managing global & domestic tax controversy

22nd Annual Health Sciences Tax Conference Managing global and domestic tax controversy: trends and leading practices December 3, 2012

Managing global and domestic tax controversy: trends and leading practices

Disclaimer

Any US tax advice contained herein was not intended or written to be used, and cannot be used, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax law provisions.


Disclaimer

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Presenters

► Stephen DelSordo Tax Director Johnson & Johnson New Brunswick NJ

► Rob Hanson Ernst & Young LLP Washington, DC +1 202 327 5696 rob [email protected]

► Ned Connelly Ernst & Young LLP Stamford, CT +1 203 674 3006 [email protected]

► Frank Ng

Ernst & Young LLP Washington, DC +1 202 327 7887 [email protected]

Managing global tax risk


The economic climate change … and what does it mean for your business?

► US debt crisis ► Banking crisis ► Tax reform ► Financial crisis ► Euro crisis ► Sovereign debt

crisis ► Greek

bankruptcy? ► Rising

unemployment ► Austerity focus


The four engines of change are still running at full speed …

Globalization Shifting economy Legislative and regulatory change

Changing models of administration


2011– 12 Tax risk and controversy survey A new era of global risk and uncertainty

► Ernst & Young surveyed stakeholders in more than 541 companies in 18 countries, including tax directors, CFOs and 100 Audit committee members

► In addition, we surveyed tax policy-makers and administrators around the globe

► Download the survey from our webcast screen or at www.ey.com/taxrisksurvey


2011–12 Tax risk and controversy survey A new era of global risk and uncertainty

► 75% have experienced more aggressive tax audits.

► 85% have experienced an increase in international focus by tax authorities.

► 57% of tax administrators identified transfer pricing as their leading tax risk.

► 94% of tax policy-makers predict some or significant growth in General Anti-Avoidance Rules (GAAR) and anti-avoidance measures.

► 97% of tax administrators will increase their focus on international structures and cross-border transactions.


What is the corporate tax community saying about tax risk and controversy? ► Tax administrations around the world become more aggressive and focused:

► 75% of companies say they have experienced a rise in volume or aggressiveness of tax audits.

► 85% of tax directors in companies with more than US$5 billion in revenues reported that they had experienced an increase in international focus by tax authorities in the last two years.

► High pace of legislative change creates more risk and uncertainty: ► 75% of tax directors in the largest companies report heightened risk or uncertainty around tax legislation. This figure

rises to 78% for Brazil, Russia, India and China (BRIC)-based companies and 83% for US-based companies.

► 81% of tax policy-makers see growth in GAAR and other anti-avoidance legislation in the next three years, while 94% see new legislation in the area of disclosure and transparency.

► Disclosure and transparency requirements are growing: ► 78% report that they have experienced an increase in disclosure and transparency requirements made upon their

company in the last two years. US-based companies report 83%, China respondents 85% and Brazil-based respondents 88%.

► 76% of tax administrators expect to focus on enforcing these requirements in the next three years, while 94% of tax policy-makers expect there to be either some or significant growth in transparency.

► Expansion in emerging markets is creating tax risk and uncertainty: ► 92% of China-based companies and 62% of Brazil-based companies confirm that they have experienced a rise in

the volume or aggressiveness of tax audits in the last three years.

► 78% of BRIC-headquartered companies reported greater risk or uncertainty around legislation, compared with 67% of all companies globally.


A tax controversy “explosion” — what are we observing ► More frequent controversies and key areas of focus are:

► Transfer pricing ► Indirect taxes ► Employment taxes — expatriate, domestic, short-term travelers ► Cross-border financing arrangements ► Focus on high-net-worth individuals ► Information reporting requirements and withholding taxes ► Business credits and tax incentives

► More time being spent managing tax controversy and risk ► Increased C-suite attention on managing global tax risk ► Stiffer penalty regimes ► Government collaboration — information exchanges and joint audits ► Expectation to comply with both “spirit” and “letter” of the law ► Heightened reputational, financial and personal risks


The global consequences are real and companies are paying the price Country Example

China Manufacturer subjected to largest payroll audit ever in China resulting in the requirement for payment of $25m in back taxes and $8m in penalties.

France Increasingly aggressive social security authorities led a raid and criminal investigation on multinational company resulting in $8m assessment of back social security tax and penalties, even though the company had an agreement with another EU country to protect its position in France.

USA Oil company fined $20m for falsifying work permit applications.

Japan Global financial services company had their entire foreign retirement plan retroactively disqualified for Japan tax purposes required payments of back tax of $8m and 1m in penalties.

Germany SEC enquiry into related matter uncovers internal control breakdown requiring multinational company to re-state financial statements by Euro 100m to correctly report employer paid tax expense.

UK Company pays ₤40m + in back taxes and penalties for failure to accurately report home paid income in the UK.

Brazil Company unable to collect $1m in employee debt by not being able to enforce loan agreements not written in local language.

India European multinational assessed Euro 5m in penalties for failing to report full home paid compensation for employees assigned to work in India. Indian authorities now open full 3-year investigation resulting in additional professional fees of over Euro 1m to respond.

UK Of 407 immigration investigations in the UK, 72% resulted in prosecution and criminal sanctions, of which 46% included jail sentences of 7-12 months.


Heightened tax risks mean unpleasant surprises:

► Unbudgeted costs

► Increased compliance burden

► More penalties

► Diversion of personnel to controversy management

► Reputational risk — consumers and tax administrations

► External stakeholder concern

A proactive approach that incorporates tax risk management into strategic decision-making can reap benefits:

► Creates greater certainty and ability to plan

► Releases significant amounts of cash from the provision

► Provides more timely resolution of issues

► Provides reduction of tax compliance costs

► Frees up best people from managing complex tax controversies and litigation

► Increases prospects of a lighter tax audit focus in the future

Potential business impacts and opportunities


Assessing your global tax risk management capabilities … are you prepared?

► Do you understand Internal Revenue Service (IRS) and foreign enforcement priorities, audit practices and procedures?

► Do you have organizational strategies and processes to manage tax risk and global tax audits?

► Do you have management information systems to manage global tax audits and disputes?

► Do you have a process to assess information-reporting compliance risks?

► Is tax risk management and controversy embedded in corporate governance at all levels of the company?

► Do you have a process to monitor global legislative and tax administration changes?


Stay connected with global legislative, regulatory and tax administration change

Evaluate global resources, processes and systems for tax risk management

Adopt a global approach to tax risk and controversy management

Address tax risk and controversy at a strategic level — and execute well

Make strong corporate governance in tax a priority — it is to tax administrators, and it makes good business sense

Five focus areas for an effective tax controversy management


Effective and efficient management of global tax controversy: five leading practices

Adopt a global approach to

managing tax risk and controversy

► Established your global tax risk policy?

► Established your vision and strategy?

► Enhanced your relationships with global tax policy and administration?

► Pursued a process to influence tax policy and administration?

Have you …

► Embedded “tax risk thinking” in all aspects of the tax life cycle?

► Ensured proper governance over global tax risk management?

► Understood tax risk implications of changing business models and transactions?

► Established an ongoing process to identify, assess, monitor and mitigate risks?

► Obtained and retained the right talent and resources?

► Understood financial accounting implications of resolved disputes?

Evaluate your global systems and resources

for tax risk management

Have you …

► Help your board understand the tax implications of business decisions?

► Help your board understand the structure, processes and policies related to tax controversy and risk management within the company?

► Ensure appropriate oversight of tax risks related to transactions?

► Keep the board informed of tax policy, legislative and administration issues that may impact your business?

Include global tax risk as a corporate

governance issue

How can you …

► Ensure all major tax areas of tax policy and regulatory changes in key jurisdictions are integrated into tax risk planning?

► Assess the implications of the potential change upon your business operations?

► Develop clear lines of responsibility, lines of communication and knowledge-sharing among responsible resources?

► Actively engage with policy-makers on key issues?

Stay connected with tax policy and legislative

changes

How can you …

► Conducted a global assessment of current inventory based on key criteria?

► Identified appropriate processes for managing controversies (centralized vs local)?

► Understood implications of actions in other jurisdictions, entities and years?

► Leveraged opportunities to use resolution tools and processes in countries to help facilitate closure of disputes and issues?

► Understood multi-year and multi-jurisdictional implications?

► Understood legislative and regulatory environment?

Manage your ongoing and potential tax

controversies at a strategic level

Have you …

Global tax risk management — corporate governance framework


Global interest in tax corporate governance

“ The board must oversee how management manages them (taxes). And that means some level of understanding, a set of policy principles and then a control system of review and reporting that assures the board that their policy is being carried out. My goal is to promote good corporate governance on tax issues and engage the corporate community in a dialogue about the appropriate role of the board of directors in tax risk oversight.”

Douglas Shulman — Commissioner, Internal Revenue Service — United States

“ I am suggesting that you, the leaders of your organizations, should have a mechanism to oversee tax risk as part of your governance process.” “…the audit committee needs to know and influence what tax posture the tax planners are taking.”

Dave Hartnett, HMRC Permanent Secretary for Tax – United Kingdom

“ Most of the material weaknesses and the business processes have to do with taxes…(the) result of this development is that tax is becoming increasingly important in the boardroom.”

Theo Poolen, Deputy Director-General, Dutch Tax and Customs Administration — The Netherlands

“ Tax legislation has long imposed tax compliance obligations on companies. While this is not new, what we are observing — both here and overseas — is an increasing focus by regulators on the need for robust risk management frameworks. My question for you as directors is: how well-placed are you to meet increased levels of scrutiny, both now and into the future?”

Michael D'Ascenzo — Australian Tax Office Commissioner


What should clients do?

► Develop a global tax corporate governance model that includes: ► A board policy outlining the overarching approach to dealing with

tax risk at a strategic level ► A Tax Charter defining the operational elements of tax corporate

governance to ensure staff accountability ► A tax risk management reporting framework that supports Tax

Charter guidelines

► Embed tax risk governance throughout the organization ► Establish board, management, tax and business unit roles

and responsibilities ► Implement mechanisms to identify and escalate significant

tax risk to the board


Benefits of global tax corporate governance

► Improves communication with the board on tax issues ► Standardizes procedures and operational elements of the

tax function across the enterprise ► Applies a consistent global approach to tax risk

management ► Encourages global issues to be escalated and considered

by designated responsible person/office ► Identifies early tax risks, with earlier opportunities to

manage impact ► Enhances global accountability related to tax risk

management

Short-term business travelers — a growing issue for global controversy management


Short-term business travelers (STBT)

► Globalization and centralized business models have led to an increase in STBT

► Often unclear whether tax issues are handled by HR or the Tax Department

► Corporate tax permanent establishment exposure

► Personal income tax exposure

► Social Security and fringe benefits taxes

► Withholding obligations ► Transfer pricing

“This is a question too difficult for a mathematician. It should be asked of a philosopher.” ~Albert Einstein, about filling out his income tax form, 1944


STBT enforcement activity across the Americas

► United States ► In June 2011, employment tax audit specialists were given specific training on

STBT issues ► Employment tax audit specialists are now specifically targeting foreign executive

travellers, including requesting copies of visas and travel records ► Focus on Section 482 service charges ► IRS Outer Continental Shelf Initiative

► IRS is using Coast Guard GPS records to identify vessels

► Canada ► Taxing authorities are now paying greater attention to board of directors ► New program makes it easier for companies to obtain tax deduction waivers

► Program is seen as possible prelude to crackdown on STBT ► Asking for list of employees who are not on the Canadian payroll is now a part of a

routine audit ► Canadian Border Services agents are aggressively questioning STBT and making

referrals to Immigration Department


STBT enforcement activity across EMEIA

► France ► Increasingly aggressive Social Security authorities led to a raid and criminal

investigation on multinational corporations (MNCs), resulting in a US$8m assessment of back Social Security tax and penalties, even though the company had an agreement with another EU country to protect its position in France

► Germany ► SEC enquiry into related matter uncovers internal control breakdown, requiring

multinational enterprises to restate financial statements by Euro100m to correctly report employer-paid tax expense

► United Kingdom ► Company paid £40m+ in back taxes and penalties for failure to accurately report

home paid income in the UK ► Of 407 immigration investigations in the UK, 72% resulted in prosecution and

criminal sanctions, of which 46% included jail sentences of 7-12 months


STBT enforcement activity across Asia-Pacific

► Australia – enforcement activity in relation to ► withholding obligations of employers ► Value-added tax (VAT) obligations ► fringe benefit tax obligations and lodgement enforcement ► unintended creation of permanent establishments

► China – enforcement activity in relation to STBT obligations, as well as difficulty in obtaining consistent treatment across regional SATs (revenue authorities)

► India – increased focus change of to on of permanent establishments within India

► Japan – audits in relation to withholding obligations for short-term travellers and creation of permanent establishments

► Korea – very active in the exchange of information with other countries in relation to STBT

► Taiwan – audits of STBT obligations and information-sharing with immigration authority, which has precluded some employees from re-entering the country

Questions or comments?

managing global & domestic tax controversy

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