• Service: Tax
  • Type: Business and industry issue
  • Date: 5/1/2013

May 2013 

Welcome to the May 2013 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. Each update will bring you 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.

Australia – large R&D clients under the microscope

The Australian Taxation Office (ATO) is increasingly scrutinizing large research and development (R&D) claims, seeking extensive information and documentation related to intellectual property ownership, global group policies for R&D cost contributions and sharing, and substantiation of R&D claim amounts.

Such audits highlight the problems taxpayers face when they lack of contemporaneous documentation, especially in the area of substantiation.

Further Information:

Jeremy Geale

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Brazil – 2012 tax audit take rises to US$58 billion

Brazil’s federal tax authorities have released the final results of tax audits performed in 2012, reporting that they levied a total of US$58 billion on audit, an increase of 5.6% over 2011. In 27 percent of the audits, tax authorities found evidence of tax avoidance and sent the cases to the criminal authorities for analysis. Preferred tax audit targets appear to be large taxpayers, individuals and companies.

Further Information:

Marcos Matsunaga

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Brazil – Supreme Court judges split on CFC rules' constitutionality

The Brazilian controlled foreign company (CFC) rules have been under review by the country's Supreme Court since 2001, in a case challenging the constitutionality of the rules launched by the National Confederation of Industry. To date, the Supreme Court judges have issued differing opinion. Some have held that Brazilian companies should not be taxed on the profits of their CFC´s and affiliates, while others have issued opinions that are unfavorable to taxpayers. As a result of this divergence, the judges have postponed the final ruling's announcement.

Update as of 25 April

The Brazilian Supreme Court has completed the trial of the Provisional Measure No. 2158/2001 (Brazilian CFC Rules) and has confirmed the unconstitutionality of the article 74 of Provisional Measure n. 2158/2001 for Brazilian affiliated companies domiciled in countries not defined as low tax jurisdictions.

It was ruled the unconstitutionality of the retroactive effects of the aforementioned rules for profits before 2002. Although, the Supreme Court has decided that Provisional Measure No. 2158/2001 is constitutional for Brazilian subsidiaries located in low tax jurisdiction.

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Brazil – courts challenge penalties for federal tax offsets

In another constitutional legal challenge, Brazil's National Confederation of Industry is arguing that penalties for federal tax offsets violate the right of petition to administrative authorities. The penalty is applied at 50% of federal tax debts in cases where taxpayers have used federal tax credits to offset those debts and the credits are denied.

The Supreme Court has yet to analyze the lawsuit. Meanwhile, taxpayers successfully challenged the penalty in the Lower Federal Courts. KPMG in Brazil is assisting clients to set up the strategy on federal taxes offset procedures, which may include representing clients before Courts in order to seek an injunction or preliminary relief to avoid the penalty.

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France – tax authorities audit powers extended

Under an amendment to French law, businesses that keep their accounts in computerized systems will now be required, in the event of a tax audit, to present their accounting records in dematerialized form at the very outset of the audit. Proposed amendments that aimed to give taxpayer a reasonable amount of time to process the data before submission were rejected.

Failure to present accounting records in a dematerialized form is subject to a fixed penalty of 5% of turnover or of the gross receipts reported or upwardly adjusted (where applicable) per fiscal or calendar year audited (with a minimum penalty of €1,500). Further, a breach of the obligation would constitute an opposition to the tax audit, entitling the administration to carry out a jeopardy assessment of the tax bases.

These measures will apply to tax audits for which the audit notice is issued after 1 January 2014. To prepare for these new rules, IT, tax, accounting and financial teams should work together to identify areas for improving their information systems.

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France – tax raids target foreign groups

The French Tax Authorities have recently changed their approach their tax raids, which can result in severe reputational harm and significant assessments and penalties. Recent raids have targeted:

  • foreign groups conducting e-business in France without a sale structure there (such a distributor)
  • foreign groups with permanent establishment issues in France
  • French groups with holdings and/or subsidiaries in foreign countries with no substance.

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India – update on tax issues for cross-border transactions

For companies investing in or transacting with India, tax complexities and uncertainties abound. Based on the experience of KPMG's member firm in India in assisting multi-national companies doing business in India, these issues should be considered as a critical component of any India strategy:

  • indirect asset transfers
  • withholding taxes on payments to non-residents
  • issues related to permanent establishments, transfer pricing and attribution
  • income tax holidays claimed by Indian captive subsidiaries
  • collection of tax and stays of demand.

Also of note is India's new Advance Pricing Agreement program, its general anti-avoidance rule (expected to apply as of 1 April 2015), and the Indian government's Tax Accounting Standards project in progress.

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United Kingdom – challenges of multi-party litigation

A recent report from the UK's National Audit Office highlighted some 41,000 unresolved tax disputes, many of which involve common issues of law and fact. The First-tier Tribunal rules include a formal procedure for resolving common issues via a lead case, the result of which is then binding on other cases that sign on to the process. But the procedure presents various challenges, and it has been used fewer than 20 times since its introduction. Revising the procedure to adopt some of the positive aspects of the group litigation order process could make the litigation process more effective.

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United States – court denies foreign tax credits due to lack of substance

The US Tax Court recently held that the taxpayer's transactions lacked economic substance and thus upheld the IRS determinations of income tax deficiencies for the 2001 and 2002 tax years.

As a result, in Bank of New York Mellon Corp. v. Commissioner (140 T.C. No. 2 (11 February 2013)), the court denied the taxpayer's foreign tax credits and expense deductions in connection to the transactions. The court also held that income to a trust with a UK trustee used to effect the transaction was US-source income and not foreign-source income.

Find out more about denial of foreign tax credits.

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United States – IRS closes record number of APAs in 2012

Tax Analysts Online reports that the IRS Large Business and International Division and transfer pricing operations closed more than 140 advance pricing agreements in 2012, more than ever before. The rising numbers reflect a successful new strategy at the IRS for handling transfer pricing cases.

The IRS has created a "roadmap", first announced in 2012, that explains how transfer pricing cases will be developed. The IRS plans to post the document on its website soon.

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United States – IRS adds new Q&A to FAQ on uncertain tax positions

Tax Analysts Online reports that the IRS has revised its list of frequently asked questions on Schedule UTP, adding a new question and answer on the reporting obligations of a corporation that had pre-2012 tax positions for which reserves have been recorded.


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