1. Prospective Tax Dispute Case

For the purpose of better understanding for readers, I would like to introduce a prospective tax dispute case.

We need to foresee what kind of situations multinational enterprises will face under the new BEPS Project system. Let's assume that a Korean multinational enterprise ("X Group") which has an obligation of BEPS Project reporting has manufacturing factories (semi-finished goods or finished goods) in i) Korea, ii) the United States, iii) China, iv) India, and performs world-wide sales activities within 15 nations (including Korea, the United States, China, India) through its sales subsidiaries.

Thus, X Group would submit a BEPS Project report to the Korean tax authority, and its US subsidiary “Y” which performs manufacturing & selling activities in the United States also would file its BEPS Project report with the US tax authority. Under this situation, where the US tax authority raises a transfer pricing issue against Y’s cross-border transactions with its affiliates in Korea, China, India and other 11 (15-4) nations, Y should establish that its cross-border transactions with its affiliates are carried out on the arm’s length principle under the international taxation principle.

In case where the US tax authority raises an issue against cross-border transactions with China and makes a TP adjustment, Chinese affiliate’s income should be transferred to Y’s income in the United States in order to avoid double taxation. However, if the Chinese tax authority does not agree with the position of the US tax authority and not allow the transfer of income, X Group would definitely get caught into the taxing right dispute between the US government and the Chinese government.

2. Past Approaches to Resolve Problems

When the above situation took place in the past, X Group could have managed the problems through the compromise process with the US tax authority without notifying both Korean and Chinese tax authorities of these problems. That is, it was possible to resolve problems in a patch-up approach.

However, as X Group’s cross-border transaction information with all relevant nations is disclosed to their tax authorities under BEPS Project, it becomes difficult for X Group to hide the taxation case which took place in a specific nation. In case where the taxation case of a multinational enterprise is disclosed, the tax authorities related to this taxation measure could have a suspicion on cross-border transactions in issue. Thus, a multinational enterprise must pay attention to this kind of undesirable situation.

If the US tax authority would raise an issue against cross-border transactions with Korea, China and India, X Group could get involved in the taxing right dispute between four nations. Accordingly, multinational enterprises should adopt an international group policy to consistently and systematically manage such issues to prevent dangerous situations as mentioned above. That is, a proactive management approach on cross-border transactions rather than a past patch-up approach is absolutely necessary.

3. Active Management

When a multinational enterprise handles the problems on a posterior approach at the time of tax audit, we can define it as a passive management approach. On the other hand, when it handles the prospective problems on a proactive approach in order to minimize risks, we can call it as an active management approach.

As cross-border transactions with several nations affect the taxing rights of these nations, the beforehand and active management is absolutely necessary to minimize the risk of repetitive disputes between several tax authorities. Given that the taxation cases often result in tens of millions dollars of additional taxes, it can be easily understood that the proactive management is the best way to maximize the management performance by saving both unnecessary taxes and related expenses.

4. Consistency and Reasonableness of International Tax Policy

In the past, multinational enterprises generally resolved the problems with a help of outside consulting firms at the time of tax audit. However, it would be practically difficult to resolve the problems by utilizing a quite different method per each country under the newly introduced BEPS Project.

The reason is that multinational enterprises must maintain the consistency and reasonableness in the establishment and execution of their international tax policy from the standpoint of risk-avoidance because their cross-border transaction information is going to be disclosed to the tax authorities of nations where they are doing business.

The parent company of a Group should prepare a detailed plan for its world-wide affiliates to perform the cross-border transactions according to Group’s policy and resolve problems within its international tax policy even when tax authorities raise issues on its policy. Otherwise, its foundation of cross-border transactions would be impaired and result in serious problems.

As explained above, the patch-up approach under the new BEPS Project necessarily leads to an undesirable double taxation. And additional and unnecessary expenses could occur in case where another tax authority raises the same issue again. Accordingly, multinational enterprises should establish a consistent and reasonable management system under which Group’s international tax policy can be executed, and invest on education for the introduction of this system.

Only when multinational enterprises maintain the consistent and reasonable policy, can they get the highest effect at the lowest expense possible, in particular, at the time of tax dispute. The consistent and reasonable policy becomes even more important when they have more overseas affiliates because they should discuss the more issues with more tax authorities. Since the tax dispute expense often amounts to an astronomical number, the investment on education of BEPS Project is very important. The education expense is minimal compared to the expenses related to the international tax disputes.

5. Lecture of BEPS Project

As tax authorities are going to scrutinize the details of cross-border transactions reported by multinational enterprises through the introduction of BEPS Project, multinational enterprises should make substantial efforts in order to avoid unnecessary challenges by tax authorities. Assuming that you have to consider two variables when you do business in two nations, you should consider six (1x2x3) variables when you do business in three nations.

If there are more variables to be considered, the probability of having a problem would also increase. Thus, it is necessary to establish a thorough and consistent group policy on cross-border transaction. In case where tax authorities raise an issue on cross-border transactions, multinational enterprises should be able to logically and consistently explain why their approach based on the group policy is reasonable. That is, before reporting the information on  cross-border transactions to tax authorities, multinational enterprises should carefully review the issues for potential challenges to be made by tax authorities. Otherwise, they would inevitably cause an unnecessary and costly dispute of taxing rights between tax authorities and pay enormous taxes and additional expenses.

BEPS Project Lecture jointly held by the Daily NTN and Lee & Han International which begins from June 16, 2016 will focus on how to manage international tax issues under the newly introduced BEPS Project.

 

The course's details and follow-up on the lecture are as follows:

 

Step	Contents
First step	Understanding of BEPS report (how to complete the BEPS report and how to prepare a transfer pricing report)
Second step	Analysis on potential problems the BEPS report will cause after submission of the report (analysis based on actual cases presented in the teaching material "BEPS Project Lecture" written by Dr. Han)
Third step	Comparative legal analysis of international taxation systems and dispute resolution approaches
Fourth step	Formation of discussion group for the people who completed the BEPS Project Lecture(Lee & Han International will continuously support the discussion groups after the regular lecture course through the question & answer website (www.leeandhan.com) created by Lee & Han International

 

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