Audit Committee Bulletin: January 2014

A better way to deal with international tax disputes?

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With governments struggling to pay off their debts and companies squeezing every last ounce of profit from their operations, disputes over tax are becoming more frequent.

Tax authorities now work together and share information as never before. Following guidance from the Organisation for Economic Co-operation and Development (OECD), they have increasingly pressed for joint or simultaneous audits of companies and clamped down on loopholes.

As a result, companies need to manage tax risk and its implications, sometimes across many jurisdictions, much more proactively than in the past.

Companies need to tackle “here and now” tax issues, but they also need to consider how past transactions may be viewed against today’s standards of disclosure.

Reputation at stake

The challenge is as much about reputation and governance as it is about managing a company’s tax exposure.

Companies need to tackle “here and now” tax issues, but they also need to consider how past transactions may be viewed against today’s standards of disclosure, and how current decisions may be regarded in the future.

They must remain consistent in what they say about their tax affairs. With governments exchanging information, sometimes on a real-time basis and particularly about international companies, messages can quickly become mixed.

A tax treatment that might result in just a warning in one jurisdiction could result in criminal sanctions or a tough penalty in another.

A new role emerges — the Global Head of Tax Controversy

To address these challenges, some companies have created a new role — the Global Head of Tax Controversy. Audit committes should consider what value this model could add to their organization. Honeywell and Lego have taken this path, and insurer AIG recently appointed Nancy Chassman to this post.

Chassman says she works closely with senior management and the company’s regional tax controversy leaders “to ensure we are proactively and effectively managing our audits and tax litigation.”

She notes that while many tax authorities are aggressively expanding their enforcement activities, they are also seeking ways to improve collaboration with large businesses to resolve tax disputes. She is setting up a framework to implement a global tax controversy function to enhance AIG’s relationships with tax administrators around the world.

“I believe that, through cooperation with tax authorities, we will mitigate tax controversy and resolve tax disputes in a timelier manner,” she says.