev. Proc , which compliments the requirements of Rev. Proc

56 56 United States Ernst & Young contacts Debbie Nolan Elvin Hedgpeth Frank Ng David Canale Brief description of available Alternative Dispute Resolution processes The United States has a number of Alternative Dispute Resolution processes, most of which are relatively mature. Description of the processes Process 7 Process 8 Process 9 What is the process called? Private Letter Ruling Delegation Order 4-24 Delegation Order 4-25 When was it introduced? N/A 1997 N/A Is the process documented? Yes Rev. Proc Yes Delegation Order 236 (Internal Revenue Manual ) Pre-filing or post-filing? Pre-filing Post-Filing Post-Filing How does the process work? Is there a user fee to use the process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) A taxpayer may request a written determination by an Office of Associate Chief Counsel in response to the taxpayer s written inquiry, filed prior to the filing of it return about its status for tax purposes or the tax effects of its acts or transactions. A letter ruling interprets the tax laws and applies them to the taxpayer s specific set of facts. A taxpayer may request a closing agreement with a letter ruling or in lieu of a letter ruling, with respect to a transaction that would be eligible for a letter ruling. Yes, generally $11,500, though this fee may be less, depending on type of ruling requested. A letter ruling may be requested on a number of issues related to proposed or completed transactions. However, the IRS ordinarily does not issue a letter ruling if an identical issue is involved in the taxpayer s return for an earlier period and that issue is currently being examined, in Appeals, or in litigation. The IRS also maintains a listing of certain enumerated areas in which letter rulings will not be issued. Where a taxpayer has entered into a settlement (including hazards settlements) with Appeals on an issue, Delegation Order 4-24 gives examination case managers the authority to apply that settlement where the same issue is under examination for other tax periods. No The underlying issue must have been settled by Appeals independently of other issues (e.g. no trading of issues) in the settled tax period. Yes Delegation Order 4-25 (Internal Revenue Manual ) When Appeals issues written settlement guidelines for certain coordinated issues, Delegation Order 4-25 provides examination case managers the authority to accept settlements following the Appeals guidelines at the examination level. No Delegation Order 4-25 applies only to coordinated issues for which Appeals has issued written settlement guidelines.

57 57 United States Ernst & Young contacts Debbie Nolan Elvin Hedgpeth Frank Ng David Canale Brief description of available Alternative Dispute Resolution processes The United States has a number of Alternative Dispute Resolution processes, most of which are relatively mature. Description of the processes Process 10 Process 11 Process 12 What is the process called? Post-Appeals Mediation Post-Appeals Arbitration Simultaneous Appeals/ Competent Authority Consideration When was it introduced? N/A Is the process documented? Yes Rev. Proc Yes Rev. Proc Yes Rev. Proc Pre-filing or post-filing? Post-filing Post-Filing Post-Filing How does the process work? The Appeals mediation procedure is a non-binding process that uses the services of a mediator, as a neutral third party, to help Appeals and the taxpayer reach their own negotiated settlement. To accomplish this goal, the mediator acts as a facilitator, assists in defining the issues, and promotes settlement negotiations between Appeals and the taxpayer. Though the mediator has no authority to impose a decision, if successful, mediation can save time and money by resolving the case without litigation. The Appeals arbitration program allows taxpayers to request binding arbitration for factual issues that are already in the Appeals administrative process. Under the procedure, the taxpayer and Appeals must first attempt to negotiate a settlement. If those negotiations are unsuccessful, the taxpayer and Appeals may jointly request binding arbitration. Binding arbitration is available for cases in which a limited number of factual issues remain unresolved following settlement discussions in Appeals. This process coordinates simultaneous involvement of Appeals and competent authority consideration to expedite resolution of the unagreed issue under competent authority jurisdiction before the issue is presented to the foreign competent authority. The Appeals representative will consult with the U.S. competent authority during this process to ensure appropriate coordination of the Appeals process with the competent authority procedure, so that the terms of a tentative resolution and the principles and facts upon which it is based are compatible with the position that the U.S. competent authority intends to present to the foreign competent authority. Any resolution reached with the IRS under this procedure is subject to the competent authority process and, therefore, is tentative and not binding on the IRS or the taxpayer. The conclusions of the tentative resolution, however, generally will be reflected in the U.S. position paper used for negotiating a mutual agreement with the foreign competent authority.

58 58 Description of the processes Process 10 Process 11 Process 12 Is there a user fee to use the No process? What types of tax issues does the process cover? (eg Valuation, timing, Transfer pricing, transactions, other) No. However, if the taxpayer elects to use a non-irs co-mediator, the taxpayer is responsible for the related expenses. Mediation is generally available for all factual and legal issues. However, Mediation is generally not available for industry-wide issues, Appeals Coordinated Issues, or for cases or issues designated for litigation since the settlements of these issues have been circumscribed by other procedures. No. However, if the taxpayer and Appeals select a non-irs arbitrator, the taxpayer is responsible for one-half of the related expenses. Arbitration is available only for factual issues. Moreover, arbitration is generally not available for industry-wide issues, Appeals Coordinated Issues, or for cases or issues designated for litigation Competent Authority issues.

59 59 Stay up to date with the shifting tax landscape Tax administration without borders Globalization is accelerating at an unprecedented pace, economies are in flux, businesses continue to fight for survival and market share at the same time, and governments are addressing this new environment by trying to protect revenues and co-operate as never before. What does this mean for businesses that are trying to achieve certainty and reduce the risk of controversy? Tax administration without borders looks at the unfolding trends in global tax administration and sets out a number of leading practices for businesses to consider when protecting themselves against future tax controversy. Download at Tax administration without borders: wealth under the spotlight After a decade of massive wealth generation around the world, the global financial crisis that began in late 2007 had a devastating impact on the assets of high net worth individuals (HNWIs). At the same time, output in many advanced economies dropped precipitously, while government revenues fell as economies slowed. With Governments having two levers they can pull to increase the revenues that they collect from HNWIs higher tax rates and increased tax enforcement the spotlight is shining brightly on those most able to pay. Download at Tax Policy and Controversy Quarterly Briefing Ernst & Young's TPC Quarterly Briefing reflects the continuing heightened volume of change in the tax policy and administration environment. The October 2010 issue includes an interview with Jeffrey Owens, chairman of the OECD s Centre for Tax Policy and Administration, as well as coverage of a range of other issues including transfer pricing, employment taxes, research incentives and alternative dispute resolution processes. Download at

60 60 Contacts Country Argentina Australia Belgium Brazil Canada Chile China Colombia Costa Rica Denmark Dominican Republic (Also El Salvador, Guatemala, Honduras, Nicaragua) Estonia European Union Finland France Tax policy /telephone Jorge Gebhardt Alf Capito Herwig Joosten [email protected] +32 (0) Romero Tavares [email protected] Jim Morrisey [email protected] Maria Javiera Contreras [email protected] Becky Lai [email protected] Margarita Salas [email protected] Rafael Sayagues [email protected] Niels Winther-Sørensen [email protected] Juan Carlos Chavarría Pozuelo [email protected] Ranno Tingas [email protected] Klaus von Brocke [email protected] Jukka Lyijynen [email protected] Charles Menard [email protected] +33 (0) Tax controversy /telephone Jorge Gebhardt [email protected] Howard Adams [email protected] Johan Van Caillie [email protected] +32 (0) Julio Assis [email protected] Daniel Sandler [email protected] Macarena Navarette [email protected] Owen Chan [email protected] Romero Tavares [email protected] Ramiro Bravo [email protected] +52 (81) Niels Winther-Sørensen [email protected] Ramiro Bravo [email protected] +52 (81) Ranno Tingas [email protected] Arjo van Eijsden [email protected] Jukka Lyijynen [email protected] Charles Menard [email protected] +33 (0)

61 61 Country Georgia Germany Hong Kong India Indonesia Ireland Italy Japan Kazakhstan Latvia Lithuania Luxembourg Malaysia Malta Mexico Tax policy /telephone Alexandra Lobova Ute Witt Owen Chan Satya Poddar Dodi Suryadarma David Smyth Maria Antonietta Biscozzi [email protected] Masaaki Ishida [email protected] Alexandra Lobova [email protected] Ilona Butane [email protected] Kestutis Lisauskas [email protected] John Hames [email protected] Azhar Lee [email protected] Robert Attard [email protected] Carlos Cardenas [email protected] +52 (55) Tax controversy /telephone Alexandra Lobova [email protected] Jürgen Schimmele [email protected] Hanno Kiesel [email protected] Owen Chan [email protected] Rajan Vora [email protected] Dodi Suryadarma [email protected] P.J. Henehan [email protected] Maria Antonietta Biscozzi [email protected] Masaaki Ishida [email protected] Alexandra Lobova [email protected] Ilona Butane [email protected] Kestutis Lisauskas [email protected] John Hames [email protected] Azhar Lee [email protected] Robert Attard [email protected] Ramiro Bravo [email protected] +52 (81)

62 62 Country Middle East The Netherlands New Zealand Norway Panama Peru Philippines Poland Romania Russia Singapore South Africa South Korea Spain Sweden Switzerland Taiwan Tax policy /telephone Mohammed Desin Marnix van Rij Aaron Quintal Arild Vestengen [email protected] Luis Ocando [email protected] Roberto Cores [email protected] Alf Capito [email protected] Agnieszka Talasiewicz [email protected] Alexander Milcev [email protected] Alexandra Lobova [email protected] Gek Khim Lim [email protected] Kabelo Malapela [email protected] Jong Yeol Park [email protected] +(822) Ramon Palacin Sotillos [email protected] Gunnar Thuresson [email protected] Bernhard Zwahlen [email protected] Albert Chou [email protected] Tax controversy /telephone Mohammed Desin [email protected] Arjo van Eijsden [email protected] Kirsty MacLaren [email protected] Luis Ocando [email protected] Roberto Cores [email protected] Cirilo P. Noel [email protected] Agnieszka Talasiewicz [email protected] Alexander Milcev [email protected] Alexandra Lobova [email protected] Sunghak Andy Baik [email protected] Dong Chul Kim [email protected] +(822) Javier Albors Fernandez [email protected] Gunnar Thuresson [email protected] Peter Brülisauer [email protected] Albert Chou [email protected]

63 63 Country Turkey Ukraine United Kingdom United States Venezuela Tax policy /telephone Erdal Calikoglu Jorge Intriago Chris Sanger +44 (0) Mark Bilsborough +44 (0) Vincent Oratore (Financial Services) +44 (0) Tom Neubig Barbara Angus Gary Gasper Washington Council Ernst & Young Nick Giordano Washington Council Ernst & Young Alaska Moscato Tax controversy /telephone Erdal Calikoglu Jorge Intriago Chris Oates +44 (0) Helen Maddaford (Financial Services) +44 (0) Rob Hanson Debbie Nolan Elvin Hedgpeth Bob Ackerman Katherine Pinzón

64 Ernst & Young Assurance Tax Transactions Advisory About Ernst & Young Ernst & Young is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 141,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit Ernst & Young s Tax Policy and Controversy services Ernst & Young s global tax policy network has extensive experience of helping develop and implement policy initiatives, both as external advisers to governments and companies, and as advisers inside government. Our dedicated tax policy professionals and business modelers help address your specific business environment and improve the chance of a successful outcome. Our global tax controversy network will help you address your global tax controversy, enforcement and disclosure needs. In addition, support for pre-filing controversy management will help you properly and consistently file returns and prepare relevant back-up documentation. Our professionals leverage the network s collective knowledge of how tax authorities operate and increasingly work together to help resolve controversy and pre-filing controversy issues. It s how Ernst & Young makes a difference EYGM Limited. All Rights Reserved. EYG no. DL0339 This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor. The opinions of third parties set out in this publication are not necessarily the opinions of the global Ernst & Young organization or its member firms. Moreover, they should be viewed in the context of the time they were expressed.