Based in Germany, Westphal+Partner offers a wide range of independent tax, accounting and audit services, specialising in small and medium-sized foreign-owned enterprises doing business in Germany. Besides that, the firm acts as a controlling unit for the investor ensuring oversight. As CPAs, Westphal+Partner’s accounting operates risk-oriented detecting and avoiding misstatements during the accounting process, preventing changes at the annual financial statement. Finance Monthly speaks to Partner Ingrid Westphal-Westenacher, who tells us what clients expect from an accountant and shares the challenges that her firm faces.

From your experience, what do clients actually want from an accountant?

Our customers have decided to hire experts to solve a problem that has nothing to do with their core business. They want to focus on their business idea without losing sleep thinking about tax payments and accounting. Once entrepreneurs decide to outsource bookkeeping or get help from a tax advisory, they expect viable solutions enabling long-term success. And they are right to do so. An outsourced bookkeeping must be objectively and legally correct at any time, while also being up-to -date. Since corporate tax in Germany tends to be quite complex, especially for people with scant knowledge of the local tax codes, clients should expect their tax adviser to explain tax issues in a comprehensible manner, so they can make the right decisions.

How do you make sure to keep up with you clients’ expectations?

Communication - not just with the business owner, but with the management and the staff too.

What challenges would you say you and your firm encounter on a regular basis? How are these resolved?

One challenge that we face is knowing our clients’ business, plans, expectations, and needs. Only by knowing all of them, you are truly able to advise clients on a rational basis. One way to resolve this issue is to build a relationship of mutual trust. In order to do so, we firstly articulate what customers can expect from us, clearly defining our services and explaining our proceedings. With this certainty, customers know what to expect from us, so they can focus on their businesses without worrying about taxation or accountancy standards.

Foreign clients add a cultural dimension to the customer relationship - an aspect often underestimated and frequently resulting in underlying frictions. People from different parts of the world have different cultural preferences and backgrounds; i.e. some people from China have a different attitude when it comes to taxation, when compared to people from Germany. The essence of it is to avoid pointing out the differences, but instead, to make sure that both sides fully understand how the other side’s processes and systems work. To avoid any kind of misunderstandings, we not only pay close attention to these differences, but, for example, we also have colleagues in our team who are Chinese or have lived in China and are familiar with the culture.

How are these challenges set to change, in conjunction with the advent of technologies and the potential future needs of clients?

Both challenges will persist, even with the advent of technologies. However new technologies are already disrupting audit and bookkeeping. Today, clients can check the books at the end of the month online and see how their business performed. In the future, bookkeeping will be a fully automated process with real-time results, by the day, enabling better oversight and steering and even fewer costs due to AI-powered accounting software.

As a long-term former Chairwoman of the working group Quality Assurance SME at the Institute of Public Auditors in Germany (IDW), I’m convinced we will see significant changes in the field of auditing. Tool-based data analytics will enable us to read out process data and check them by sophisticated data algorithm. This will put auditors in an unrivalled position to consult the client on strategic decisions.

What’s your piece of advice to our readers?

When the decision to outsource bookkeeping has been made, try to hire an accounting firm run by CPAs. Accounting firms with a pure background in tax sometimes tend to disregard the code of commercial law, focusing narrowly on tax law; thereby causing problems with the mandatory preparation of the balance sheet under the German commercial law, and insofar causing unnecessary trouble and costs. Finally, trust your gut feeling when hiring an accounting company - it is very important to feel at ease and understood by your adviser. Be cautious of people hiding behind technical jarring.

Website: https://www.westphal-wp.de/

Catriona Coady provides tax and financial planning services to a wide variety of clients within Goodbody Stockbrokers. Her client base includes several HNW individuals and her role involves assisting those clients with their domestic and overseas tax affairs and addressing their tax planning needs. This tax technical expertise is on hand to assist with the financial planning and investment process.

Goodbody, part of the Fexco Group, is Ireland's longest established stockbroking firm with roots dating back to 1877. As well as being one of the leading institutional brokers and corporate finance houses, it is one of the largest wealth management firms in Ireland. Here Catriona tells us more about the company and her role.

What is your previous experience and how do you draw on this in your current role in Goodbody?

Prior to joining Goodbody I worked for a Big 4 firm. I started out my training with PwC and up to two years ago had spent a number of years working for EY. Although I was trained to understand all tax heads, my specialism has always been tax for HNW individuals and the specific tax issues affecting individuals working across multiple jurisdictions.

In my current role, my experience has proved invaluable to clients wishing to understand the tax implications of their financial plans and goals. This covers a wide range of issues which tax impacts such as clients’ succession plans, business exit plans, tax issues for entrepreneurs and cross border tax planning. It is an important service as it assists clients with understanding the tax implications of their financial plans and to enable clients to determine where further advice may be needed.

The tax implications of specific investments is also an area that I assist clients with. For example, not dissimilar to the UK, Ireland has a tax regime for investments in non-Irish funds which can be complex. The input I provide into the tax implications of investments helps clients to design their portfolios with tax efficiencies in mind while also aiming to achieve their desired investment return.

As a Private Client Tax & Pension Specialist, what are the typical challenges that clients approach you with?  What are the most common day-to-day challenges that you are faced with?

Clients typically approach me initially with perhaps one or two specific investment objectives, but after discussing their personal circumstances in more detail, it becomes very clear that they have several more financial goals that they require assistance with or wish to achieve. These can range from wishing to retire early, involving detailed cashflow planning and target retirement funding to asset protection via trusts and family partnerships and suitable investments for those not domiciled in Ireland.

Pulling clients goals and objectives together into a clearly defined plan, which identifies overall net worth, detailed cashflow analysis, attitude to risk, overall asset allocation and a strategy for achieving their goals is an invaluable exercise and one that provides a guided path through the financial and investment process. While the initial challenges are in driving awareness of the full extent of our service offering and gathering the information required to compile a financial plan, the end product is a comprehensive document containing all the salient information related to the client’s financial plans and goals. This is a document that can be consulted and updated on an ongoing basis.

In your opinion, are there financial planning and investment issues relevant to both Irish and UK tax resident clients?

Given our close proximity there are numerous issues relevant to both Irish & UK tax resident clients. While not exhaustive, the following are examples of the issues that can arise:

Dual tax residence status

Many clients have dual tax residence status, meaning they are both Irish and UK tax residents. For example, Irish nationals can spend the working week living and working in the UK while also returning to Ireland every weekend and while doing so, accumulating wealth along the way. Navigating the two tax systems can be difficult, but with the right assistance and advice, it is possible to develop a financial plan which takes account of the tax regime of both jurisdictions. In several ways Ireland’s tax regime is similar to the UK - for example we have a tax regime for non-domiciled individuals for Income Tax and Capital Gains Tax (CGT). We also have similar rebasing rules for CGT purposes on certain events e.g. death. While expected to be improved, Ireland has a favourable CGT regime for entrepreneurs and an Enterprise & investment Scheme.

UK & Irish pension assets

Many clients have both Irish and UK private pensions, which can be defined benefit and/or defined contribution. They are also likely to have built up entitlements to both Irish and UK State Pension. The issues relevant to defined benefit pensions in the UK are just as much of an issue in Ireland with clients being offered enhanced transfer values (ETVs) in respect of their defined benefit entitlements. The decision whether to accept this offer is one that requires careful consideration and is an area in which we provide detailed planning and advice to clients.

There are also decisions for clients to make around whether to transfer a UK pension fund to Ireland or vice versa.

Estate Taxes

Cross-border estate taxes also play a large part in the advice provided to clients. This is because many hold assets in both jurisdictions and may be unaware that estate taxes can arise in both countries. As this is often overlooked, it is important to review a client’s asset base to determine the extent of the estate tax liability in both Ireland and the UK. Where taxes may be due in both countries, the Estate Tax Treaty should be consulted to determine whether any exemption or credit is available to mitigate the double tax charge.

When you first joined Goodbody, what were your goals in driving change within the company?

When I first joined, there was a definite need amongst the client base to have their financial plans and goals structured and delivered in a coordinated manner. This led to driving change in how we provide this service to clients. Clients respond very well to having a fully developed plan in relation to their evolving financial plans and to having a trusted advisor who is with them every step of the way in achieving their financial goals.

How would you evaluate your role and its impact over the last two years?

My role has deepened the tax expertise within Goodbody and as a result the service offering that we provide.

Seeing the benefit of the service to clients and colleagues is also very rewarding.

What do you hope to accomplish in the future?

I would like to continue to enhance the client experience at Goodbody. Many clients accumulate wealth in a variety of different ways and very often do not have access to or obtain fully rounded advice. It would be my desire for clients to have a single provider experience in relation to meeting their personal financial and investment needs.

“I think in times of significant global economic change it is vital for clients to closely monitor their financial plans and goals and to work closely with their financial advisor. It is also important to have an advisor that can provide an investment and tax offering to ensure that both are appropriately aligned.”

Website: https://www.goodbody.ie/

Written by Philippe Neefs, KPMG Luxembourg Transfer Pricing Leader

Since 1 January 2015, Luxembourg’s transfer pricing regime has been based on article 56 of the Luxembourg Income Tax Law (LITL), which introduced the arm’s length principle into local Luxembourg law. In addition, the Luxembourg tax authorities could also refer to article 171 of the Abgabenordnung, modified by the Law of 19 December 2014, which essentially states that taxpayers should be able to provide transfer pricing documentation sustaining the arm’s length character of all intercompany transactions.

On 27 December 2016 article 56bis was introduced, together with the publication of a new transfer pricing circular for companies principally performing intra-group financing activities. This new article, applicable as from 1 January 2017, gives taxpayers and Luxembourg tax authorities more guidance on how to apply the arm’s length principle in the context of a wider value chain analysis. It focuses on the comparability analysis based on the OECD’s five comparability factors approach. The comparability factors to be taken into account are the following:

1. Contractual terms of the transaction: the contractual terms should be found not only in the legal documentation, but should also be reflected in the accounting statements.
2. Functional analysis: a wider value chain analysis, as well as the ability to control the risks, should be outlined.
3. Characteristics of goods and services: differences in quality or availability of a product or a service should be considered.
4. Economic circumstances: product life cycle, market size, and the extent of competition should be taken into consideration.
5. Business strategies: risk diversification and innovation strategies that have a possible impact on transfer pricing should be examined.

The commercial rationale behind each intercompany transaction is also of outmost importance. If the commercial rationale is lacking, then a transaction could be disregarded. This has a critical impact as taxpayers must now be prepared to be able to document the commercial rationale as part of the transfer pricing documentation. Attention will need to be paid to pre-structuring documentation. Therefore a description of the Luxembourg value chain should take any no-tax reasons into account.

The circular published on the same day as article 56bis clarifies the transfer pricing rules applicable to entities principally performing intra-group financing activities (Circulaire du directeur des contributions LIR n° 56/1-56bis/1 of 27 December 2016). The scope of the application of the circular remains the same as under the 2011 transfer pricing circulars previously applicable in Luxembourg. Notably, it applies to all entities realising intra-group financing transactions, while holding activities remain out of its scope. The definitions of “intra-group financing transactions” and “associated enterprises” remain unchanged.

In this new circular, strong emphasis is put on the analysis of the risks assumed by the companies. In that regard, different factors need to be taken into account such as the solvency of the borrower, the potential guarantees for specific financing transactions, the costs in relation to the financing transactions, and the actual value of the underlying assets.

The circular further provides that if a company has a similar functional profile to the entities regulated under EU Regulation n° 575/2013 that transposes the Basel Accords, and the company has an amount of equity complying with the solvency requirements under this regulation, then it is considered to have enough capital to support the risks assumed. Moreover, as a safe harbour, it is considered that such a company complies with the arm’s length principle if its remuneration corresponds to a return on equity equal to 10% after taxes. In practice, it is not expected that many Luxembourg companies will fall into this category due to the particular nature of the required functional profile.

All other companies should perform an analysis to determine the necessary capital at risk using the widely accepted methodologies in this area. These companies must have the financial capacity to assume such risks. The level of capital at risk should correspond to the functional profile under review, meaning that the required capital at risk should decrease when the risks borne become more limited. It must be noted that there is no reference anymore to the minimum required capital at risk of 1% of the financing volume (capped at €2 million) that could be derived from the application of the 2011 transfer pricing circulars.

Furthermore, the circular provides that in order to be able to control the risks (i.e. the decision-making capacity), the company performing the intra-group financing transaction should comply with the following substance requirements:

1. The members of the board of directors, or the managers empowered to engage the entity in particular, must be residents of Luxembourg; the majority of the board members should also be Luxembourg resident or, if non-Luxembourg resident, should be taxable for at least 50% of their income (listed in the circular) in Luxembourg.
2. The company should have qualified personnel to control the performed transactions. However, the company could outsource some functions that do not have a significant impact on the control of the risks. This latter item still under debate.
3. The entity must not be considered a tax resident of a foreign jurisdiction.

The circular additionally provides for a measure of simplification, which a taxpayer can opt for should the following conditions be fulfilled:

1. No transfer pricing study has been prepared.
2. The intra-group debt receivables are financed by intra-group debt payables.
3. The company fulfils the substance requirements (as outlined above).

It will be considered that these taxpayers comply with the arm’s length principle if their remuneration corresponds to a return on the financed assets of at least 2% after taxes. However, these cases will be subject to exchange of information.

The circular specifies that it remains possible to obtain an Advanced Pricing Agreement based on the facts and circumstances of each case if the conditions outlined in the circular are respected. It further stipulates that any Advanced Pricing Agreement issued before the entry into force of article 56bis LITL should not be binding by the Luxembourg tax authorities as from 1 January 2017 for the fiscal years following 2016.

Although it is not indicated, it can be interpreted that a Luxembourg entity carrying out an intra-group financing activity that does not have the so-called organisational and economic substance would be considered a conduit entity and that this information can be exchanged spontaneously with concerned jurisdictions. It can be anticipated that tax audits in source jurisdictions may be initiated and that the beneficial owner status of the Luxembourg entity may be questioned.

In light of these developments, previous Advanced Pricing Agreements and defensive transfer pricing documentation need to be reviewed and possibly updated.

Additionally, on 27 December 2016 the law on non-public country-by-country (CbC) reporting transposing the EU Directive 2016/881 of 25 May 2016 into domestic law was published. This measure reflects OECD/G20 BEPS Action 13. On 12 July 2017 the Luxembourg tax authorities acknowledged and explicitly referred to the OECD’s guidance on the implementation of the CbC reporting. Nevertheless, it is important to note that Luxembourg has not yet implemented any measures that would transpose the Master File and the Local File requirements under OECD/G20 BEPS Action 13. The author hopes that Luxembourg will transpose these measures into its domestic law in order to fully comply with the multi-tier transfer pricing documentation standard. This would further confirm Luxembourg’s commitment to the greater transparency that is required today.

Notably, CbC reporting requirements apply to multinational enterprise (MNE) groups whose total consolidated group revenue exceeds €750 million (or an amount in local currency approximately equivalent to €750 million) during the previous fiscal year.

As a result of this legislation, constituent Luxembourg entities must notify the Luxembourg tax authorities as to whether they are an ultimate parent entity, surrogate parent entity, or constituent entity. If the constituent entity is not the reporting entity that will be filing the group's 2016 CbC report, they must provide the identity and tax residence of the actual reporting entity to the tax authorities. MNE groups with a fiscal year-end in 2016 had to provide this notification by 31 March 2017 (instead of 31 December 2016, which was originally the deadline). This notification procedure is performed online on a specifically dedicated website of the Luxembourg tax authorities. Luxembourg's new law requires the first CbC reports to be filed for fiscal year 2016 within 12 months of the last day of the reporting fiscal year of the group (e.g. 31 December 2017 if the 2016 accounting year of the MNE group ends on 31 December 2016). Failure to do so may entail a fine of up to €250,000!

As a conclusion, the above mentioned measures are welcome on the Luxembourg market, as they provide additional guidance on the application of the arm’s length principle. The new article 56bis LITL can be seen as a transposition of OECD/G20 Base Erosion and Profit Shifting (“BEPS”) Actions 8-10. These developments mirror international and European ones, putting Luxembourg on a level playing field. The author, however, anticipates an increase in tax audits and would advise the preparation of agile transfer pricing documentation. In this respect, readers must ask themselves the following questions with respect to their Luxembourg investment structures:

• Is your company engaged in any intercompany transactions (e.g. intercompany loans, management fees, license fees, etc.)?
• Are your intercompany transactions covered by a legal arrangement/part of your transfer pricing policy and are these agreements also reflected in your accounting system?
• Is there any transfer pricing policy available on the group/local level that covers all your intercompany transactions?
• Have you entered into any Advance Pricing Agreements with the tax authorities and have you checked whether the facts are still applicable?
• Does your group qualify for the country-by-country reporting requirements?