1. Centre for Tax Policy and Administration Organisation for Economic Co-operation and Development Auditing Multinational Enterprises 10. Practical Aspects of Auditing

2. Evasion, Avoidance, Planning? Evasion - illegal, - possibly criminal Avoidance - legal, though possible exposure to penalties - exploiting loopholes - exploiting domestic or international mismatches - often some form of artificiality or circularity - primarily tax-driven transactions - not within intention of the law Planning - legal - no culpability - within spirit of the law

3. Evasion, Avoidance, Planning? Cutting Edge example:  Examples of evasion?  Examples of avoidance?  Examples of planning? With large multinational groups, avoidance is normally the most important concern to tax authorities.

4. Voluntary compliance Voluntary Compliance: involves taxpayers carrying out all the requirements of the tax law of their own volition – needs an environment that will encourage compliance – most effective way of achieving the overall objectives Taxpayer service –encouraging voluntary compliance – Taxpayers have full information on rights and obligations – Taxpayer obligations are clear, proportionate and consistent – Administration’s power exercised consistently and impartially – Compliance mechanisms are as user friendly and cheap as possible Taxpayers need incentives to comply voluntarily – Reduced costs of defending an audit - ‘lighter touch’ for compliant taxpayers – Reduced risk of reputation as an ‘avoider’ - and consequent auditor attention – Certainty of treatment – Reduced risk of penalty

5. Risk assessment  An assessment of the risk of a loss of tax arising from a particular issue or the behaviour of a particular taxpayer  Risk assessment allows tax authorities to direct their limited resources to the issues that represent the greatest risk of a loss of tax .. and to prevent taxpayers from incurring costs in defending an audit on trivial issues.

6. Risk assessment - criteria  Quantum risk - how much tax is at risk?  Behaviour risk – does the taxpayer’s behaviour suggest a high risk of understated income?  Transaction risk – do the features of the transaction suggest a high risk of understated income?  Financial performance risk

7. Behaviour risk  What do you know about the taxpayer’s standard of record-keeping and documentation?  And the organisation and capabilities of its tax department?  Has it engaged advisors known to be market aggressive tax planning schemes?  Is the taxpayer generally aggressive in its tax matters?

8. Transaction Risk  Where is the counter-party to the transaction? Is it in a low-tax or tax-sheltered jurisdiction?  Does the transaction make commercial sense?  Is there any element of artificiality or circularity in the transaction?  Are back-to-back arrangements being used?  Does the transaction involve intangibles – such as the transfer of ownership of intangibles or a new licence agreement?  Has there been a business restructuring - a change in the commercial relations between the parties involved?  Is it likely that the taxpayer owns valuable assets, or is taking important commercial risks, that do not appear to be reflected in its income?  Is it known that the taxpayer houses key personnel or carries out vital profit-earning functions, but these do not appear to be reflected in its income?

9. Financial Performance Risk  Is the taxpayer making consistent losses?  Does the taxpayer’s financial performance match that of its known peers?  How does the taxpayer’s performance compare with other members of the MNE?  Have there been changes in the taxpayer’s financial performance?

10. Conduct of Enquiries  Focus – take up the right cases and focus on the key issues  Avoid pitfalls  Need to manage the enquiry  Need to set the agenda

11. Focus The auditor needs to be clear about:  What it is he/she is testing in the audit  The relevant legal criteria  The information needed to test the point against the legal criteria.

12. Potential pitfalls  Unfocused and excessive information requests  Enquiry fails when auditor leaves the case  Auditors taking up inappropriate cases for enquiry.  Auditors lacking skills and experience to conduct an audit effectively and efficiently.  Lack of consistency in treatment.  Audit cases not being closed down when warranted..  Auditors taking approaches that may are not consistent with the internationally recognised arm’s length principle, thus giving problems under MAP if a claim for a corresponding adjustment is made under the relevant treaty.  Potential corruption.

13. Managing the enquiry  Consider an enquiry timetable and plan….. possibly agreed with the taxpayer  Full use of all information and other powers to encourage progress  Setting up an enquiry team - with defined roles and regular meetings

14. Teamwork  Allows the right mix of skills to be employed in the case – e.g. bringing together experience of the taxpayer, the industry, the technical issues and investigation techniques.  Permits more efficient working.  Aids the development of expertise in team members.  Provides some continuity as team-members leave the case.  Promotes best working practices amongst members and provides a safeguard against unfair or corrupt practices.

15. Taking control  Auditor needs to set the agenda for the enquiry - not the taxpayer  …. and needs to take control over: - the issues to be considered - the pace of the audit - the information to be provided - who to interview