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Tax risk management_13th_oct_2015

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A presentation focused on Indirect Tax Risk Management. How to implement an effective Tax Risk Management system across tax processes in an enterprise. The focus being on preventing risks from materializing.

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Tax risk management_13th_oct_2015

  1. 1. www.taxquotient.com Indirect Tax Risk Management An effective Enterprise Tax Risk Management (TRM) 13th October, 2015 Anthony Fernandes Founder Tax Quotient
  2. 2. Tax Risks Tax risks are potential outcomes that arise from activities or events which could lead to tax adversities throughout the life of an enterprise. www.taxquotient.com
  3. 3. Tax Risks – The Indian Context • Tax Risks are currently one of the most significant risks faced by businesses and they are not “insurable”. Biggest business risks – Lloyd’s survey 2013 • The Indian tax system, particularly the indirect tax system is still evolving. • There are 3 levels of indirect taxes, some over-lapping. The tax system is complex, dynamic and overseen by an aggressive tax administration. All these factors creates scope for tax risks/difficulties. • So how does one recognize the risks, assess and mitigate them? www.taxquotient.com
  4. 4. Tax Risks & Tax Opportunities The nature of the activity determines the type of risks involved www.taxquotient.com The key therefore is to understand the activity and risks involved.
  5. 5. Litigation Govt. Audits, Investigations & Notices These activities are misunderstood as merely routine tasks. Bur are the breeding ground for tax disputes. This is where most operations related risks emerge which are usually invisible & unvisited by Sr Mgmt PREVENTRESOLVE Only at this the risk begins to get management attention. In most orgs even this is left to the Tax Function Litigation may go right up to Supreme Court involving high stakes uncertainties and may include prosecution. How Tax Risks Emerge, Escalate & finally get noticed Operations Business processes, SOPs, IT systems, Accounts, documentation, declarations, returns, tax payments, internal reviews & audits, outsourcing, agents etc. Monitoring, Reviewing, Assessing & Creating Awareness
  6. 6. Tax Legislations & Frequent legislative Changes Transactions & changes in Policies Tax Infrastructure & Tax Accounting and Compliance Processes Tax Assessments, Tax Audits Investigations Tax Risks Ability to identify tax risks across the spectrum of business activities
  7. 7. Tax Risk Management (TRM) • TRM is NOT about becoming RISK AVERSE. Its about : – Risk awareness. Its not about avoiding all risks nor about grabbing every tax opportunity blindly. – Its about creating a risk conscious infrastructure with continuous risk identification, assessment and mitigation – Its about placing the right systems, processes & procedures in place to rein- in risks within acceptable levels – Its about being proactive. Preventing not resolving risks after they emerge – Opportunity to consciously calibrate risks to match with risk appetite of an enterprise. – Avoiding all surprises! A known tax risk will never surprise! • Not leaving it to chance! No surprises! Surprises are usually caused by “flawed” behaviour. www.taxquotient.com
  8. 8. BLIPS – Context & Contributory factors for tax risks • Behaviour – Risk appetite, attitude, conduct, focus, documentation and priorities • Legislations – The operations an enterprise is engaged with determines the tax laws applicable • Infrastructure for tax – Internal & External including CHA legal counsels, tax authorities and communication channels • Policy – companies policies on risks, disclosures and risk mitigation • Systems including IT systems for compliance www.taxquotient.com
  9. 9. An ideal tax risk management system will work in tax areas like the autonomous or involuntary nervous system in a human body. A system which controls vital life functions continuously, very silently without any fuss. The idea is to institutionalize it. Make it involuntary! An Ideal Tax Risk Management www.taxquotient.com
  10. 10. Types of Tax Risks Transactional Risk Operational Risk Compliance Risk Financial Risk Reputational Risk Litigation Risk www.taxquotient.com
  11. 11. Types of Controls Tax Control Environment Risk Assessment & Mitigation Standard Operating Procedures Financial Reports Periodical monitoring & Review Review by Board & Audit Committee www.taxquotient.com
  12. 12. Changes in Law Some are historical Introduction of VAT in 2005 Negative list based service tax from July 2012 Budget changes – This is an annual exercise EXIM Policy changes – 5 years (Policy Annual Supplement) Introduction of GST expected sometime in 2016? Information Importance of information sharing with Tax Audits Dealing with audit & investigation. Sharing information Declarations Risks related to misdeclaration, suppression of facts can lead to deadly consequences Examples of Risks from Operations - Generic issues www.taxquotient.com
  13. 13. Tax Engine Procedures – New products/ services/ transactions ERP/IT systems (erroneous changes in master data can lead to disastrous consequences) Who has to be informed about changes Paying “right tax” and at the “right time” Returns, declrns, assessments Filing correct returns Making declarations (Employees, CHA) Valuation – Related person Import from related party. Global Purchase agreement Sale of finished goods to related party Set out Accountabilities Examples of Risks from Operations – Generic Issues www.taxquotient.com
  14. 14. Disclosures & Risk Assessment Periodical review of pending tax proceedings at all levels, including on-going audits and assessments. Classify into High, Medium, Low and Frivolous items Periodic Disclosures, Assertions and Provisioning to ensure adequate disclosure of tax risks to stakeholders. Mitigating risks Ensuring right defense at all stages All facts to be brought out at the first stage of adjudication itself. Legal arguments can be introduced later also. Provisional assessment can be a long term risk. it normally continues for more than 5 years. Examples of Operational Risks - Litigation www.taxquotient.com
  15. 15. Unusual or one-off transactions create the greatest risks! Setting up a new plant Mergers & Acquisitions Sale or purchase of assets Entering into JV (consortium) to execute a contract Starting a new product or service line Sale & purchase OR “job-work”? Sale or licensing of intellectual property Examples of Risks Emerging from Transactions This is only illustrative & not an exhaustive list of likely issues
  16. 16. Customs duty Capital goods Imported capital goods. Eligible for Project Import and EPCG? Which is better? Pre & Post import conditions under Project Imports and EPCG. Registering the contract for Project Import before actual import. Valuation – know how/ technology, warranty, on-site services for erection, commissioning etc. whether includible. Agreements to be vetted for compliance EXIM License for import (purchase from market) Inputs Advance Authorization or DFIA under EXIM New FTP - EXIM Schemes : MEIS & SEIS - Transfer of license possible Examples of Risks from Transactions - Setting up a new plant www.taxquotient.com
  17. 17. Service Tax Imported services Vet contracts to ensure clarity on tax liability including future tax liabilities Compliance with reverse charge liability. Not only the liability but also the “point of taxation” (when) Ex. duty, sales tax & CST Local purchase - capital goods Cenvat credit on ‘capital goods’ before registration Local purchase - inputs & services Whether Cenvat and VAT credit available? C forms and E1 sale in intra-State purchases Finished product Various Union & State exemptions Examples of Risks from Transactions - Review before setting up a new plant www.taxquotient.com
  18. 18. “Slump sale” Conditions. A business undertaking sold as a “going concern”. When its not a “slump sale”? Srei Infra (Del HC) & Bharat Bijilee (Bom HC) Sale of assets & liabilities Sales tax liability. Scope for overlap between service tax & sales tax (lease) on the IPR. Cenvat Credit Cenvat credit balance. Liability on removal of inputs, CG whether reversed Project Import Project Import obligations EXIM obligations EPCG and other authorizations ? Checks before transfer ? Pending Litigation Evaluating tax risks in pending litigation (incl notices) at all levels Examples of Risks from Transactions – M&A www.taxquotient.com
  19. 19. Customs Hse Agt Background check, interview & clear ground rules. Incorrect declaration by CHA can get goods seized. Create financial and delay your project. CHA’s are vulnerable. Can be pressured by Customs authorities. Use of ICE code Don’t allow use of company IEC code other than for company purposes. Employees, etc. Private Jetty Private jetty. Wrong goods or number of packages are removed without verifying. Samples Goods to be sampled for testing. Special attention needed to ensure declarations are correct. Preserving samples drawn Provisional assessment It is common to start provisional assessment but it normally continues for not less than 5 years. Examples of Operational Risks - Customs www.taxquotient.com
  20. 20. Import of bulk liquids Quantity imported of liquids, the ullage quantity, the shore tank quantity, what should be the value Valuation Related person. SVB Valuation. Claim for deduction from post removal expenses from the price Valuation– “know how”/technology, warranty, on-site services for erection, commissioning etc. Agreements to be vetted for compliance Inputs Advance Authorization or DFIA under EXIM New FTP - EXIM Schemes : MEIS & SEIS - Transfer of license possible Examples of Operational Risks - Customs www.taxquotient.com
  21. 21. Summons and Searches Direction of the investigation is moving Stay calm but alert. Keep personal bias out. Keep an open mind, ears and eyes Check if other companies also face a similar situation Stay to the point. Don’t volunteer information. Don’t say or sign anything you don’t know. Its okay to appear ignorant. Be extremely polite, but don’t agree with something just to be polite. Investigating officers sometimes summon Directors of Companies for routine information or facts. Mainly to test and apply pressure. One should appear and state the facts. Pressure on Senior Management usually to compel immediate deposits before completing investigation / adjudication. Don’t take a summons lightly. Summons and notices should be escalated to Senior Management Operational Risks - Investigations www.taxquotient.com
  22. 22. Tax risk management is a combination of strategy and processes adopted by the Company Board and Management to : • set up infrasturcture, systems, processes to create risk consciousness • continuously identify, • continuously assess, and • continuously mitigate tax risks to ensure tax risks are within acceptable risk appetite. Also to provide periodical assurance that this objective is being achieved. In short this will be a "Tax Control Framework" www.taxquotient.com Summarizing - TRM
  23. 23. Disclosure • Duty to disclose – applications, declarations • Mistake Vs. Misdeclaration and willful suppression, • Intention – extended time limit, penalty and personal penalties Due diligence • Involve tax staff in planning stage and when implementing changes • Formal risk assessment process and sign off • Opinion from expert/ Senior Counsel • Comply and pay all legitimate taxes Responsiveness • Be alert to pick signals that things are not ok. • Watch out for queries, audit objections etc. and do your due diligence • Quick responses to queries silence suspicions Summarizing - Tax Risk Management Review • Conduct regular reviews to rectify gaps proactively • Watchfulness about changes in law, processes etc. www.taxquotient.com
  24. 24. 24 Searches (Raids) & Seizure Summons Summarizing - Managing Tax Emergencies • Prompt attention and action • Analyze the facts and information fully before parting. Find root cause • Response to the point – don’t volunteer information unless sure. “Don’t know” is good response • Is it a “industry” issue or only your Company • Handle with extremecare and caution. • Be polite, circumspect and gather as much info on exact cause of raid? • Whether this is an industry wide issue? • Don’t volunteer information check with tax executive • Immediately informall senior executives • Ensure written receipt for all goods and records seized 24 www.taxquotient.com