2014 tax risk and controversy survey highlights
The right tools are essential to climb a mountain not only triumphantly but safely; our survey shows that many companies may be using outdated tools and approaches to manage tax risk.
Companies are spending more time managing tax risk and controversy. Survey respondents say they are spending slightly less time on financial reporting and tax planning than in 2011 (about 5% and 6% less among the largest companies) and more time on managing routine compliance and disputes/controversy (about 9% and 11% more among the largest companies).
Connectivity between tax and the rest of the business also continues to grow strongly. Eighty-two percent of all companies surveyed believe their tax function has significant or adequate involvement in the general business strategy and planning process.
Fifty-one percent report that their company CEO’s and/or board of directors’ oversight relating to tax risk and controversy management has increased over the past two years, while only 1% report that it has decreased. And 81% of large companies regularly provide briefings or advice to the CEO and/or CFO on how tax risks and tax controversy are being managed — a 53% increase since 2011.
|New or refreshed tax controversy policies|
Effective management of complex tax issues relies upon effective policies. Not surprisingly, 55% of all companies report either creating or refreshing their tax risk or tax controversy policy in the last two years as a direct result of the focus on taxes paid by multinational companies.
Fifty-three percent of all company respondents say they have increased the overall size of their tax function since 2011. Of these companies, 55% attribute the increase to a direct response to the changing tax environment described in this report. But three in four large-company respondents say that insufficient tax function resources may still be contributing to increased tax risk or controversy.
That is up from 57% in 2011.
The effective deployment of tax function resources may be even more important than their overall number. Indirect taxes and withholding taxes are both areas of significant change and growth for government policymakers.
|Who's managing indirect taxes?|
Both have a direct impact on the corporate bottom line, but our survey data shows that there may be a lack of clarity about who manages what within the enterprise: 71% of respondents from the finance or accounting department said their department managed indirect taxes, but 65% of people in a tax role said the tax function was in charge.
When asked who is responsible for managing VAT, 71% of respondents in a finance role, including 68% of CFOs, said the finance/accounting department was in charge. 65% of people in tax roles said the Tax department was in charge. 71% of large companies say they don’t have a global indirect tax director.
That’s a big divergence for what was reported to be the second-highest tax risk for business, and the same may also be said of withholding taxes. At best, this leads to the inefficient use of resources; at worst, it drives significant risk of trapped tax, new disputes and financial penalties.
Survey data also indicated a fall in the number of companies who reported having a single, readily identifiable individual who has overall responsibility for managing tax risk within the enterprise, from 81% in 2011 to 69% in 2014. Getting the mix of people, processes and technology right is important because companies say they are typically juggling a significant volume of disputes.
|Visibility of open disputes and audits|
For example, more than half of companies reported over 11 disputes and 7% said they had more than 100. Just 3% of the largest companies reported having no active disputes. Yet only 43% of large companies globally (i.e., those who may reasonably be expected to have the largest number of disputes) say they have “complete visibility” over open tax audits and disputes around the world.
The good news is that companies appear to know that the right tools can make all the difference. Sixty percent of global companies say that a lack of processes or technology may contribute to increased tax or controversy risk. But identifying a problem is easier than solving it.
Large numbers of companies report using rudimentary technology — or no technology at all — to manage tax audits and ever-increasing requests for information and data from tax authorities. Forty-three percent of all companies use no technology or rely on local personnel to manage tax audits and incoming data requests.
|Managing tax audits|
An identical proportion use internally developed software templates (e.g., Excel spreadsheets) while 8% use an internally developed software application (e.g., Microsoft Access or other custom programming). Twelve percent use software provided by an external vendor, outsourcing, accountancy or professional services provider.
These figures are only slightly higher for the largest companies, where 16% of the largest companies use software provided by an external vendor, outsourcing, accountancy or professional services provider. Our survey shows similar results across other areas where better use of technology might improve responses to tax-related information management.
Of course, even the best technology has limited utility if it is not combined with the correct resources, processes and communications — all of which companies tell us they are struggling to deploy in the face of so much change.
Companies also indicate they lack the resources to meet anticipated new demands for greater information reporting and transparency, including the OECD’s proposed country-by-country reporting and transfer pricing documentation requirements. Just 62% of all company respondents believe they have sufficient reporting systems in place to gather and provide that information.
The rapidly-developing tax risk landscape is clearly driving more and more companies to test their internal controls. Seventy-six percent of the largest companies surveyed say they have a testing and review process as part of their controls environment within the tax function.
This is a 62% increase from 2011. Many companies are also taking the opportunity to document their controls in ways that exceed regulatory requirements.
Among the same population of largest companies, 46% say they document their controls in the jurisdictions where this is required. Twenty-one percent say they document them in the jurisdictions where this is required and also some others. The same percentage (21%) say they document their internal controls in all jurisdictions in which they operate, whether or not it is required.
Sixty-two percent of companies also said they changed the way they document transactions for tax purposes during the last two years. For companies operating in the BRIC nations, that figure increases to 77%. Almost twice as many respondents (91%) cited a desire to reduce compliance risk as the leading driver of this change, far ahead of improving their internal data sharing capabilities (46%).
|Increasing importance of tax risk and controversy|
Overall, 81% of the largest companies surveyed agreed or strongly agreed that tax risk and tax controversy will become more important for their company in the next two years. But companies are also actively engaged in other activities.
On a global basis, companies said managing strategic business transactions and managing tax audits and controversy were their two leading priorities. Yet the survey data reveals significant regional differences of opinion and focus.
Among Americas companies, for example, management of the effective tax rate is the leading focus area by some distance. Among Asia-Pacific and EMEIA company respondents, however, effective tax rate management ranked fourth place, behind strategic business transactions, managing tax audits and controversy, and securing the effectiveness and efficiency of global tax compliance and reporting.
Overall, it would seem that as the external pressures mount, the air is becoming a little thinner in the tax function.