On November 13, 2014, Hong Kong and the United States signed an inter-governmental agreement (IGA), which will require financial institutions in Hong Kong to comply with the US Foreign Account Tax Compliance Act (FATCA).

FATCA provides the Internal Revenue Service (IRS) with the tools it needs (not a scalpel but a chainsaw) to obtain information on financial accounts held at foreign financial institutions (FFIs) by US persons. An FFI’s failure to disclose information on their US clients hits it where it hurts the most: in their wallets. Very simply, it results in the withholding of 30 percent tax on payments of US-sourced income.

Model IGAs are creatures of the US Treasury and have been developed to overcome a Read More

Foreign direct investments have been increasing for the past few decades.

According to Baker & McKenzie for multinational companies venturing into China through Mergers and Acquisitions there are eight essentials that these companies need to be aware of in order to succeed.  They are as follows:

1. Knowing your China counter-party
2. Conducting deep due diligence
3. Structuring the deal
4. Navigating government approvals
5. Satisfying valuation requirements Read More

Algirdas Semeta, EU’s Commissioner for Tax wants Australian PM to use G20 Presidency to lean on Asia-Pacific financial centres to reduce bank secrecy & share tax information.

In an exclusive in today’s Australian Financial Review, journalist Geoff Winestock reports that Commissioner Semeta (who is currently in Australia) wants Prime Minister Abbott to convince Singapore, HK, Taiwan & Macau to reduce their bank secrecy provisions and to share tax information with other authorities. Commissioner Semeta is due to meet today with Australia’s Treasurer Joe Hockey and the two are likely to discuss protection of the tax base against multinationals that shift profits to offshore financial centres.

Commissioner Semeta said “Australia could find a way to get all these countries on board”. Read More

TaxConnections Offshore BusinessHONG KONG

In August 19, 2013, the Hong Kong Monetary Authority (HKMA) released a circular directing financial institutions to ensure compliance by establishing the necessary processes and controls, if applicable. HKMA also suggested that the Hong Kong Association of Banks and the DTC Association offer appropriate assistance to facilitate the development of good practices for compliance with FATCA and other overseas tax regimes. There is no explicit mention of a potential IGA with the U.S. (Source: HKMA)


Bangko Sentral ng Pilipinas (BSP), in a memorandum, reminds financial institutions – including commercial and investment banks – to evaluate if they are Foreign Financial Institutions (FFIs) subject to FATCA, to study the potential effects of FATCA on their businesses, and determine the steps to take to avoid the unfavorable consequences of non-compliance. And if they are subject to FATCA compliance, the institution must put in place a policy to comply. The BSP message states that any FATCA-related questions or concerns of banks should be provided to the Association of Bank Compliance Officers, Inc. (ABCOMP) which serves as the central repository of FATCA-related inquiries and collate such queries for a more systematic submission to the U.S. Government. There is no explicit mention of a potential IGA with the U.S. (Source: BSP)


In a media release last May 14th, Singapore has indicated its intent to enter into an intergovernmental agreement (IGA) with the U.S., a move which will help financial institutions operating in the city-state comply with the U.S. Foreign Account Tax Compliance Act (FATCA). (Source: IRAS) Read More

TaxConnections Blogger Yvette Kwong posts about Value Added Taxes In ChinaThe pilot VAT program put in place in January 1, 2012 was expanded nationally on August 1, 2013. The long-awaited administrative measure on VAT exemption for cross border services would now allow companies in China to follow the prescribed procedures to obtain VAT exemption on previously non-zero-rated service revenue from cross-border international transportation and “modern services” within the scope of the pilot VAT program.

Services that may benefit from this new administrative measure include R&D and design services provided to foreign service recipients.

Certain services such as consultancy services in respect of immovable properties or goods located in China are fully subject to VAT even if provided to foreign service recipients.

Services such as exhibition and advertising services are VAT exempt only if performed overseas and regardless of whether the service recipient is Chinese or foreign.

International transportation services are either zero-rated or VAT exempt depending on whether the service provided is a general VAT taxpayer with relevant licenses or a small-scale VAT taxpayer.

Zero rating means that service provider in China does not have to charge output VAT on cross-border services and also can apply for a refund of its related input VAT. Read More

TaxConnections Member and Blogger Yvette Kwong posts about China Free Trade ZoneAs part of China’s strategy and long-term goal to further open up China to the world economy and international trade, China has set up a “Free Trade Pilot Area” or FTPA in Shanghai.

The intent is to observe and learn from Shanghai’s experience for nationwide application later on in China.

According to Deloitte the focus will be on policy reforms rather than preferential treatment. This should result in trade, investment and financial liberalization.

Details of the rules are expected to be announced shortly with full implementation of those rules to be accomplished by the end of 2013.

Business Sectors Likely to Benefit from the FTPA

The FTPA will give wholly foreign-owned banks the opportunity to set up shop in China for the first time.

Two foreign banks (Citigroup and Development Bank of Singapore) and eight Chinese banks have received approval to open branches in the zone.

According to the Wall Street Journal banks in the zone are expected to have more freedom to set interest rates and Read More

TaxConnections Tax Blog - China and Southeast Asia Transfer Pricing IssuesLocation Specific Advantages (LSAs)

Tax authorities in emerging markets such as China and South East Asia are paying more attention to LSAs.

LSAs generally refer to location savings on the supply side  and market premiums on the demand side.

Location Savings

In the context of transfer pricing (TP), ‘‘location savings’’ generally refer to (net) cost savings realized by an MNE (multinational enterprise) as a result of relocating  some of its operations from a ‘‘high cost’’ to a ‘‘low cost’’ location.

Market Premiums

On the other hand, market premiums refer to location specific ability to sell products at a higher price.

In a United Nations Transfer Pricing (“TP”) Manual released in 2012  China’s State Administration of Taxation (“SAT”) indicated that China would promote the LSA concept in future practice.

Current  challenges include how to identify, quantify and allocate LSAs. Read More

iStock_000015914943XSmallAccording to a recent Deloitte webcast China is simplifying its procedures for outbound payments.

Bulletin [2013] No. 40 and Huifu [2013] No. 30 removes the requirements of tax clearance certificates for outbound payments.

Also, SAFE is allowing cross-border cash pooling for pilot multinational companies and state-owned enterprises. This allows for cross-border intercompany borrowing, lending and netting or cash pooling (within limits). Tax considerations include deductibility of intercompany interest expense, withholding tax on interest payments, and transfer pricing issues concerning intercompany charges.

Further, excess cash from the China operations of an MNC could be used to finance overseas cash needs of sister companies via equity or debt. Read More

TaxConnections Blog Post Removal of Penalty of Perjury Declaration regarding FATCAIt had been expected that a Responsible Officer (RO) would be required to certify, under penalty of perjury, as to compliance with FATCA. The original post describing the possible consequences to a Responsible Officer making a false certification under FATCA can be found here.

Recently, the Internal Revenue Service opened the FATCA registration system and published additional guidance. There is not a full length “FFI Agreement” as the IRS had previously stated would be published in a Revenue Procedure before the opening of the registration site; instead, the Agreement is more of a broad and open-ended certification by the RO that the FFI will comply with FATCA. This is similar to that provided in a recent draft of Form 8957. The specific certification is as follows:

Financial Institution – Agreement

I, Joe Smith, as RO for the Financial Institution, certify that, to the best of my knowledge, the information submitted above is accurate and complete and agree that the Financial Institution (including its branches, if any) will comply with FATCA obligations in accordance with the terms and conditions reflected in regulations, intergovernmental agreements, and other administrative guidance to the extent applicable to the Financial Institution based on its status in each jurisdiction in which it operates. Read More

TaxConnections Blogger Jim Calvin Posts about FATCAWhat could be the consequences to a Responsible Officer making a false certification under FATCA?

It is expected that participating FFIs will be required to identify a Responsible Officer who will be required to certify, under penalty of perjury, as to compliance with FATCA (Chapter 4 of the Internal Revenue Code). The proposed regulations describe several certifications by Responsible Officers and by others. Implementation will likely require that subordinate certifications and documentation from other persons will be required to support the certification made by the Responsible Officer.

The Internal Revenue Service may criminally prosecute a false document case under more than one statute. Only one of those possibilities is discussed below – that is, section 7206 of the Internal Revenue Code – because it is the one most likely to be invoked, and, in fact, it is the most frequently charged criminal tax violation. It applies where a “return, statement or other document…contains or is verified by a written declaration that it is made under penalties of perjury.” In addition, civil sanction may, and almost always does, follow a criminal investigation.

Sometimes referred to as the false-statement, tax perjury or fraud statute, section 7206 aptly illustrates the serious consequences of a false certification. Consider those consequences: Any person who willfully makes Read More

Global Tax Audit & Controversy Risk Management Process – PART 1 OF 5


www.TaxRiskManagement.com (“TRM”) have maintained in our publications and workshops over the years that managing tax risk is one of the greatest challenges for tax departments around the world (creating the opportunities to build lasting world class relationships with Revenue Services), starting with the verification audit through to the resolution of tax controversies. A recent big 4 survey supports this contention. More than 540 companies from 18 countries took part in a fairly recent survey aimed to identify global trends in tax function priorities, time allocation and success measures.

Key aspects that emerged can be summarized as follows (key points are highlighted):

Tax risk is everywhere

… companies continue to face increased pressure on the tax function. As a result, tax functions are focused on addressing risks in every major area of the tax lifecycle – planning, provision, compliance and controversy. Improving the tax function is clearly more important than ever, with more than 90% of companies indicating this will be an important area for them over the next two years.

People are a tax risk

87% of respondents identified people issue as an important challenge facing the tax department. Companies are struggling to get enough people to staff their tax department. They are also challenged to train the people they have, with 77% of companies indicating that the lack of skilled resources is a contributing factor to tax risk.

The trend – proactive versus reactive

Today, companies report a significant increase in the time they’re spending identifying, managing, tracking and responding on tax risk. The number of companies who spend at least 20% of their time on tax risk increased over the last two years from 16% to 25%. Leading tax functions are responding by becoming more efficient and broadening their response to risk. Building linkages to other parts of the organization is becoming increasingly important.

Communication is key

According to our findings, companies that have regular communications with their board about tax risk are also more likely to report having specific measures in place to address those risks. The difference seems to be that they take a broad approach to tax risk assessment and work to efficiently leverage their people, processes and technology.

Throughout the world, any tax question or issue (before it becomes material) should be considered at a central division or consultation facility in order to determine what the approach should be to that question or issue – after being exposed to the proper factual analysis, and then to the applicable broad set of legal principles – tax and constitutional & administrative law. Without a central considering authority, one can never know in a large organization exactly where a tax review (potential or actual) may end up. Stated otherwise, group tax will not know exactly what is going on if each and every tax review is not reported to a centralized office that will then in turn decide how the matter should be dealt with.

The lessons learnt from the many clients TRM have consulted to show the following trends must be maintained:

§    up-to-date international best practice;

§    relationships with Revenue Services;

§    engagement with Revenue Services at various levels;

§    analysis and resolution of potential and actual tax reviews;

§    record keeping, filing and data securitization

The aim of this report

The aim of this report is to convince the head of group tax that the appropriate emphasis should be placed on the tax audit process through a tried and tested methodology, where this area of tax risk management can be streamlined and improved, in line with the lessons learnt by TRM in acting for multi-national corporations in reducing potential tax exposure on tax controversies from 100% to a mere 3%.

The focus is a pro-active engagement with Revenue Services, supported by a process (analyzing & strategizing the facts & law, through to a data securitization process) to deal with potential tax exposure issues before they become material risks. This precise methodology is currently not followed by most corporations as expounded in the textbook ‘Tax Intelligence’ written by Prof. D N Erasmus, the Chairman of TRM. It is a process that has significant merit in the correct circumstances.

These circumstances include a global environment where there is:

§         ‘country collusion’ between Revenue Services;

§          increased verification audits through Large Tax Units (LTU’s), and in the areas of indirect taxes, transfer pricing, and anti-avoidance;

§          more litigious Revenue Services; and

§          global tax administration.

The challenge in convincing the head of group tax is that this area of tax risk should be a high priority, and should be implemented on a broad scale across the group, region by region, in a staged manner. The urgency with which this must be done will become apparent from the results of the survey, that will justify the additional time and expense. It is also noteworthy that the benchmark case study recognizes this as a high priority and has commenced an implementation process.

Analysis of various sources to compile this report

This report has been compiled after analyzing various information sources.

The OECD Centre for Tax Policy and Administration released its first report dated 28 January 2009, prepared by the Forum on Tax Administration under the then leadership of Pravin Gordhan. The report is headed Tax Administration in OECD and selected non-OECD countries: Comparative information series.

In addition to this, and the analysis of various EU and Latin America Tax Reform and Development texts, numerous survey questions were prepared. Careful analysis was made of tax policies, processes and procedures to create a benchmark against which group tax information can be compared.

The OECD report covers 43 countries. We applied the information of that report to one of the top 50 taxpayers in South Africa, and established the following:

Of the 43 countries that participated in the report, 15 countries group operations in them. They are as follows:

EUROPE: Czech Republic, Germany, Hungary, Poland, Romania, Italy, Netherlands, Spain & UK

ASIA: Australia & China

AFRICA: South Africa

NORTH AMERICA: Canada, Mexico & USA

LATIN AMERICA: Non – although many Latin American countries are in a tax transition phase, and are in the process of following the tax reforms initiated in some of the former Eastern Bloc countries that have joined the EU.

In addition to the above, the Group Financial Statements make the following disclosure:

Company law requires the directors to prepare consolidated financial statements for each financial year. Under that law the directors have prepared the consolidated financial statements in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The consolidated financial statements are required by law to give a true and fair view of the state of affairs of the group and of the profit or loss of the group for that year.

This requires comment – During February 2006 the FASB and the IASB concluded a Memorandum of Understanding stating their intention to seek a convergence of their standards and interpretations by 2008. FIN 48 is the FASB standard, requiring a two-step evaluation:

§          the business determines whether it is more likely than not (50% or greater likelihood) that a tax situation would be upheld in an examination, including resolution of any potential ensuing litigation process, based on the technical merits of the tax situation;

§          the tax situation that meets the more likely than not recognition threshold is measured to determine the amount to recognize on financial statements.

As a result, the advent of FIN 48, like SOX 404, underpins the requirement for businesses to embark upon a systematic TRM process to limit and expose, with the view to efficiently minimizing the incumbent tax risks. IFRS looks to do exactly the same.

The group has an extensive worldwide TRM process in place. The process works on a decentralized basis where each business unit reports to group tax risks when they become material.  The gap between the commencement of verification audits and the creation of a tax dispute (when it becomes material) is an area of TRM that we propose requires more careful attention, in each region, to ensure better risk management of any potential emerging tax risk exposure, before it becomes material.


Prof D N Erasmus is teaching the International Tax Risk Management class for the LLM in International Taxation at Thomas Jefferson School of Law, this summer semester. He is co-author of the IBFD Tax Risk Management textbook available from www.IBFD.org, and Tax Intelligence (on Tax Risk Management) available from www.Amazon.com.  Connect with him on TaxConnections.