Tax Directors Should Plan for Global Coordination

Global tax administrators are pushing forward with global coordination on tax issues, and the Foreign Tax Administration (FTA) and U.S. Internal Revenue Service (IRS) recently announced that they are developing a how-to guide for joint audits.

For the uninitiated, a joint tax audit would see auditors from different countries’ internal revenue services work together to produce a single tax report on a global firm. IRS commissioner Douglas Shulman said that the joint audit plan will be based on the successes of “simultaneous exams, bilateral advanced pricing agreements, and mutual assistance agreements,” which provides some hints about the joint audit structure. But theory is very different from practice and, as heads of tax know from experience, the IRS doesn’t always function as intended.

However, as internal revenue services are increasingly likely to work together through schemes like this, heads of tax should prepare by improving their firms’ policies on global document retention, their tax organizational alignment, and the way they treat different countries’ authorities.

Global Document Retention

As Shulman notes “the joint audit…will make sure both countries receive the same information and presentations from the taxpayer.” For example: if the revenue authorities from two countries both request the same documents from business units in their country, then the global tax department is responsible for the exact same documentation in both cases.

Heads of tax will need global document retention, storage, and destruction policies to manage this. Tax Director Roundtable (TDR) clients can use this summary of a recent dicussion on how select heads of tax deal with the risk of business units not adhering to formal tax policies, procedures and guidelines that directly affect documentation compliance.

Tax Organizational Alignment

Heads of tax should let their regional tax managers take responsibility for the audits and documentation but the demands of joint audits may create the need for a global document retention manager to ensure uniform practices across all business units.

This will inevitably lead to more cooperation between the local regions and the central tax function, and so it is important that heads of tax educate their business units on avoiding risks by adopting documentation guidelines. TDR clients should see how Caterpillar and Rio Tinto coordinate indirect tax policy across large and complex global organizations as an example of how to do this.

Country-Specific Tax Risk Profiles

Some firms market themselves differently to different countries’ tax authorities. But a firm’s central tax function will find it much harder to play two different roles and treat two different revenue authorities differently when dealing with the same issue at the same time. Heads of tax will need to find a middle ground and a balanced approach between revenue authorities who may differ quite dramatically.

There may be a silver lining to dealing with multiple tax authorities at once however. The increased collaboration between revenue authorities should reduce double taxation. As Shulman notes, “It can take years to resolve double-tax cases. In theory, the joint audit would expedite issue identification and clarify the facts on a bi-or multilateral basis to resolve disagreements.  At the same time, for those well-prepared taxpayers, the initiative will be both timesaving and less resource intensive.”

Also, some argue that a joint audit is not even the two-on-one relationship it might seem. In fact it could take some pressure off the company. As one tax specialist says, “If CFOs and tax managers can get two tax authorities in the same room at the same time, and put all the issues and treaty provisions on the table they can play one agency off against the other. [That approach is far better than] fighting the issues piecemeal.”

Like CAP, a joint audit could prove to be mutually beneficial for both the IRS and corporations. Do you agree – is this a welcome move? We would be interested to hear your thoughts in the comments below.