Colaboration Program ITC / CIAT for the Development of the Tax Administrations in Latin America and the Carribbean

Within the framework of the international initiative “international tax Compact (ITC)”, CIAT implemented between January and June 2013 a support program for tax administrations based on 8 short-term technical assistances, mainly focused on the control of international operations and economic sectors, and to a lesser extent, on those aspects related to the application of technologies. The referred programs allowed following up the 2012 efforts, as part of the same initiative, through which 16 technical assistances were executed.

Through this assistance program, the CIAT Executive Secretariat has also identified areas requiring specific demands on priority issues that are part of the tax administrations strategic plans in force. Many of the above needs and demands are being and will be answered in 2014 through joint actions of CIAT with the EUROsociAL II, the GIZ from Germany and the IDB, along with other relevant partners.

CIAT Concludes the Second Short-term Technical Assistance Season, Carried out within the

Framework of the ITC-CIAT-GIZ Contract

Colaboration Program ITC / CIAT for the Development of the Tax Administrations in Latin America and the Carribbean

For the purpose of executing the assistances, which benefitted 11 tax administrations of member countries, experts from different fields were mobilized: American and European tax administrations, CIAT Executive Secretariat, and specialized agencies, such as the IBFD of the Netherlands.

Such collaboration actions have been highly successful in terms of satisfaction and impact, having obtained on average a score corresponding to a higher level of satisfaction than expected by the beneficiary administrations. With regard to the impact generated in the different action areas, the following results in the short term can be mentioned:

Colaboration Program ITC / CIAT for the Development of the Tax Administrations in Latin America and the Carribbean

Auditing Large Companies, Transfer Pricing and International Harmful tax Planning Control:

• Helped the creation and training of specialized teams and units.

• Supported the adoption of inspection practices to evaluate the taxpayers’ behavior more efficiently.

• Allowed the planning processes optimization for audits by sectors.

• Facilitated the definition of methodologies for analysis and risk mitigation.

• Created capabilities to identify harmful international tax planning schemes.

• Helped the development of transfer pricing legislation and allowed adapting experiences to the local context.

Colaboration Program ITC / CIAT for the Development of the Tax Administrations in Latin America and the Carribbean

Colaboration Program ITC / CIAT for the Development of the Tax Administrations in Latin America and the Carribbean

Exchange of Information and Tax Intelligence:

• Optimized the use of the information obtained as a result of the exchange between tax administrations.

• Facilitated the evaluation of tools to improve intelligence analysis and the process of exchange of information between States.

• Allowed improving the perception of the audit areas regarding the importance of the information exchange.

• Allowed formulating plans and making decisions to improve the management of the information security and confidentiality.

Colaboration Program ITC / CIAT for the Development of the Tax Administrations in Latin America and the Carribbean

Colaboration Program ITC / CIAT for the Development of the Tax Administrations in Latin America and the Carribbean

Information Technology:

• Allowed making strategic decisions on adapting and updating the tax information system.

• Generated capacities to provide maintenance to the tax system.

• Allowed identifying critical components of the tax system needing to be redesigned.

Colaboration Program ITC / CIAT for the Development of the Tax Administrations in Latin America and the Carribbean

Listed below are summarized some of the main barriers/needs and recommendations identified as a result of the assistance:

Barriers/needs RecommendationsEffective implementation of transfer pricing regulations.

• Define strategies to improve transfer pricing specialists training Ensure the existence of permanent training, and avoid risks associated with staff rotation or migration.

• Set penalties in proportion with the risk that formal noncompliance (information systems breaches) or material breaches (improper tax savings) could generate.

• Analyze in detail transactions between related parties, apart from the provisions of the inter-company agreement.• Analyze carefully which Group Company has been in charge of managing intangible assets, in order to have an

adequate position respecting these kind of inter-company operations. Example: advertising and brand promotion• Instruct staff on international instruments that have been agreed upon by countries (DTCs and TIEAs) and their

proper understanding and interpretation.Availability of local comparable. • Implement of adjustments by geographic market appropriate to the case.

• Go to the UN transfer pricing Practical Manual, which presents some useful examples related to this problem.Information regime for the control of international operations.

• Standardize and define the information regimes formats in the various processes (institutional formats, internal formats, etc.).

• Computerize, as far as possible, information systems and define how and through what means (technologies) the data use will take place to determine risks allowing to better streamline the tax administration resources.

Cases selection, audits planning and organization

The programming process used by SAT in Mexico, where a Committee authorizes audits that will be developed in the area of transfer pricing has been presented as good practice.

Internal communication • Hold strategic meetings with the leaders of the different projects/programs/areas involved, within the tax administration; aiming to share and benefit from the knowledge acquired in all audits of transfer pricing that has been carried out in different economic sectors.

• Clearly communicate goals specific to each of the members of the unit dedicated to control international operations (decentralized teams if appropriate) and offer specific incentives to the achievement of these objectives.

Communication with the taxpayer To define communication channel with the taxpayer or their assessors, in order to create a detailed view of the taxpayer’s transactions and value chain, for a win-win and transparent relationship.

Normative, operational and technical capacities in order to perform audits focused on specific economic sectors

• To draft manuals for general audits and, gradually, as the tax administration acquires experience, add sectorial audits and workbooks for planning and risk evaluation, and/or other critical points for audit processes.

• Share general and sectorial manuals between Tax Administrations. Most of the risks are similar for the same sectors in different countries

• Provide staff members with training on the major economic sectors operations.• Develop sectorial studies.

Colaboration Program ITC / CIAT for the Development of the Tax Administrations in Latin America and the Carribbean

Barriers/needs RecommendationsIgnorance of basic schemes of harmful international tax planning.

Train auditors, promote exchanges between tax administrations, share and access documents from international organizations, involve new officers to gain field experience in the control processes.

Structural and organizational deficiencies in certain assisted tax administrations.

Evaluate if centralizing control actions of international operations in specialized areas is appropriate. Models can be centralized or decentralized through specialized teams in different areas of the Organization (regions, large taxpayers, etc.). It is also important to define areas for the technical, regulatory, administrative advisory and training work.

Conflict between internal anti-abuse rules and tax conventions

Clearly state in the body of tax conventions that domestic anti-abuse rules should be applicable and will not be limited by them.

Need to revise the tax policy. Example: when to allow or restrict holding or financing structures?

Given the complexity of the field of application of the anti-abuse rules, it is necessary to balance what the tax authority could be considered abusive, with the impact that their criteria could have on the competitiveness of multinational companies that generate the flow of investments.

Commitment from the audit areas to the process of tax information exchange between States.

• Involve senior management in the definition of strategies towards the Auditors, so they consider the exchange of information as a control tool.

• Increase the level of training and sharing of documents of interest among Auditors, as far as possible, by electronic means.

• Increase the level of development of the manuals regulating the powers of the actors involved in the process of exchange of information and the procedures governing their relations.

• Establish clear criteria on access to exchanged information.• Respect aspects of confidentiality • Assess the convenience of signing multilateral instruments and become part of global initiatives such as the Global

Forum on transparency and information exchange.