Tax disputes: ending the never ending

Have you experienced that time, often many months or years (and documents) into a tax dispute when you feel you’re no further forward than day one? Sometimes further back in fact; the underlying issue remains, now saddled by mutual disappointment, frustration and entrenchment. Worse still, unity among stakeholders may be lost.

That’s when a reality check’s required. Will one more attempt help the taxman see the light? More likely, mutual creativity has failed to circumvent an issue which will never be agreed. And walking away means paying the assessment; unthinkable if you believe you’re right.

‘Rightness’ may actually be the problem. Which official wants to concede if they can kick the can down the road instead? The power of Litigation is to re-frame their question. ‘Why should I concede?’ becomes ‘Do I want to lose in court?’ Often this gives a very different answer.

Does one UK tax go too far?

Offshore Receipts in Respect of Intangible Property. Or ‘ORRIP’: the UK’s bold assertion of a right to tax anywhere.

ORRIP’s rationale invites sympathy. Some central trading hub jurisdictions still allow royalties to be ‘stripped’ to offshore havens – a legacy of US tax rules that incentivised the offshore holding of US developed intangibles. If such royalties relate to UK sales, why shouldn’t the UK tax them? Is it wrong to incentivise companies to own and tax intangibles where they’re developed?

However, there are problems. Ambiguous legislation invites debate on whether outright transfers are taxed. If so, ORRIP incentivises against behaviour change it should encourage. ORRIP is also levied on gross income yet global tax reform should skinny haven’s profits to a routine capital return.

Which takes us back to principles. Through impatience to see multi-nationals comply with reformed global rules, the UK is prepared to break them. Shouldn’t rules be for everyone?

What will your documents prove?

In tax, what was in the minds of decision makers can matter. Yet a request by evidence-hungry authorities for e-mail correspondence can be bad news. What to do? They are often relevant but how often does their provision actually help resolve a dispute?

Their unstructured and voluminous nature often means they obscure, not clarify, and make matters far worse if each side cherry-picks ‘helpful’ quotes. A potential hearing which turns on thousands of e-mails can force taxpayers to accept an outcome they know isn’t fair. The alternative? Tell your story first and tell it well. The best accompanying analysis allows the whole story to be more robustly, objectively and succinctly told, vastly improving protection against cheap shots. Amazing tools exist but are unused by many. It may take effort and skill to use them productively but it’s effort worth spending if you want your documents to prove anything.

Should the world follow India on profit attribution?

Like it or not, India’s proposed revisions to PE profit attribution ( require serious attention. Profit apportionment is ‘formulary’ – it starts with India’s share of the higher of operating margin/2% allocated to India by equal reference to Indian assets, employees and sales. Users are an extra factor for digital companies with a 10%/20% weighting depending on intensity. So profits are shared but not losses.

A formulary approach makes sense to many. Yet, each uncertain input breeds and multiplies uncertainty. India’s proposals require determination of assets and employees outside India present ‘in respect of’ Indian operations, whatever that means. Is this the path to less dispute? For many, it will seem like a more certain path to double tax. Hence a bigger lesson: the need to support OECD leadership towards a unified approach. If India’s approach is unpalatable, managing a different approach for every market territory is unthinkable.

Why the OEDC’s digitalisation consultation should be on your radar

The OECD’s latest digitalisation consultation could impact every multi-national. Increasingly, focus is on allocating ‘marketing intangibles’ to ‘customer’ territories however ‘digital’ a multi-national is. Many believe this is the only way to meet society’s concern on the growing remoteness of big business.

Beware the impact: consider the explosion of dispute/double tax if every market authority could audit their share. Some are suggesting a formulaic approach is the only way to mitigate the complexity. Can this avoid anomalies and what’s the price of abandoning the arm’s length principle?

Governments’ actions suggest a belief they will each be net winners. Can they all be right? Are some relying on this being a supplement to withholding, digital and other IP taxes? Shouldn’t a new means of taxing market intangibles replace these?

What’s clear is that the decisions taken will have a profound impact on all multi-nationals. Now’s our chance to shape this debate.