Learn. Share. Achieve. BEPS Fallout: Pragmatic Approaches to Managing Reputational Risk and Uncertainty y Miami Beach, Florida May 7, 2014 2014 U.S. Cross-Border Tax Conference Notices ANY TAX ADVICE IN THIS COMMUNICATION IS NOT INTENDED OR WRITTEN BY KPMG TO BE USED, AND CANNOT BE USED, BY A CLIENT OR ANY OTHER PERSON OR ENTITY FOR THE PURPOSE OF ((i)) AVOIDING PENALTIES THAT MAY BE IMPOSED ON ANY TAXPAYER OR ((ii)) PROMOTING, MARKETING OR RECOMMENDING TO ANOTHER PARTY ANY MATTERS ADDRESSED HEREIN. You (and Y ( d your employees, l representatives, t ti or agents) t ) may disclose di l tto any and d allll persons, without ith t lilimitation, it ti th the ttax treatment or tax structure, or both, of any transaction described in the associated materials we provide to you, including, but not limited to, any tax opinions, memoranda, or other tax analyses contained in those materials. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser. ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 2 Presenters Clark Chandler Michael Plowgian Participating Principal, Washington National Tax Principal, Washington National Tax KPMG LLP KPMG LLP Washington, DC USA Washington, DC USA Tel: +1-202-533-3186 Tel: +1-202-533-5006 [email protected] [email protected] William P. Van Saders Robin Walduck Senior Vice President & Deputy General Counsel – Partner, Head of International Tax & Treasury Corporate Ta Taxes es KPMG LLP Verizon Communications, Inc. London, England Basking Ridge, NJ USA Tel: +44 (0) 207 311 1816 +1-908-559-1901 @ p g [email protected] [email protected] ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 3 Agenda Topics to Cover BEPS Environment and Risks Impact of Greater Transparency Proactive Use of Transparency Key Takeaways Q&A ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 4 BEPS Environment and Risks BEPS, Tax Morality, and Tax Transparency Base Erosion & Profit Shifting (BEPS) • OECD-coordinated initiative motivated by high-level political interest of key jurisdictions to address add ess pe perceived ce ed weaknesses ea esses in tthe e international te at o a rules u es tthat at facilitate ac tate p profit o t sshifting, t g, a allow o “double non-taxation” and contribute to the erosion of domestic tax bases • Focus is on reform, not enforcement Tax Morality • Public naming and shaming • Politically charged (public hearings in the UK and the US) ub c co conversation e sat o has as co converted e ted into to a “tax ta morality o a ty debate debate” • Public Tax Transparency • Country-by-country reporting will increase information available to tax administrations • BEPS Action Plan also contains an item on mandatory disclosure of aggressive tax planning (Action Item 12) ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 6 Corporate Tax Risks in BEPS Environment Change Risk • Impact on existing or planned structures/transactions (BEPS or unilateral action) • Impact on effective tax rate, earnings Enforcement/Dispute Risk • More aggressive positions taken by tax administrations • Greater uncertainty, risk of double taxation Reputational Risk • Media focus on corporate tax affairs • Impact on brand, consumer (including government) behavior ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 7 Impact of Transparency Country--by Country by--Country Reporting G-8, G-20, and OECD Call for Country-by-Country Reporting • Proposal for MNEs to report income, earnings before tax, tax paid (cash and current accrual), assets and number of employees assets, employees, allocated by country • Global information to be shared with tax administration of each country in which MNE has a presence • Intended to be used for high high-level level risk assessment - What information is necessary for high-level risk assessment? - Will any thresholds/exceptions will be available? Impact on Enforcement • Does compliance with documentation requirements provide greater certainty for taxpayers? • D Does compliance li with ith d documentation t ti requirements i t aid id iin ttransfer f pricing i i analysis l i b by taxpayers or tax administration? ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 9 Country--by Country by--Country Reporting Impact on Rule Changes • Concerns about move toward greater reliance on profit split and/or formulary apportionment Impact on Reputation • Concern about confidentiality • Most tax administrations will try to protect this information, information but given the number of parties that may receive this information, it might become public ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 10 Existing Public Information There are many other sources of information about your company’s tax affairs • SEC filings (or similar regulatory filings in other countries) • Statutory accounts • Tax returns in some jurisdictions • Traditional media • Social media Consumers,, media,, tax administrations,, and politicians p use this information to form judgments ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 11 Proactive Use of Transparency Gathering Public Information First Step is Understanding What’s Out There. Typical yp information can include: • Financing structures • “Tax Tax haven haven” companies • Chief Tax Officer on the board of companies • Brand location • Details of management charges • Information f within social media feeds f and deep web ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 13 Location Analysis Luxembourg ■ [Company] Ireland ■ [Company] [ p y] Switzerland ■ [Company] British Virgin Islands Jersey ■ [Company] ■ [Company] Cayman Islands ■ [Company] Hong Kong ■ [Company] Gibraltar ■ [Company] Singapore ■ [Company] Netherlands Antilles ■ [Company] ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 14 Financing structures out in the open? Company [25%] Company [75%] Intercompany debt [50%] Company [50%] Intercompany debt Company Company Company 100% Company 100% Incorporated in X and resident in Y [25%] [100%] Company p y Trading group ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Intercompany debt Company 15 Investigative journalist articles of the future? Daily Times May 2014 Dirty deeds? [COMPANY] has been accused of doing some dirty deeds, in relation to their tax rate. It now looks like they’ve decided they’re giving a bit too much, and have engaged in some ‘clever’ clever tax planning to avoid paying their fair share. [COMPANY’s] own annual report states that its effective rate is XX%, what it doesn’t tell you is how they came up with that number At any rate, number. rate a rough estimate of the tax rate they should be paying, based on where they make their money, comes out at over XX%. They’ve achieved their significant tax savings using a number of loopholes in international tax law including offshore financing, charging companies for services provided by other group members, and charging for the use group intellectual property. ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The company has used an aggressive scheme to finance its [COUNTRY] sub group which relies on a so called “double dip” for interest expense. The tax profession likes to refer to this as “arbitrage”. To the man in the street it means that [COMPANY] pays no tax on a $XXXm inter-company loan, loan avoiding around $XXm of tax per year. There are companies in the Cayman Islands, the British Virgin Islands, Bermuda, Hong Kong, Ireland, and Luxembourg. A number of these territories have no requirement to file publicly available accounts, so their activity can remain secret, but the Chief Tax Officer is a director of some of these companies which may give a hint to their real purpose! Overall [COMPANY] has XX legal entities in XX tax havens. Numerous group trademarks are held in Delaware, a US state known for its privacy and considered by many to be a tax haven. We have presented our findings to [COMPANY] but so far they’ve declined to comment. 16 Determining Tax Footprint Country-by-Country Reporting Template • Country-by-Country Reporting template can be a starting point for a company to anticipate what questions it may face about its tax profile Other Taxes Paid ((e.g., g , Employment p y Taxes,, Consumption p Taxes)) • The total tax contribution can provide additional useful information ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 17 What might be at the tax authorities’ disposal? In the global view it becomes very clear where there sales are occurring. occurring Here we can see Singapore, the Cayman Islands and d Switzerland S it l d have the largest sales. ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 18 What might be at the tax authorities’ disposal? We have split the graph by high and low tax jurisdictions. We have chosen to define “low” low as less than 10% for this example. This provides a clear contrast. ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 19 Explaining the significance of functions... This can also show us information on employees. Here we can see the employees in Singapore. Rufina is the highest paid employee, responsible for the $35million operating profit. We can see she is only a Director and has pay of $223k. She reports to Nikki in the Netherlands. ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 20 Developing a Communications Strategy Internally • C-Suite, board, and other internal stakeholders must understand what information is available about b t th the company’s ’ ttax affairs ff i and db buy iin tto ttax risk i k strategy t t and d communications i ti strategy. t t The tax strategy should be discussed with the board and the communications strategy should be approved at board level. With Tax Administrations • It is critical to have all required documentation in order and to be able to demonstrate that operations take place in accordance with the documented tax arrangements. Be prepared to address questions about potentially damaging information in public sphere or in tax disclosure disclosure. With Media and Public • Be prepared to address questions about potentially damaging information in public sphere and to use information about total tax footprint and economic impact in local jurisdiction. ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 21 Key Takeaways Key Takeaways Make Sure C-Suite and Board Are Aware of BEPS Environment and Where Your Company Stands Have Your Documentation In Order • It is critical to have all required documentation in order and to be able to demonstrate p take p place in accordance with the documented tax arrangements g that operations • Be prepared to address questions about potentially damaging information in public sphere or in tax disclosure Gather Information to Prepare to Address Media and Public Inquiries • Be prepared to address questions about potentially damaging information in public sphere and to use information about total tax footprint and economic impact in local jurisdiction ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. 23 Q&A ©2014 KPMG LLP, a Delaware limited liability partnership and the U.S. member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. The KPMG name, logo Th l and d "cutting " tti th through h complexity" l it " are registered i t d ttrademarks d k or ttrademarks d k off KPMG International Cooperative ("KPMG International").