New Ernst & Young report highlights business risks and opportunities arising from global tax policy and administration shifts
LONDON, MOSCOW, 17 DECEMBER 2009 – Businesses and governments alike are being challenged to find new ways to succeed in an increasingly competitive global marketplace, even as they struggle to stay afloat amid a worldwide economic downturn. According to Ernst & Young’s new “Tax administration without borders” report, their actions, and reactions, are reshaping the landscape for tax policy and administration.
“Like global businesses, governments have had to respond to a changing, and challenging, business environment,” explains Mark Weinberger, Ernst & Young’s Global Vice Chair - Tax. “They are adapting their tax policies and adjusting their administrative approaches to more effectively compete for international business and investment while also collecting sufficient revenue to address growing deficits and spending needs. This has resulted in prolific tax rate and structure changes, along with increased cross-border controversy – trends that will rise before they fall back.”
Tax authorities around the world are adopting a more global approach – cooperating and collaborating more than ever – and seeking greater efficiency, expanded audit coverage and more effective compliance and enforcement efforts. The by-product, for many multinational companies, has been increased complexity and risk that is moving tax controversy up the agenda not just in the tax department, but for the C-suite and board as well.
Beyond these challenges, though, the report points out that evolving tax administration models – which often feature expanded dispute resolution alternatives and more open communication – also provide new opportunities for companies and governments to work together to achieve greater certainty on potentially contentious tax issues.
“Companies that incorporate tax risk management into their strategic decisions and proactively manage their risks and relationships with the tax authorities can reap significant benefits,” says Ernst & Young’s Debbie Nolan, a former Commissioner of the US Internal Revenue Service’s Large and Mid-Size Business Division. “They can add to the bottom line by freeing up cash from their tax provision and reducing time and costs, which is important for all businesses regardless of their geographic footprint – but essential for those with a global reach.”
“Tax Administration Without Borders” outlines the factors driving rapid changes in the tax landscape and practical recommendations to help companies better manage controversy and risk and improve their relationships with tax authorities. It features candid insights from top government officials and tax executives, exclusive survey data and insights from Ernst & Young's global Tax Policy and Controversy network.
Most of the trends identified in the report are directly relevant to Russia, even though in some areas Russia is lagging behind and focuses more on domestic than on cross-border issues. Having said that, the Russian tax authorities have been trying to take a risk-based approach for the last two and a half years, assessing a taxpayer’s profile before commencing a field audit. At a meeting in Moscow between Mikhail Mokretsov, Head of the Federal Tax Service, and Mark Weinberger, Ernst & Young’s Global Vice Chair–Tax, Mr. Mokretsov confirmed that he expects this trend to continue.
“We see more and more instances where the Russian tax authorities are actively engaging with their foreign colleagues during tax audits of Russian groups,” says Petr Medvedev, Ernst & Young Partner and Head of Tax in the CIS. “In one recent case, they sent requests to US, Irish and Swiss tax administrations, which responded under the respective double tax treaties. Even a couple of years ago this would have been completely unheard of.”
Tax administration trends and findings
Tax administrations are looking at tax through a multinational lens
- On both a formal and informal basis, they are building stronger working relationships with counterparts around the world – sharing best practices and information in an effort to address common cross-border challenges and internal issues, and resolve common taxpayer-specific issues. More than 140 new Tax Information Exchange Agreements have been signed in 2009 to facilitate greater information sharing. Groups such as the OECD Forum for Tax Administration and Joint International Tax Shelter Information Centre (JITSIC) – which now has offices in both Washington, D.C. and London – provide regular forums for collaboration among tax authorities.
Tax administrations are being charged with stabilizing revenues despite economic challenges
- They are increasing enforcement and stepping up penalties to collect what they consider to be their fair share of increasingly global revenues. They are expanding audit coverage and compressing the “audit cycle.” They are focusing on high-yield issues through improved risk assessment of taxpayers.
And, importantly, they are extending accountability beyond the tax function — to C-suite executives and even the board of directors. In a 10 December presentation, US Internal Revenue Service Commissioner Douglas Shulman stated. “My goal is to promote good corporate governance on tax issues and engage the corporate community in a dialogue about the appropriate role of the board of directors in tax risk oversight.” Additionally, the UK requires senior accounting officers (SAOs) to certify that they have “appropriate tax accounting arrangements” in place. The penalties for failure can be applied both to the company and the SAO personally.
Tax administrations are focusing their resources and efforts on perceived areas of risk and abuse, and other high-value opportunities.
- Tax administrations have been focusing on getting tough on high risk areas. The top issue for many tax administrations is transfer pricing. In Ernst & Young’s recently published 2009 Global transfer pricing survey, tax authorities indicated that they are increasing their dedicated transfer pricing resources and that more transfer pricing audits, penalties and disputes seem likely.
Other areas under the microscope include: treaty shopping, intellectual property, permanent establishment, high net-worth individuals, short-term business visitors, share-based remuneration schemes, cross-border transactions and withholding.
Leading practices for businesses
Companies are adopting effective global tax risk management approaches
- They are building relationships with key tax authorities to establish credibility, collaboration and a compliant reputation. They are making an effort to understand their tax authorities’ approaches and focus areas, and proactively addressing potential issues. They are involving representatives from across the enterprise to ensure the development of a holistic and comprehensive tax risk strategy. And they are preparing their strategy and processes to support increased board level engagement.
“Leading companies are making it a priority to understand the unique rules of engagement and build relationships with tax authorities in each jurisdiction,” said Bob Brown, Global Director of Tax Controversy at Ernst & Young. “Businesses and tax authorities will continue to be interlinked in either cooperation or controversy – so it’s up to corporations to invite the former and prepare for the latter. This is not a time to rely on the old ways of doing business – it is a time to embrace change.”
To view the full report and findings, please visit www.ey.com.
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