We see a growing scrutinity and increasing sophistication of tax authories and a growth in audit activity. Preparing the company on an on-gong basis for a future audit can often save both money and resources when an audit actually takes place. It’s worth remembering that it can also be difficult to re-create documentary evidence and calculations for several years back in time.
Arrangements that are likely to attracte greater tax authority scrutinity include:
- Business restructuring (particularly where valuable intagibles have been transferred),
- Intra-group financial arrangements,
- Loss-making entities,
- Groups with a low efficitve global tax rate,
- Dealings with tax haven jurisdictions, and
- Services in low cost jurisdictions i.e. where location savings are arguably derived.
We note that the tax authorities are presenting more detailed questions and the following preparatory measures can be of major importance in the context of a future audit and reduces the likelyhood of a tax authority adjustment.
- In respect of actual behaviour, ensure that the company is able to evidence that the functions and risk profile of the various entities are correctly reflected in the behaviour of the employees.
- Being able to evidence that intra-group agreements are actually complied with and that the risk allocation described in the agreement between the parties is also applied, in practice.
- Being able to provide evidence of the commercial nature of a given measure or procedure, and that it is not tax reasons that has resulted in the change. Ensuring, based on documentation (minutes of board meetings or mapping of decisions taken) that the company is able to evidence how decision-making and risk assumption is handled as regards to the key functions within the operations.
- Financial analyses and reports from third parties can provide an objective market perspective.
In certain cases, it can be appropriate to request an advance pricing agreement, ”APA”, from the relevant competent authority in order to prevent future double taxation in a dispute with the tax authorities. This applies, not the least, in situations where subjective assessments must be made or when it is uncertain if all of the countries involved have the same interpretation and application of the arm’s length principle.
When a dispute arises, a mutual agreement procedure, ”MAP” can serve as an alternative to a court process. The aim of a mutual agreement procedure is that the competent authorities that are concerned can, through negotiations with each other, mitigate the double taxation.
Read more about audit preparedness in the following article.