Tax Audit Trends and Developments:

How taxpayers can achieve optimum

results

Panel Speakers

Eugene Lim, Partner, Baker & McKenzie (Singapore)

Chun Ying Ng, Associate, Baker & McKenzie (Singapore)

Jason Liang, Associate, Baker & McKenzie (Kuala Lumpur)

Amit Bhalla, Vice President, Tax & Customs APAC, Schneider Electric (Singapore)

Michael Palumbo, Director of Tax, Baker Hughes (Singapore)

Overview of the Audit Environment in

Developing Countries

Key Trends

Increased aggressiveness in tax audits

Audit focus areas:

• transfer pricing

• anti-avoidance

• generally, cross-border tax disputes

Driven by search for revenue

Expect increased transparency – BEPs country-by-country

reporting requirement; OECD Automatic Exchange of Information

Aggressive? Recent Areas of

Audit Focus

Statistics New Approaches/

Trends

China Yes • Entities engaged in

export tax refund,

gold transactions and

capital transactions

• Real estate and

construction industry

• High-income

individuals

• Commercial

educational training

institutions

Collections from tax

audit was RMB 172b for

2014, with a growth rate

of 21.45%

Extending the tax audit

to fapiao related

activities and anti-

avoidance

India Yes • Withholding tax

provisions and their

applicability to cross-

border deals

• Transfer pricing

Collections for direct

taxes for FY14/15 up by

19% compared to the

previous fiscal year

Bill providing for

separate taxation in

respect of undisclosed

foreign income and

assets. Non-compliance

will attract stiff penalties

including imprisonment

and fines.

Aggressive? Areas of audit

focus

Statistics New Approaches/

Trends

Malaysia Yes • Anti-avoidance

• Transfer pricing

• Tax incentives

Collections for corporate

income tax increased by

56% between 2011 and

2015

• Determination of Arm’s

Length Price

• Removal of time bar

Indonesia Expected to be

increasingly aggressive

– increase in audit

activity

• Abuse of tax treaties

• Foreign related party

transactions

• Mining, oil and gas

taxpayers

• Wholesale trading

taxpayers

• Professionals, middle

and high income

individual taxpayers

Collections for 2015

increased by 19% from

previous year

Tax audit revenue target

for 2015 increased by

206% compared to the

target for 2014

The Government issued

regulation number

60/PMK.03/2014

regarding exchange of

information. This

regulation stipulates the

procedure on the

exchange of information

between Indonesia and

its partner countries,

which can be done by

request, spontaneously

or automatically.

Vietnam Yes • Transfer pricing

• VAT credit

• Expense deductibility

• Frauds in small local

companies

Tax revenue budget for

2015 increased by

16.4%

• Transfer pricing

• Royalties

• VAT credit

Aggressive? Areas of audit focus Statistics New

Approaches/

Trends

Thailand Medium but tends to be

more aggressive due to

country’s lack of revenue

• Income fluctuation e.g.

significantly decreased or

underfiling

• Overclaiming expenses,

especially intercompany

charge

• Complex tax planning

transactions

• Operation in tax haven

countries

• Transfer pricing

• Export of goods and services

entitled to VAT at 0% or VAT-

exempt business

Target for 2015 is

75.1 billion bht

higher than actual

tax collected in

2014

Increasing and more

intense, including

Transfer Pricing

audits

Philippines Yes. Even business

closures which used to

be easy, are now audited

closely. Tax authority

obtains company

information from SEC,

and audit notices are

sent to directors and

officers. Uses media to

embarrass non-

compliant taxpayers.

• Withholding tax, VAT and

income tax.

• Use of information obtained

from third parties, e.g.,

suppliers, customers, and

other gov’t. agencies such as

the bureau of customs.

Tax collection

target for 2015

increased by 21%

from 2014 target

Fiscal Intelligence

Unit (FIU) of Dept. of

Finance, now tasked

to conduct post-entry

audits. Findings are

sent to Bureau of

Customs and Bureau

of Internal Revenue

for proper action.

New Era of Increased Transparency

BEPS – Country-by-Country Reporting Requirement

Multinational corporations will be required to report information to tax authorities on

a country-by-country basis:

Required Information

EBIT

Cash income tax paid

Tangible assets

Number of employees

Accumulated earnings

Stated capital

Current year income tax

accrued

Revenues (related/

unrelated)

Target on “hot” data points

- high profit, zero tax and low substance jurisdictions

- ring-fencing of preferential tax regimes

- no-where income

How to ensure consistency in the information provided in each

jurisdiction

How will data be used by authorities? For transfer pricing risk assessment or for making adjustments?

Endless audit queries?

Impact on the Management of

Audit / Controversies

Adopting a Strategic Approach in

Managing Audits and Controversies

Controversy

Audit

Planning

Holistic Approach

Planning Stage

• Risk assessment in light of BEPS –consider restructuring of structures considered aggressive

• Importance of documentation and alignment of facts –analyse ability to collect and process data (sources of data points, responsibilities, systems requirements)

• Awareness of local trends and developments –have “eyes and ears” on the grounds

• Consider privilege issues at an early stage

• Consider obtaining certainty:

• APA?

• Rulings?

Audit Stage

• Assign appropriate staff to handle the audit queries and seek professional advice

• Identify areas of risk and escalate issues appropriatelyAt the Beginning

• Conduct rigorous due diligence

• Develop consistent case theory and consider advocacy position

• Consider evidentiary issues (privilege, burden of proof, documentation)

Preparation

• Identify and manage risks in the provision of information and documents to authorities

• Ensure consistency in communications

• Adopt the right cooperative attitude and focus on effectiveness and efficiency in engaging the authorities

Communications with the Authorities

Controversy Stage

Engage suitable external advisers

Consider the appropriate dispute resolution forum:

• administrative

• litigation / judicial review

• MAP

Plan negotiation strategies with advisers

• best case scenario vs bottom line

• deal with issue in isolation or with other issues

Understand the procedural rules

• timelines

• processes

• evidentiary rules

Practical difficulties?

Risk management vs time and cost efficiency – a balancing act?

Tax v Legal – when should Legal be involved?

Best case scenario?

• Appropriate flagging of audit areas at risk from extensive audit

queries

• Rigorous and coordinated efforts with internal teams and

external advisors to strategise and prepare audit response

Reality?

• Demands on time and cost – limited resources

• Organisational challenges

Summary of Lessons Learnt

Malaysia

Audit Dispute Resolution Strategies

• Time consuming, granular, detailed

for TP

• Expect focus on SSF in particular

• Requirement, remoteness,

duplication of service

• Cost base, allocation key, mark

up

• Evidence of benefit

• Leasing, purchases / sales

• Non TP tax issues in focus,

withholding tax

• Document agreed issues

• Control the documents, copies, sign

for records

• Use of 3 year vs. 1 year results

• Propose a settlement, especially if

auditor leaving

• Errors, use as basis to settle in

lieu of issues

• Bring in advisors to help

negotiate

• Meeting at higher level

Indonesia

Audit Dispute Resolution Strategies

• TP handled by local office, no

expertise

• No consistency in issues

• Expect focus on SSF in particular

• Time sheets

• Evidence

• Leasing

• Withholding tax and VAT in

focus

• Interest Expense

• No guidelines on debt/equity

limit

• Resolve as many issues before

closing conference

• Document disagreements as basis

for appeal

• 99% of appeals rejected, ticket to

Tax Court

• Timeliness of decisions

• Leasing, use comps to reflect IRR

• DGT comps may form basis of

settlement

China

Audit Dispute Resolution Strategies

• Quick request for documentation

• Focus on “market” intangibles for

TP

• Focus on SSF, even in country

• Cost base, allocation key

match service, mark up

• 6 point test,

reasonableness, separate

agreements

• SAFE

• Interplay with PE, secondment,

Circular 19

• Focus on VAT Pilot vs. Business Tax

• Circular 146, Royalties paid in last

10 years

• Effective / efficient communication,

officer and bureau

• Negotiate dollar threshold,

percentage turnover

• Resolve disagreements early,

document

• Educate them on your business

• Educate Management about

Bureaus different opinions of same

issue

Vietnam

Audit Dispute Resolution Strategies

• Quick request for documentation

• 5 years of books in 2 weeks

• Presumption that taxpayers do not

keep VAS

• VAS will be relevant in audit in

many ways, way to deny

deductions

• Inconsistency in rulings and

applications, province

• Liberal usage of term “tax evader”

• All taxes in focus, emphasis more

on TP

• Minutes of meeting taken by Tax

Dept.

• Ensure proper items documented

and agreed before signing.

• Resolve as many issues in audit,

document differences in Minutes as

basis for appeal.

• Appeal to Tax Dept in Province,

Internal Audit Division.

• Treaty matters to MOF in Hanoi.

Mutual Agreement Procedures in Asia

MAPs in Asia: nascent but growing

Country New cases /

inventory

(2013)

Canada 127 / 235

France 216 / 618

Germany 267 / 858

UK 79 / 160

USA 403 / 732

Country New cases /

inventory

(2013)

Australia 8 / 23

Japan 36 / 65

Korea 23 / 80

China 23 / 43

New Zealand 14 / 13

• Average time to resolve MAP cases: 23.57 months (2013) vs. 25.46 (2012)

• Disputes themselves are more frequent, particularly in transfer pricing area

• Recognition of need for additional resources to deal with volume: trend to invest in programs

• Recognition of need to make processes more effective: BEPS take-up in APAC as a whole?

• Before going to MAP, recognise the difficulties and consider all dispute resolution options

Insights:

vs.

MAPs in Asia: an example case – best practices

Best practices Application to the case

Know the process, facts and the issues

involved, and ensure sufficient analysis and

documentation in place

Careful analysis and prepare contemporaneous

documentation in advance to review and justify

the possible positions to take

Robust functional and factual analysis key

Organise resources and carefully assemble

your support team

Senior client team and advisory team

appropriate to the issues at hand

Be realistic with facts on hand and know the

strengths and weaknesses of your position

Don’t expect to win on all points

Clearly understand the contradicting views of

the competent authorities

Up-front analysis is key

Invest time and energy to ensure position is

fully understood

Seek advice as early as possible Strategic advisor can help through the process

to fully analyse the key technical issues and

determine possible approaches early

MAPs in Asia: an example case

FMCG company

Master distributor in Singapore established as part of a restructuring program, as part of function as a Regional Principal

Master distributor remunerated as Regional Principal, earning residual profits

Japan distributor remunerated as an LRD on an operating margin using local comparables

Basis of disagreement

Did marketing intangibles exist in the Japan distributor?

Transferred as part of the restructuring?

If transferred, how to be remunerated?

If not, how would this affect the go-forward transfer pricing model?

Japan appeal route had been entered without agreement, options are court or MAP

JP court process possible but lengthy, no guarantee of relief in MAP or court

Key issues

Global HQHQ services Singapore

Master Distributor

Japan distributor

Customers

Suppliers

Raw materialsManufacturer

Products

MAPs in Asia: an example case (possible resolution)

MAP chosen

Agreement or no agreement between authorities that valuable marketing intangibles were transferred as a part of the restructuring

If yes, agreement that this should be valued as a transfer and subject to exit taxation

Agreement on the basis of valuation – a return of relevant total marketing costs plus a return on investment

Agreement or no agreement on the go-forward model on the basis of a Principal/LRD structure without further TP adjustment

To consider:

Domestic resolution through appeal/court is no longer possible after MAP route entered

Double taxation exposure remains if no resolution through MAP – and resolution is not mandatory

No mandatory binding arbitration

ConclusionsGlobal HQ

HQ services Singapore Master

Distributor

Japan distributor

Customers

Suppliers

Raw materialsManufacturer

Products

MAPs in Asia: is resolution likely?

Clear trend to invest further in programs, both in terms of

resources and capabilities – some limited impact in reducing

times to resolve

…but, even with greater investment, disputes are becoming

harder to resolve

technical disagreements are particularly common

few countries in Asia are fully OECD-aligned and/or share a

common interpretation of the arm’s length standard

Improved dispute resolution mechanisms are important, but

without mandatory binding arbitration double tax risks remain

As a consequence, there is an increase in litigation in the region,

where possible

BEPS?

Thank You

Q&A