Óscar Hernández has spent the last 11 years working in the Forensic department of Deloitte. His current position is Director, with a primary focus on financial fraud investigations and the preparation of expert witness reports, as well as the defence of the expert report in the Court (during the judgement).Here, Óscar talks to Finance Monthly about financial crime in Spain, recent changes to the criminal justice system and offers advice for companies on how they can protect themselves from fraud.
Financial crime is becoming more and more prevalent - what legal remedies are available to businesses that fall victim to financial crime, especially fraud?
In Spain both the legislation and the sensitivity of companies, especially some financial institutions, despite the improvements, are still very far from those in other neighboring countries, such as the United Kingdom, Germany or Switzerland. There is still no developed fraud prevention culture in Spain, which is why companies tend to act only reactively. In order for the damage suffered to be mitigated as far as possible, from the instant the fraud is identified, the company must put itself in the hands of its legal advisors. From a forensic point of view, it is essential to preserve the evidence of the possible crime in order to face possible legal proceedings that could be initiated and aimi to mitigate as much of the economic damage suffered by the company as possible.
How has the criminal justice system changed in recent years to combat the increased sophistication of fraud? What have been the significant changes?
The Criminal Code has been modified in recent years in order to provide judges and prosecutors with more powerful tools for the fight against corporate fraud and organized crime. Among other reforms, the assignment of criminal liability for legal persons, modified penalties for fraud and revised punishment for corruption in business (payment of bribes to politicians and officials) stand out. Although there is a social environment that is very sensitive to the many cases of political corruption that affect many institutions, there still exists some tolerance and permissiveness in relation to the submerged economy. These newly introduced reforms are on the right track, but still not enough.
What are the trends in Spain, in terms of the types of financial crimes that are being committed? What factors drive crime in certain sectors, for example the financial sector?
The most relevant fraud cases in Spain are closely related to political corruption. This corruption is intimately linked to corporate corruption and bribery, with the ultimate goal of achieving public work awards circumventing the legal awarding procedures based on quality and price. With regards to the financial sector, since the beginning of the financial crisis almost ten years ago, there have been a number of financial scandals related to the management of Savings Banks. Many of those entities have disappeared as a result of the crisis itself, but also due to ruinous investments made by the former management, payment of millionaire pensions and unjustified expenses.
What precautionary measures can companies take to protect themselves against fraud?
The reform of the Criminal Code and the attribution of criminal responsibility to legal persons have led to greater awareness of the companies’ Boards of Directors against financial crime. A greater development of proactive fraud prevention policies is being noted, especially in large companies, with the proliferation of Ethical Codes, Whistleblower channels and action protocols for fraud situations.
What are the complexities and challenges of investigating accounting irregularities?
Most of the fraud investigations related to accounting manipulation in Spain are mainly aimed at the upward manipulation of revenues, with different objectives such as achieving budgeted results or EBITDA, that are linked to the variable compensation of the Management, the makeup of the results for the possible sale of the company, etc. The investigation of these irregularities is very thorough and is based, most of the times, on the use of technological tools focused on communications review and data analytics.
What are the specific challenges that you are typically faced with when working on financial crime cases?
In recent years, fraud investigations have become increasingly complex. The fraudsters are getting more and more “professional”, which on many occasions forces us to adapt the investigation strategy on the fly and introduce even more technology in the investigations. It is becoming more necessary to have an open-minded attitude in order to be able to put ourselves in the fraudster’s shoes.
Kunj Vaidya has been recently given the responsibility for Price Waterhouse & Co.’s transfer pricing practice. Prior to taking over this mantle, he had been involved in setting up and establishing transfer pricing practices in Chennai and Sri Lanka, where PWC is now established as a market leader.
Kunj has practiced transfer pricing in the USA, Australia and India. Since relocating back to India in early 2010, his primary focus has been to help clients plan well in advance and thereafter, provide certainty using various dispute resolution mechanisms. A large part of his role as the national leader will include ideating new solutions and strategies for their clients including significant use of technology, to deliver value to clients. Here Kunj tells Finance Monthly more about his new role and sheds some light on transfer pricing in India.
What is your take on Indian transfer pricing compliance? How are you advising clients on approaching this?
Traditionally, transfer pricing compliance was aimed at providing specific and largely one-sided pieces of information along with certification of reported numbers.
In October 2015, three-layered transfer pricing documentation requirements have been recommended, as part of the final reports on Base Erosion and Profit Shifting (BEPS) initiative of the OECD and G-20 countries. Most countries, including India, have adopted these requirements.
Global corporations are now required to document and present information regarding the ownership and operational structures, key transaction flows and pricing policies within the group. This documentation necessitates a holistic view to be considered by corporations, requiring involvement of their business teams.
Corporations need to consider transfer pricing while taking strategic decisions, and not as a post facto compliance exercise.
How have transfer pricing audits evolved in India?
In the last 15 years or so, the audit focus has matured from routine issues, such as requirement of high mark-ups for services and disallowances of royalties/ service charges to also complex issues like re-characterisation of transactions, valuation of intangibles, location savings, compensation for advertisement, marketing and brand promotion spends, etc.
In early 2016, the procedure for selecting cases for audits was overhauled to focus on cases with high potential of transfer pricing risk.
We are experiencing a different undertone in TP audit approach across the country. Taking guidance from the BEPS Reports, the audit approach is increasingly leaning towards understanding the business of taxpayers – including meeting with business teams. Another area is active exchange of information with overseas tax authorities.
How should the audit approach evolve from here on?
We believe that audits should happen in a more cooperative and amicable manner.
With the introduction of three-layered documentation, the ‘big picture’ of a corporation will be available to tax authorities, It is hoped that selected parts of this documentation are not used against taxpayers without appreciating the entirety of surrounding facts and circumstances.
In our ongoing recommendations to the Government, we have recommended audits to be conducted in a block of say 2-3 years to consider business life-cycles, this would provide a larger picture of the business to the authorities and would also reduce audit efforts for taxpayers.
How have outcomes been for taxpayers at higher levels in appeals?
First level appellate forums are from within the tax administration, and success rate for taxpayers at these levels has been rather low.
The second level appellate authority - the Tribunal is outside of the tax administration. Tribunal rulings have been rather rational and success rate for taxpayers across the country has been relatively very high.
How do you help companies manage transfer pricing issues and what strategies do you implement in the tax risk analysis to assist your clients effectively?
With the ever increasing focus of tax authorities globally on transfer pricing, companies need to plan transfer pricing approaches upfront, We have helped several companies in setting up transfer pricing policies to meet their business objectives, at the same time prepare them adequately from possible challenges in future.
In cases where we foresee potential risks, we believe that transparency is the best strategy. Our advice to clients has been to disclose pertinent facts and discuss relevant issues upfront with tax authorities. This is where I believe the Indian APA program has also been very helpful!
Has the Government taken any initiatives to ease transfer pricing burden on corporations? How satisfied are you with these efforts?
The Government is acutely aware of the challenging transfer pricing scenario in India, and how it has been impeding foreign investment into the country. The Government has been consciously bringing global best practices to India.
One key measure which has received resounding success in India is the APA program. The feedback from the taxpayer community for the program has been extremely positive (including Bilateral agreements with Japan, UK, US).
India also introduced safe harbour rules a few years back, but the program has had little success. However, I understand that the safe harbour rules are being revisited and rules with a more rational outlook may be issued sometime soon!
What changes do you see in the importance companies attach to transfer pricing?
We have witnessed a sea change here – from being seen as a compliance burden, increasingly, transfer pricing issues have even caught the attention of the CXO suites. In fact, corporations are increasingly realising that transfer pricing is also a reputation and governance issue for them.
What role does technology play in transfer pricing and how feasible is this for corporations to adopt?
Technology will increasingly play an important role in transfer pricing. Corporations will need to be able to use technology to build and manage frameworks to ensure that transfer pricing policies are followed, ensure compliance with terms and critical assumptions agreed in an APA, identify red flags or exceptions, and to report key indicators to the management and other stakeholders.
Use of technology in transfer pricing in the above areas could be fairly new but corporations will need to find a way to integrate technology and transfer pricing,
Another way of looking at technology is how it will play a role in the value chain of companies including those operating in traditional businesses.
As a national leader in transfer pricing - how are you developing new strategies and ways to help your clients?
Our endeavour is to help clients look around the corner and prepare them for what is to come!
In recent times, our key focus areas have been the following:
- Conceptualising and developing technology tools to help clients manage their transfer pricing function. We also help clients assess risk in their existing operations using our internally developed data analysis tools.
- Facilitating dialogue between taxpayer fraternity and the Government on transfer pricing matters.
- Helping clients understand the implications of ever-evolving legislative developments on their transfer prices, including, for instance, aligning GST and transfer pricing, understanding transfer pricing implications of migrating to Ind-AS (Indian IFRS equivalent) reporting environment, leveraging transfer pricing compliances for corporate law requirements around related party transactions, implications under General Anti Avoidance Rules (GAAR), etc.
- Strategizing transfer pricing dispute management – including litigation strategy; and proactive dispute resolution options.
What do you see as potential innovative solutions by the Government for some of the transfer pricing issues corporations are facing?
The Government is keen to improve ease of doing business in India, and give a push to some of its pet programs such as ‘Make in India’.
The Government may consider some solutions such as joint customs and transfer pricing audits for imports; joint audits by different Governments and their agreement on pricing; audits for a block of years together; settlement options for transfer pricing disputes etc. Another area, which is beginning to find acceptance in EU is the use of arbitration to resolve transfer pricing and international tax disputes!
One of the thrust areas of the BEPS initiative is effective dispute resolution. The Government should consider providing bilateral transfer pricing dispute resolution window to residents of all tax treaty partners, rather than only few countries currently.
What do you see as the future of transfer pricing?
Going forward, Governments will increasingly use technology for transfer pricing risk assessments and risk management. We have also started seeing increasing cooperation and exchange of information between Governments. There will be increased emphasis and reliance on value chain analysis and insistence on use of profit split methods, as more global information becomes readily available.
The future of transfer pricing lies somewhere in being proactive, better relationships, more transparency and cooperation between Government and taxpayers.
