Tax policy and tax administration are undergoing monumental changes, with more on the horizon. How are businesses being affected, and what does this mean for you?
Globalization is accelerating at an unprecedented pace. Economies are in flux, businesses are fighting for survival and market share at the same time, and governments are addressing this new environment by trying to protect revenues and collaborate with one another like never before.
Ernst & Young has identified several key factors that are driving change in the global tax controversy and risk management landscape:
- The accelerating pace of globalization
- The shifting economy
- The rapid succession of legislative and regulatory changes
- The changing model of tax administration
Four trends changing the face
of tax — and leading to a rise
in tax controversy and risk
These engines for change have been making a critical impact on your business — an impact that you need to understand and act on.
Around the world, companies have been striving to achieve success in an increasingly competitive global marketplace, even as they address the challenges of economic turmoil. Shifting flows of capital have re-balanced economic influence from west to east, giving rise to a new global economic middle class and interconnecting global economic fortunes. Companies around the world have had to re-frame their decision-making processes and look to emerging markets in their efforts to grow and become more efficient.
Meanwhile, the financial market distress and resultant economic downturn of the past year have hit every industry and every part of the world hard, straining even those businesses with the most solid foundations. Businesses have had to search for further efficiencies wherever they could be found — in the workforce, in the supply chain and within their own organization.
For each change that businesses have had to make, governments have had to consider how to react. They have adapted their tax policies and adjusted their administrative approach to more effectively compete for international business and investment while collecting the revenue they need to address growing deficits and increased spending needs.
Tax administrators today face significant challenges in understanding the complexities of new business structures and transactions, as well as the dynamics created by an expanding global footprint for people and businesses.
Governments are looking to their tax administrators to rise to these challenges and deliver fair tax administration to very complex global businesses in a time of significant change. In doing so, they are:
- Attempting to create more efficient dispute resolution tools
- Refining their risk assessment models
- Sharing and collaborating more
- Focusing on enforcement as a way to make sure they collect the amount of taxes they consider are due
The result: complexity, uncertainty and, increasingly, controversy.
This is the reality tax directors, C-suite executives and board directors grapple with every day. You don't need to look far for evidence. Reports of billion dollar tax settlements have made front page headlines, and individual corporate executives are increasingly being held accountable for tax planning decisions. The financial and reputational risks of ignoring new global tax realities have never been greater.
However, companies that consider and effectively plan for controversy before it happens and incorporate tax risk management into their strategic decision-making can reap benefits. They can:
- Achieve greater certainty and gain greater flexibility in their ability to plan
- Release significant amounts of cash from the provision
- Reduce their tax compliance costs
- Free up their best people from managing complex tax controversies and litigation
And through the enhancement of their relationships with tax administrations, they can increase their prospects of a lighter tax audit focus in the future.
In a world where cash remains tight and the best people are always in significant demand, these are compelling reasons to get tax controversy and risk management strategies right, over and above the financial and reputational risks that are increasingly at play.