Q&A: Monique van Herksen, Ernst &Young

Last Updated: Fri, Dec 16, 2011 04:01 hrs

Monique van Herksen, Tax and Transfer Pricing Controversy Leader, Ernst &Young, specialises in cross-border dispute resolution, including mutual agreement procedures and arbitration. Based in Amsterdam, Netherlands, Van Herksen takes care of the firm's controversy practice in the EMEIA (short for Europe, Middle East, India and Africa) region. She counsels clients on controversy issues and regularly provides different authorities with guidance and/or internal training. She spoke to N Sundaresha Subramanian on the "tsunami of transfer pricing controversies" in India and other key controversy areas. Edited excerpts:

What are the major controversy areas for companies today?
Business restructuring, indirect taxation (value added tax) and permanent establishments are some of the major areas. But transfer pricing is clearly the most significant controversy area, both in size and volume.

Why is transfer pricing such a major issue across the globe?
Though many countries have adopted principles laid down by OECD as regards the arm's length standard, there is a lot of uncertainty due to differences in interpretation on what qualifies as actually being at arm's length. Globally inconsistent practices can also add to the trouble. Tax inspectors are often not transparent about what truly motivates the tax adjustment, which leads taxpayers to seek recourse with the courts seen as more balanced and impartial.

Do you feel Indian tax authorities have become more aggressive?
Statistics show that India certainly stands out, with much more tax and transfer pricing controversy than any other jurisdiction. In our recent global controversy survey, 75 per cent of companies say they have experienced a rise in the volume or aggressiveness of tax audits. In India, this was 89 per cent. Globally transfer pricing principles are same. In India, it appears the rules are interpreted and applied differently. For example, on profit margins on services, the Indian revenue authorities are of the opinion that much more profit should be allocated to India for those services than anywhere else for similar services. But the profit margins need to be comparable to what unrelated companies report. If that is not the case, foreign investors will reconsider doing business in India, as cost management is important to operate in a competitive fashion. What they also may not be realising is that the increased costs in tax ultimately get passed to the people in India. Companies do not carry costs. Ultimately,it is the people who are going to pay for costs incurred, one way or the other. Foreign investors seek a predictable, industrious and fair environment to conduct business. If the Indian tax authorities apply the arm's length standard in an unpredictable fashion that will have a major impact on the appetite of foreign investors to do business. There is a saying in Netherlands." Trust comes by foot but leaves by horse." Going by the orders raised, it appears the government has just ordered a horse.

What is the way out?
If we could remove the worry caused by the uncertainty, it could be mutually beneficial. Advance Pricing Agreements offer that. A number of countries have started using a so-called "horizontal monitoring" system. Under this, you discuss the interpretation of the tax laws to the company's facts with the tax inspector before you file the return, and this way the relationship is enhanced and there is more certainty. Netherlands has invented it. Sweden is introducing its own model; Korea has implemented it as well. People want to carry on business. They do not want to come to your country to defend their tax position in litigation.

How are leading companies coping with these controversies?
Our survey indicates companies are starting to take a more global, strategic approach to managing tax risk and controversy. Companies also told us they are embedding tax risk management more prominently within their corporate governance approach, opening more lines of communication with their board and audit committee and tax policy-makers and tax administrators. This is a crucial step in an era when tax issues have moved to the forefront of perceptions of corporate citizenship; 72 per cent of companies say they are pursuing a more open and collaborative relationship with a tax administrator.

Do you see results?
Yes, these tactics help companies improve their likelihood of having to address responses to tax disputes, reducing the threat of unexpected assessments and penalties and achieving greater certainty and flexibility in their ability to plan. The leading companies also tell us good risk management allows them to reduce the size of the tax provision and lower their overall costs of compliance, freeing resources for more innovative pursuits. And, importantly, they can reduce the overall threat of reputation risk.

Taxes contribute to society and being engaged in constant tax disputes does not send a good message to consumers, nor does it give a good impression of how the tax authorities run their business of collecting tax and serving the taxpayer community.

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