TEI roundtable on biggest issues in international tax.

• Position: Tax Executives Institute

Experts from Tax Executives Institute (TEI) recently held an exclusive panel discussion with Thomson Tax & Accounting (TTA) to discuss the most complex and time-consuming international tax planning issues for corporate tax departments. TEI is the preeminent association of business tax executives in North America. Its 7,000 members represent 3,200 of the leading corporations in the United States, Canada, Europe, and Asia. The topics discussed below came up most often in a preliminary poll of TEI's members. Moderating for TTA during the teleconference were Steven A. Zelman, Senior Vice President, and Linda Scheffel, Vice President and Publisher.

Mr. Zelman said: "Meeting with TTA's TEI Advisory Board is my favorite part of the TEI semi-annual meeting. The Advisory Board is the best example of tax professionals networking with their peers to share information and tax advances that I have ever seen. In addition to the Advisory Board, TTA also has regular panel discussions with TEI members to discuss cutting-edge topics affecting corporate tax departments. Their insights and expertise ate essential to TTA.

"TEI provides TTA with the best exposure to sophisticated analysis of the international tax issues facing corporate tax departments. The expertise of TEI's membership is unparalleled, and we always learn from them. The number and diversity of jurisdictions in which these experts work make their insights invaluable to TTA."

The issues that the TEI panel identified as most challenging, despite their significant expertise, were:

* Non-U.S. transfer pricing rules and documentation requirements, especially relating to countries that use secret comparables.

* U.S. transfer pricing rules, most notably transfer pricing exposures under FIN 48.

* FIN 48 / risk control, involving the effective capture, measurement, reporting and updating of all material international tax issues.

* Treaty issues (U.S. and non-U.S.), including emerging issues related to server locations.

* International tax and accounting aspects of stock-based compensation.

* Tax management issues, including monitoring of law changes across multiple jurisdictions; policing of risk management policies; and education of and communication with regional tax teams.

* Contract manufacturing issues.

* China-specific tax issues.

* Foreign exchange issues.

* Conversions of business form, especially from branches to CFCs.

* Foreign tax credits.

* VAT in cross-border transactions.

* Taxable presence of individuals in other countries.

* U.S. expatriate taxation.

* U.S. withholding.

* Sourcing of income and apportionment of expenses.

* Deductibility of overhead related to out-of-country operations/projects in other countries.

* Worldwide thin-capitalization issues.

"We were not surprised by the position of transfer pricing at the top of the list," said Mr. Zelman. "The U.S. transfer pricing Regulations have always been a challenge, even for experts like TEI's members. The additional burdens of dealing with non-U.S. regimes with practices such as non-public or secret comparables, as well as complex new accounting rules (e.g., FIN 48), can overwhelm the resources of MNE (multinational enterprise) corporate tax departments. As you will see in the discussion below, the panel participants indicated which transfer pricing issues were among their most time consuming. This is essential information for TTA because we publish such a large library of transfer pricing information in addition to the CrossBorder Solutions software products."

Timothy McCormally, Executive Director of TEI, said "The tax department in any well-run corporation will spend a significant amount of time considering management issues, like the tax department management issues that this TEI/TTA panel discussed. Education of business partners, for instance, has become significantly more important as domestic and international accounting issues have become part of the realm of the tax departments of MNEs." The panel members agreed that advances in communications technology and in research and document storage have vastly improved their ability to manage corporate tax departments across international boundaries.

What follows is an excerpt from an article in the March issue of the JOURNAL OF INTERNATIONAL TAXATION (19 J. International Taxation 24) summarizing the panel discussion. Mr. Zelman commented that "the analysis was both wide-ranging and in depth--exactly the kind of discussion that TTA wants to foster."

Overview

According to Mr. McCormally, "VAT, withholding, sourcing, thin capitalization, permanent establishment (PE), apportionment, and tax credits have been challenges for tax executives for years. FIN 48 issues are newer but now provide a complicating overlay to many problematic tax planning and compliance issues."

The consensus of the panelists was that transfer pricing (both U.S. and non-U.S.) topped the list of issues. Mr. McCormally said that "Transfer pricing takes a significant amount of time and training in many of the multi-national enterprises in our membership. According to TEI's most recent Corporate Tax Department Survey, TEI's members have substantial tax planning responsibility, and in more than 80 percent of the cases our members have significant responsibility for planning with respect to transfer pricing. Moreover, as several of the TEI panelists said, we do expect transfer pricing to get more scrutiny in countries around the world."

Problems related to the management of multinational tax departments, like maintaining control over far-flung local tax resources, were seen as less severe due to the Internet, email, organized tax department teleconferences and other recent communication advances. Some of the other issues that the TEI panel raised during the discussion in this area ate:

* Maintaining connectivity between regional tax teams and U.S. colleagues.

* Educating business partners on international tax issues.

* Policing internal company risk management policies (e.g., making sure policies are followed) to avoid tax risks.

* Monitoring current tax law changes across multiple jurisdictions.

* Consistently complying with administrative and statutory rules in all countries.

With regard to FIN 48 compliance, the panel identified international tax positions as the most challenging issue for corporate tax departments. According to Mr. McCormally, "Increasingly, tax executives are faced with meeting regulatory and compliance requirements, while continuing to provide value-added strategic services to the corporation. The best way for tax executives to handle a new area like FIN 48 is to make sure their staffs, including international staffs, are fully trained, and up to date on the latest guidance. They can do this by networking with peers on best practices and by looking at other company filings."

Non-U.S. Transfer Pricing

The key issue for the panel was foreign transfer pricing, the rules and documentation requirements--specifically, what percentage of their department's time is spent on this issue; how it is split between main and local offices; whether they use outside resources; whether those resources are significant; and whether they expect this issue to be more or less significant over the next year.

One panelist said, "For transfer pricing, we do use outside resources. We use our local office people to work with those outside resources. In some countries like India, we're actually required to have an outside resource do our transfer pricing study. We use our local office in a data furnishment mode. We do try to control it all out of the U.S. so we could have some influence and direction. I see it as an area where there will be more and more involvement and more intensity because transfer pricing is a play-or-lose game to the foreign government. So unless you're Ireland and you have an extraordinarily low tax rate, if you're not playing in that game, you stand to lose. I'd say that maybe 15 percent or our department's time is spent on this issue."

Another panelist said that "percentage-wise, I think we're pretty low. I would estimate maybe 5 percent to 7 percent of our total department time is spent on dealing with documentation and so forth. Everything globally is handled from here and we do the work internally. We subscribe to two of three of the databases of information, and we use a third-party vendor's standard report format software. I don't do the work--someone else does that. But it's fairly limited.

"We probably do more documentation than we technically need to, but we've always been that way--belts and suspenders. Of course now the countries are catching up and in some cases we're doing it because maybe we thought it was good practice or wanted to be ahead of the curve in terms of an audit. We always figured in a foreign audit situation, where they challenge transfer pricing, and if they didn't require a report or a study but we had a study, it would help us, and it has of course helped in a lot of cases. Now those countries are requiring it, so we were ahead of the curve; we're not so much now. But our structure and product flow and so forth is fairly simple. So I'm guessing that's why our percentage of time spent on this is fairly low. We have no APAs (advance pricing agreements) right now anywhere. I don't expect the significance of the issue to diminish. I think it's going to get more and more scrutiny around the world."

For another panelist, "Foreign transfer pricing is obviously an important issue. For my international team, they spend a lot of their time--probably 20 percent, 30 percent--on transfer pricing and documentation. But again, that depends on whether there's an auditor if we're trying to get a comparables study done. The time is split between main office and local office. I would say it's really coordinated, so as a U.S. multinational, we have most of the directors here with people out in the regions, but it's a coordinated group, so...