• Service: Tax
  • Type: Business and industry issue
  • Date: 3/25/2014

March 2014 

Welcome to the March 2014 edition of our quarterly Global Tax Disputes Update, bringing you the latest news in tax controversy around the world.

With tax audit and dispute activity rising in almost every country, keeping up with trends and developments is more important than ever. In this edition, you’ll find briefings on key news, events and thought leadership submitted by Global Tax Dispute Resolution & Controversy professionals in KPMG member firms worldwide. Staying informed can be a crucial first line of defense as you manage your disputes around the globe.

Make sure to view our past issues of Global Tax Disputes Update.

Focus on tax dispute resolution and controversy

Tax Disputes and Controversy Update – Focus on Horizontal Monitoring

As tax laws get more complex and resources for tax administration dwindle, governments and tax administrators have sought ways to improve the efficiency of tax collection. One solution is “horizontal monitoring” programs, which are now in place in some form in 24 countries. How are these programs evolving? Are they meeting their objectives of easing compliance and allowing tax authorities to re-direct resources to taxpayers with higher non-compliance risk?

Sharon Katz-Pearlman, Head of KPMG’s Global Tax Dispute Resolution and Controversy Network and a Partner with the US member firm, recently led a panel discussion with six Tax Dispute Resolution and Controversy Services leaders from across KPMG International’s network of firms. Countries represented included four with established horizontal programs – Netherlands, United Kingdom, United States and Canada – and two that are currently piloting a horizontal monitoring program – Russia and France.

Read the article.

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KPMG puts arm’s length standard on trial

Even though transfer pricing rules around the world are generally based on the arm’s-length principle, the principle itself is under pressure from all sides. Taxpayers, tax administrators and tax practitioners complain about its complexity, inconsistent enforcement and the associated compliance burden. Politicians, the press, and non-government organizations blame it for enabling tax planning that erodes the tax base. Examining the arm’s length principle and alternatives is a key element of the OECD’s Action Plan on Base Erosion and Profit Sharing.

During its 2013 Europe, Middle East and Africa (EMA) tax summit in Berlin, KPMG’s global transfer pricing services (GTPS) team held a mock trial of the arm’s length principle. Those in the courtroom heard testimony and arguments from senior KPMG’s network of transfer pricing professionals, including India’s former Commissioner of Income Taxes Alpana Saksena, now with KPMG in India, Montserrat Trapé Viladomat, EMA leader of KPMG’s GTPS team, François Vincent of FIDAL*, and John Neighbour, KPMG’s deputy global leader for GTPS, and Sean Foley, head of GTPS. Also participating as a “witness” was Richard Parry of the Organization for Economic Co-operation and Development (OECD) Center for Tax Policy and Administration.

After hearing arguments for and against the arm’s length principle, the mock court concluded that, despite some flaws, the principle presents better grounds for setting transfer prices than the alternatives (e.g. formulary apportionment of payroll). Richard Parry, Head of Global Relations in the OECD’s Centre for Tax Policy and Administration summed up the advantages of the arm’s length principle as follows:

  • The arm’s length principle, allows for a fair result reflecting the market position.
  • It is based on a broad global consensus, and there is no political appetite for change to another approach, be it global formulary apportionment or some other system.
  • It is not clear right now that the alternatives would solve the problems that the arm’s length principle currently faces, and they could create other systemic problems.
  • In developing international taxation principles, we need to be realistic. Because resources are limited, we need to focus on what is likely to be the most productive course of action—dealing with
  • the specific issues that have arisen under the arm’s length at the current time.

In short, the arm’s length principle works most of the time, and where it does not, it can be fixed through targeted special measures. No system is perfect, and the goal is to set rules that work as effectively as possible. Right now, that is the arm’s-length principle.

Further information:

Brian Trauman

* FIDAL is an independent legal entity that is separate from KPMG International and KPMG member firms.

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OECD – Guidance on transfer pricing and country-by-country reporting

The Organisation for Economic Co-operation and Development released an initial draft of revised guidance on transfer pricing documentation and country-by-country reporting pursuant to Action 13 under the Base Erosion and Profit Shifting Action Plan.

Read the article.

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Australia – Tax authority introduces independent reviews

In order to improve the speed of resolving disputes and narrow the range of disputed issues, the Commissioner of the Australian Taxation Office introduced an independent review (IR) function on 1 July 2013.

To date, 11 large business taxpayers have requested an IR, giving them a one-off opportunity for a reviewer (not previously involved in the audit) from the Law Design and Practice Group to consider the technical merits of the audit position paper, the taxpayer’s response and the final Statement of Audit Position. The reviewer also conducts a case conference, where the audit team and taxpayer meet face-to-face to discuss the technical merits of their respective positions. In the experience of KPMG in Australia, the case conference is a positive initiative, and taxpayers should come well prepared to take advantage of this opportunity to convince the reviewer of its arguments, including seeking input from counsel.

However, the IR is currently limited to a review of the information previously provided during the audit. If the reviewer concludes they do not have sufficient information to make a decision, they may close the review, leaving the audit team free to finalize the audit position and issue assessments (to which the taxpayer may still object). In other words, the reviewer cannot act as a quasi-auditor who gathers additional information not previously requested by the audit team.

While the taxpayer may submit additional information to the reviewer to ensure that information already provided is properly understood, KPMG in Australia’s experience is that taxpayers should not rely on this ability, given the reviewer’s conviction that their role is not to act as quasi-auditor.

Overall, KPMG in Australia believes the IR function is a positive initiative but the option should be considered carefully on a case-by-case basis.

Further information:

Peter Murray

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Brazil – State tax authorities target inventory differences

Brazil’s state tax authorities are increasing their online state value added tax (ICMS) investigations related to mismatched information in inventory books and record books of entry and exit of goods. When the state tax authorities find significant differences in the electronic files submitted by taxpayers, they are of the view that they can apply a legal presumption of transactions (acquisitions and sales) without issuance of tax invoices without any further investigation, resulting in ICMS adjustment and penalties.

In disputing such a finding, it is crucial to present concrete evidence, based on accounting records and commercial documentation, to avoid the legal presumption of sales without tax invoices. Although this issue is relatively recent, some cases already decided in administrative courts have disregarded the tax authorities’ legal presumption when taxpayers were able to prove that their online accounting and fiscal files were submitted with mistakes.

Further information:

Marcos Matsunaga

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Canada – Tax authority offers cash for offshore tax evasion tips

The Canada Revenue Agency (CRA) has launched an informant’s hotline as part of its Offshore Tax Informant Program, intended to focus on international tax evasion and aggressive tax avoidance.

The CRA's program, part of its larger Stop International Tax Evasion Program, pays individuals with information about major international tax non-compliance a percentage of the federal tax collected as a result of information provided. The federal tax collected must result in assessments or reassessments of federal tax exceeding 100,000 Canadian dollars (CDN). The payments to the individual will be up to 15% of the federal income tax collected.

The CRA advises that it will review all information given by an individual to decide if there is evidence of major international tax non-compliance that would ultimately lead to additional taxes being assessed and collected. Where the potential additional assessment of federal tax, excluding interest and penalties, is more than CDN100,000, the CRA will enter into a contract with the individual providing the information.

Individuals will receive payment after the tax debt has been collected and all recourse rights associated with the assessed tax have expired; no payment will be made to an individual who has been convicted of tax evasion related to the information provided.

Read CRA’s news release.

Visit CRA’s Offshore Tax Informant Program webpage.

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China – Advance warning system for transfer pricing audits

The tax authority of Suzhou, a neighboring city of Shanghai, has developed a new system to identify transfer pricing audit targets. The system identifies over 500 indicators for tax authorities to watch out for, such as:

  • industry
  • profitability as compared with industry norms
  • actual tax payment
  • high-technology status.

KPMG in China says that it would not be surprised to see this advance warning system rolled out to other provinces or even the whole country.

Further information:

Cheng Chi

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China – Tax approval processes and restrictions on tax inspections

At the end of 2013, the Chinese State Council issued a decision that cancelled and decentralize nine-tax related administrative examination and approval processes. In response, the State Administration of Taxation (SAT) announced several changes that aim to decentralize administrative examination and approval processes. The SAT also improved tax law enforcement procedures in favor of protecting taxpayers’ rights and interests, including important restrictions on:

  • duplicate information requests
  • multiple investigations by different functions of tax bureaus
  • the number of in-house visits to taxpayers’ locations.

With Announcement 9 on the “determination of Chinese-controlled enterprises registered overseas as resident enterprises on the basis of effective management”, the SAT decentralized approval power to the provincial/municipal/autonomous region State Tax Bureaus. Such companies no longer need to apply for residency at the SAT level but with the local tax bureaus. Consistent with the State Council’s decision, the SAT believes this action simplifies the approval process, increases clarity for taxpayers and enhances supervision and investigation for the authorities.

The SAT also issued a notice on “tax authorities further standardize law enforcement efforts involving the entry upon taxpayers’ locations” strongly restricts tax authorities from making duplicated investigations and entering taxpayers’ locations. The key elements of the notice are as follows:

  • Standardizing law enforcement activities to avoid repeated entries to taxpayers’ locations during enforcement effort, by requiring tax authorities to use their own information systems to obtain relevant taxpayer information, reducing or avoiding the need to enter taxpayer locations. It sets the standard that, in a single tax year, the same taxpayer should not face repeated in-house tax assessments, tax investigations and tax audits. Tax authorities may not enter taxpayers’ location twice for the same matter.
  • Unifying of all resources in law enforcement, by simplifying and combining requests to avoid entering taxpayers’ locations.
  • Maximizing the usage of existing data and information and minimizing requests for information from taxpayers, by exploring the set-up of an information-sharing platform to reduce or eliminate the need for entering taxpayers’ premises.
  • Enhancing coordination among tax authorities, by encouraging State Tax Bureaus and local tax bureaus within the same region to work together and by ensuring different functions (such as tax collection, audit and investigation) work together, share information and communicate. Multiple teams entering taxpayer locations repeatedly should be avoided.
  • Strictly standardizing the process for entering taxpayers’ locations, by correcting violations and exploring the set-up of external supervisory mechanisms.

KPMG in China welcomes these moves toward protecting taxpayers’ rights and reducing taxpayers’ burdens and is cautiously optimistic about the changes. However, given that China is a large country and that change takes time, KPMG in China expects that the new standards will be implemented gradually and that the pace of implementation will vary from region to region.

Further information:

Annie Wang

David Ling

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European Union – EC supports global standard against tax evasion

The European Commission (EC) issued a statement in support of an agreement by the G20 Finance Ministers on a new global standard to counter tax evasion and to improve tax transparency worldwide. The standard was developed by the Organisation for Economic Cooperation and Development.

As noted in the EC release, the G20 Finance Ministers “gave the green light to the global standard for the automatic exchange of information.” G20 Finance Ministers will consider their implementation plans at their next meeting, scheduled for September 2014.

The EC release concludes that the EU must continue to lead by example in tax good governance. The EC intends to implement the new standard along with those countries that have committed to its early adoption.

Read the release.

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France – FTA combines APA and MAP programs

The French tax authorities (FTA) have created a new group, the “Mission d’expertise juridique et économique internationale” (MEJEI), to deal with advance pricing arrangements (APA) and mutual agreement procedures (MAP).

Previously, two groups within the FTA administered the MAP and APA programs separately. However, the two groups did not cooperate and taxpayers suffered, for example, in managing roll-backs for APAs or in achieving consistent resolutions.

Like the US Advance Pricing and Mutual Agreement (APMA) program, the MEJEI combines APA and MAP administration under one roof and within one team, creating efficiencies and synergies in dealing with these similar programs. Unfortunately, no additional resources are located to manage the existing cases and the new requests. Moreover, MEJEI tends to be stricter in terms of acceptation of cases especially when a non-cooperative state appears within the legal organization chart.

Further information:

Pascal Luquet

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France – Tax authorities intensify application of penalties

In the past two years, the French tax authorities (FTA) have not hesitated to apply high penalties in the scope of tax audits. They are applying not only the 50 percent penalty for failure to file some tax returns or the 15 euros per invoice penalty for missing information but also the 40 percent penalty for deliberate failure on tax reassessments.

Previously, the FTA tended to be more tolerant. However, their attitude has changed due to France’s budget constraints and the 2012 French Court of Auditors’ position that French tax audits are inefficient.

Further, the French government has tried to impose harsh new penalties (i.e. in the 2014 Finance Act and 2013 Law against Fraud). A 0.5 percent penalty, assessed on turnover, was proposed for taxpayers who did not provide their consolidated accounts, analytical accounts, accounting entries in a dematerialized format or transfer pricing documentation in the scope of tax audit. This penalty would have applied even where no tax was ultimately reassessed. The Constitutional Court has cancelled the penalty, presumably because the Court believed the penalty was disproportionate to the infringements.

Despite this good news, the FTA’s tendency to apply penalties should not be underestimated, and this trend will probably continue. At a minimum, French taxpayers should carefully verify that all their tax returns are filed and, if not, take steps to rectify the situation.

Further information:

Audrey-Laure Illouz

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Hong Kong – Compliance with global standard on tax information exchange

At its November 2013 meeting in Jakarta, the Global Forum announced the findings of its review of Hong Kong’s compliance with the international standard on exchange of information for tax purposes. The review found that Hong Kong is largely compliant, although the Forum made some recommendations to strengthen its information exchange procedures.

Read the article.

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Indonesia – APA and MAP programs may ease appeals backlog

Indonesia audit environment for transfer pricing audits can be quite challenging, as its auditors may be prone to using aggressive tactics and making unfounded or incorrect adjustments. The Indonesian tax authority issued official criteria for audit selection. In practice, tax audits are mainly triggered by requests for tax refunds.

Indonesia currently faces a backlog of appeals. Common areas of dispute involve:

  • not recognizing the realities of business
  • royalties
  • services.

The situation could improve in the future. The first negotiations are taking place under Indonesia’s mutual assurance procedure and advance pricing agreement program, and tax offices are encouraging more taxpayers to take part.

Further information:

Iwan Hoo

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Japan – Perspectives on OECD BEPS project

Japan is taking part in the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) project, but with a somewhat different perspective than other participating countries.

Few international Japanese companies engage aggressive tax planning, and the effective tax rate of Japanese MNEs is not relatively low. However, Japanese companies may be challenged by the tax authorities of Brazil, Russia, India and China (BRIC). These countries stretch definition of profit shifting from one that involves tax havens to one that includes developed countries BRICS countries insist on right of fair allocation. This has led to problems with mutual agreement procedures, due to the inability to resolve disputes with BRICS countries in a timely manner.

The Japanese tax authority’s general approach to transfer pricing is to consider the location of value creation, and to adjust transfer prices where the risks and ownership of tangible and intangible assets are shifted artificially.

Further information:

Nobuhiro Tsunoda

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Malaysia – New framework for transfer pricing audits

Malaysia’s tax authority, the Inland Revenue Board, released a framework for transfer pricing audits with effect as of 1 April 2013. Previously, transfer pricing audits were conducted without the guidance of any formal framework. The new framework is substantially similar to the tax audit framework in terms of processes and procedures, but there are some important differences.

Read the article.

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Nigeria – Tax authorities show more aggression, tax tribunal held “unconstitutional”

Nigeria’s state internal revenue authorities are reported to be more aggressive in recent dealings with taxpayers. Additionally, Nigeria’s Federal High Court has held that the Tax Appeal Tribunal is an “unconstitutional body” and that only the High Court has exclusive jurisdiction concerning the federal revenue and taxation of companies.

Read the article.

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Singapore – Property owners win landmark tax refund claim

The owners of a real estate development won a landmark appeal against the tax authorities to recover about 7 million Singapore dollars in property tax refunds for a “vacant” building, even though tenants had rented the building. With assistance from KPMG Singapore’s principal tax consultant, Leung Yew Kwong (former Deputy Comptroller of Property Tax and Chief Legal Officer with Inland Revenue Agency of Singapore) the IRAS), the property owners successfully argued that they were entitled to refund for a period in which repair were carried out as the work did not affect the unit’s vacancy.

Further information:

Yew Kwong Leung

Oi Leng Mak

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United Kingdom – Proposals for paying taxes in dispute and identifying promoters

HM Revenue and Customs (HMRC) has issued consultation documents that include proposals for taxpayers to accelerate the payment of tax in dispute or subject to enquiry (see article below). Additional proposals involve identifying “promoters” of tax avoidance.

Read the article.

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United Kingdom – Proposals for paying taxes in dispute

HM Revenue & Customs (HMRC) has issued a consultation document “Tackling marketed tax avoidance”, which sets out proposals for taxpayers to make accelerated payment of tax that is in dispute or subject to enquiry. The proposal aims to prevent the use of delaying tactics to avoid settling open cases.

The document includes draft legislation that requires taxpayers to settle disputed tax on receipt of a “follower notice” that their case is on substantially the same grounds as a case that has already failed in the tribunal/court. The follower notice require taxpayers to amend their tax returns or settle their tax disputes in line with the tribunal or court decision. At the same time, these taxpayers will receive a “payment notice” requiring payment of the tax within 90 days.

The document further proposes extending accelerated payment of tax to:

  • arrangements disclosed under the Disclosure of Tax Avoidance Schemes regime
  • cases where the independent Advisory Panel for the General Anti-Abuse Rule (GAAR) has issued an opinion that the GAAR applies to a set of arrangements and HMRC has decided to pursue counteraction.

These accelerated payment proposals are intended to apply to both open and new cases, so they are potentially retrospective. Taxpayers could be asked to make payments of disputed tax in fourth quarter of 2014, even though enquiries to determine the tax outcome are ongoing.

Further information:

Paul Harrison

Julie Hughff

Kevin Elliot

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United Kingdom – HMRC updates tax dispute resolution documentation

HMRC have updated two documents detailing their governance arrangements for resolving tax disputes: its code of governance for resolving tax disputes and its commentary on the litigation and settlement strategy

The code of governance for resolving tax disputes was introduced when the first Tax Assurance Commissioner, Edward Troup, was appointed. This code is updated to provide further details of the case managements boards and contentious issues panels responsible for determining handling strategies and considering settlement proposals within each line of business.

Read the code of governance (PDF 308 KB).

HMRC’s commentary on the litigation and settlement strategy (LSS) provides guidance for HMRC staff on the practical application of LSS principles. The update responds to a recommendation following the National Audit Office review into the settlement of five large tax disputes.

In particular, the guidance on “multi-dispute cases” now confirms that, in exceptional cases, HMRC may decide against litigating a dispute, even if HMRC expects to succeed, where pursuing that dispute to litigation would not be cost-effective as it would prejudice the cost-effective resolution of other disputes with the same taxpayer. HMRC says such a settlement would be in accordance with the law as HMRC may exercise its legal discretion under the collection and management powers not to pursue an amount of disputes tax in the interests of securing the best net return to the Exchequer.

Read the LSS commentary (PDF 515 KB).

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United States – Individual and corporate audit rates decline in 2013

The Internal Revenue Service’s audit rate for individuals was 0.96 percent in fiscal 2013, the first time the rate has fallen below 1 percent since fiscal 2006, when it was 0.97 percent.

According to IRS data, the audit rate also dropped in fiscal 2013 for corporate taxpayers with assets of more than 10 million US dollars (USD). That rate fell 2 percentage points from the year before, from 17.8 percent to 15.8 percent. However, for corporations with more than USD250 million in assets, the audit rate increased to 33.9 percent from 29.4 percent.

The number of total IRS revenue officers, agents, and special agents fell to 19,531 in fiscal 2013, the lowest level in a decade. Revenue collected by IRS examinations dropped to 9.83 billion, also the lowest in a decade. Total enforcement revenue increased to USD53.4 billion, driven by collections results, which tend to follow the overall economy, and by appeals, which vary year to year as cases move through the system.

Further information:

Sharon Katz-Pearlman

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United States – Proposals improve access to mutual agreement procedure

Recently proposed revisions to the procedure for requesting U.S. competent authority assistance underscore the IRS's goals of improving taxpayers' access to the mutual agreement procedure (MAP) and increasing the transparency of the U.S. competent authority's operations.

According to an IRS official, some of the proposals codify long-standing competent authority practices. Others reflect the competent authority office's new thinking on improving taxpayer engagement and access to MAP.

Among other things, the proposals include:

  • explicit recognition that the competent authority will consider matters involving penalties and interest
  • a willingness to consider self-initiated adjustments (subject to submission of a pre-filing memorandum)
  • availability of informal consultations about foreign tax credits.

The official highlighted the competent authority office’s commitment to enforce the US tax rules requiring taxpayers to exhaust administrative remedies before bringing a case before the US competent authority (e.g. where a taxpayer simply pays foreign tax to an aggressive tax authority and applies to the US competent authority for relief).

Further information:

Brian Trauman

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United States – Resolving problems with new IRS information request procedure

The Large Business and International Division of the Internal Revenue Service (IRS) introduced new information document request (IDR) procedures to facilitate conversation on the front end of document requests. However, at a recent American Bar Association Section of Taxation meeting, an IRS official has said that work remains in educating and training agents.

To ensure problems with the new procedures are resolved, taxpayers are encouraged to escalate inquiries about the new IDR procedures up the IRS’s chain of management if needed. One area of concern is the IRS’s ability to extend the time taxpayers have to hand over the requested documents. Where issues are elevated to higher management level, timelines can be extended, depending on the specifics of the case.

Regarding whether there should be a suspension of the deadline if taxpayers are escalating an issue up the chain of management, the official said that hopefully all issues would be escalated before the issuance of the IDR. However, there are situations where such escalation may be needed after the issuance.

Further information:

Sharon Katz-Pearlman

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United States – Supreme Court to hear case on IRS summons issuance

An unpublished opinion from the Eleventh Circuit on the standard for challenging a summons will soon be scheduled for argument at the Supreme Court. Large corporate taxpayers should take notice of the Court's grant of certiorari because it has potential implications for the IRS Large Business and International Division's newly implemented information document request (IDR) and enforcement procedures.

In United States v. Clarke,1 the Supreme Court will decide whether an unsupported allegation that the IRS issued a summons for an improper purpose entitles the taxpayer to an evidentiary hearing to question IRS officials about their reasons for issuing it.

The prospect of increasing summons enforcement actions under the IDR regime gives this case added significance. The mandatory enforcement procedure for IDRs that went into full effect on 2 January 2014 is intended to decrease the number of summons enforcement actions in the long term. But, while taxpayers and the government are getting acclimated to the new procedures, there could be a short-term rise in summons enforcement.

Allegations of improper purpose on the part of the government are a relatively common challenge to summonses, so a decisive Supreme Court case on the subject could have a big impact. A government win would weaken taxpayers' ability to establish an improper purpose. However, if the taxpayer wins and the Court holds that taxpayers are entitled to take discovery or cross-examine IRS employees, the decision would significantly affect summons enforcement proceedings throughout the US.

Further information:

Sharon Katz-Pearlman

1 S. Ct. Dkt. No. 13-301 (2014), No. 12-13190 (11th Cir. 2013).

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United States – Unified guidance on information document requests (IRDs)

The IRS issued a revision to a prior IRS Directive enhancing its information gathering procedures. Under the new procedures, the IRS will use a three part approach if a taxpayer fails to timely provide information in response to an IRS Information Document Request. The Directive signals a more focused, and more aggressive approach towards information gathering at the examination (administrative) stage.

For more information read the article.

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Vietnam – Advance Pricing Agreements and Mutual Agreement Procedures now applicable

Advance Pricing Agreements (APA)

The APA regime was introduced under the Amended Tax Administration Law which took effect from 1 July 2013. Circular 201/2013/TT-BTC dated 20 December 2013 (Circular 201) of the Ministry of Finance provides detailed guidance on the APA regime, including principles, duration, procedures, right and obligations of tax authorities and taxpayers and other guidance for implementation. Circular 201 took effect from 5 February 2014.

An APA can be in the form of a unilateral, bilateral or multilateral agreement. The APA negotiation and conclusion procedures which consist of five steps – pre-filing consultation, formal application, evaluation, discussion and negotiation, and conclusion and circulation – were basically developed with reference to the OECD’s APA guidelines and international practices. According to the regulations, it is expected to take nine months from a submission of an APA request to the circulation of a concluded APA.

Duration of an APA can be maximum five years which can be extended for no more than five years. Retroactive application of an APA before the date of lodging an APA application is not allowed under the regulations.

The tax authorities are obliged to keep confidential all information and data used during the process of handling APA requests. Accordingly, where an APA application is terminated, withdrawn or cancelled, information supplied by the taxpayers in the application dossier or annual/ad-hoc APA implementation report(s) will not be used by the tax authority as evidence for tax audit purposes.

A number of pilot APAs have been discussed with the General Department of Taxation while the tax administrators are active in preparing resources with capacity and building databases (including the possibility of using external databases). KPMG’s local expert worked with international experts in providing capacity building for the General Department of Taxation’s tax officials under a project funded by the EU.

Mutual Agreement Procedures (MAP)

Although available in most of the double tax treaties to which Vietnam is a signatory, MAP has not been very practical for the taxpayers because of the lack of guidance on implementation. With the introduction of Circular 205/2013/TT-BTC dated 24 December 2013 (Circular 205) of the Ministry of Finance which provides guidance on application of double tax treaties, MAP may now be applied by taxpayers to settle transfer pricing adjustments.

Effective from 6 February 2014, Circular 205 provides two (2) separate MAP situations for taxpayers being tax residents of the treaty counterparty country, and tax residents of Vietnam in the event taxpayers believe that their tax liabilities were not assessed by the Vietnamese tax authority (with respect to the former) or by foreign tax authority (with respect to the latter) in accordance with the provisions of the relevant double tax treaty. Specifically:

  • A foreign tax resident may choose to (i) carry out domestic appellation in accordance with the Vietnamese regulations or (ii) appeal directly to the Vietnamese competent authority (being the Ministry of Finance or any person duly authorized by the Ministry of Finance, which is the General Department of Taxation) or the competent authority of the contracting state of which he/she is a resident to apply MAP in accordance with the double tax treaty; or
  • A Vietnamese tax resident may request the Vietnamese competent authority to apply MAP.

To be eligible for applying MAP, taxpayers are required to:

  • Fulfill all obligations which have been informed in an official decision on tax collection before and during the appeal process, except for the circumstance where a government competent authority decides to suspend the implementation of such a decision on tax amounts or tax impositions; and
  • Apply for MAP within three (3) years from the date of first notification by the tax authority in relation to the tax treatment which the taxpayers consider not to be in accordance with the relevant double taxation agreement.

Further information:

Thuy Duong Hoan

Dong Binh Tran

Cao Doan Trang Hoang

Thi Thuy Ha Tran

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KPMG’s TaxNewsFlash series provides a summary of the latest tax developments being reported by KPMG firms from around the globe.