TelcoFix Inc., which is headquartered in the U.S.A., is in the business of providing on-demand streaming services (e.g. movies, TV shows, documentaries, etc.) over the internet to users globally for personal use. Its annual global revenue is more than USD15 million. TelcoFix Inc. provides users in Malaysia with unlimited access to video content that is accessible through its website, for a monthly subscription fee.

TelcoFix Inc. owns the core technological intellectual property, including a proprietary streaming technology, content delivery network, and user interfaces. The streaming content and user interfaces (website and mobile apps) are stored on servers physically located in the Netherlands.

The TelcoFix group does not have any entity or office in Malaysia for the supply or delivery of streamed content to Malaysian subscribers. Further, TelcoFix Inc. does not:

• Have or operate a server in Malaysia;

• Use, operate, own or lease any equipment located in Malaysia;

• Employ any personnel in Malaysia;

• Have an office in Malaysia;

• Have any agents in Malaysia for the sale or delivery of content to Malaysian

  subscribers

  TelcoFix Sdn. Bhd., a Malaysian subsidiary of the group, provides local support services to TelcoFix Inc., including local marketing, and acts as a collection agent for the monthly subscription fees received on behalf of TelcoFix Inc. from Malaysian subscribers. TelcoFix Sdn. Bhd. earns a fee from TelcoFix Inc. for such support services on a cost-plus-mark-up basis.

  TelcoFix Inc. has adopted the position that it is not liable to pay any taxes on the subscription income from Malaysia in the absence of core operations in Malaysia as well as physical presence of an office, server or agency in Malaysia. The TelcoFix group has been on the radar of the Malaysian Inland Revenue Board (MIRB) as well as the media and is expecting a detailed scrutiny of its tax structure, filings, reporting and disclosures. At the same time, a risk review has been initiated by the tax authorities in several European Union (EU) countries.

  Further, as revenue authorities in more and more countries are using technology to directly review the financial records of businesses, including using data analytics

throughout the process, the Board of TelcoFix group is concerned that the group may be ill-prepared to manage the ever-increasing global tax compliance and reporting obligations due to the current lack of a central management and organization of its compliance function globally.

Requirement:

The Board of the TelcoFix group is re-evaluating its tax affairs, particularly in view of the ongoing developments around the Organization for Economic Co-operation and Development (OECD)’s Base Erosion and Profit Shifting (BEPS) Action Plan, taxation of digital and e-commerce businesses, transfer pricing and the local tax law reforms in different countries. It has asked EY to assist with the risk analysis and transformation.

As the EY representative, you are required to make a presentation to the Board to address its concerns, focusing on the key risk areas from a direct and indirect tax perspective given its current business model and tax positions adopted, as well as offer recommendations to mitigate the identified risk areas. The key strengths and challenges in implementing the said recommendations should also be highlighted. The Board is also interested in understanding how the group can rely on technology to better manage its tax affairs, and how EY can assist in this aspect.

Answer rating: 100% (QA)

ANS WER 1 Key risk areas from a direct and indirect tax perspective given the current business model and tax positions adopted The main key risk areas from a direct and indirect tax perspective given ... View the full answer