Companies and governments say global tax landscape more volatile and contentious and expect more controversy in years to come
- More companies see aggressive, more frequent audits as tax administrations around the world say they are becoming more aggressive and focused on cross-border business deals, value-added taxes and transfer pricing.
- Rapid pace of legislative change creates more tax risk and uncertainty, raising the stakes for companies expanding into new emerging markets.
- Companies report rising demand for documentation of transactions, particularly by tax authorities in the fastest-growing markets such as China and Brazil.
LONDON, 17 November 2011 – Business executives, tax administrators and tax policy-makers agree: the world has entered a period of elevated risk for tax controversy. Ernst & Young’s new 2011-2012 Tax risk and controversy survey: a new era of global risk and uncertainty, released today, reports the dramatic shift in the global economy is having a significant effect on tax policy, enforcement and businesses by forcing companies and governments into more clashes over tax laws and how they should be enforced.
The global survey is based on interviews with 541 senior tax and finance executives. It also incorporates interviews with audit committee members, tax administrators and tax policy-makers across 18 countries. The new report reveals deep concern among corporate executives over the current and future levels of tax risk and controversy. Among the findings:
- Audits are more frequent and aggressive, making them more costly to defend or litigate.
- Tax assessments and penalties have now entered the realm of billions of dollars.
- Companies face unprecedented scrutiny and reporting of their tax affairs by advocacy groups and the news media.
- The volume of tax information exchange agreements has increased by more than 1,000% while joint and simultaneous tax audits have gone from concept to reality.
- Yet, governments and companies are taking steps to improve their relationship.
Mark Weinberger, Global Vice Chairman – Tax at Ernst & Young said, “Governments and businesses are facing new and increased challenges in the uncertain and volatile economic environment. Tax directors increasingly have to become ‘tax diplomats,’ responding to more scrutiny from the C-suite, tax administrations, audit committees and even the media. Governments who need revenues to deal with fiscal issues are increasingly working together to assess taxpayers transactions and filings, finding new ways to lay claim to cross border revenues. Businesses are becoming more transparent with their tax positions and preparing for challenges before the traditional audit process even begins. The joint desire is more certainty and consistency.”
Tax administrations around the world become more aggressive and focused
Seventy-five percent of companies in the survey say they have experienced a rise in the volume or aggressiveness of tax audits. Ninety-seven percent of tax administrators also say they will increase their focus on tax risks related to international structures and cross-border transactions in the next three years. For companies, transfer pricing and indirect tax lead the list as the top two tax risk issues, and 57% of tax administrators also identified transfer pricing as their leading tax risk focus area.
This increase in tax enforcement will be aided by a broad range of new requirements for business taxpayers to disclose more information to the taxing authorities. Seventy-eight percent of tax directors and CFOs report that they have experienced an increase in disclosure and transparency requirements made upon their company in the last two years. These percentages increase with US-based companies at 83%, China-based respondents at 85% and Brazil-based respondents at 88%.
“Countries are looking for more from their tax systems as they struggle to get control of their budget deficits,” Weinberger said. “Tax administrators have plenty of new tools and unprecedented access to information. We’re now seeing evidence they will be scrutinizing taxpayers more closely for years to come.”
Rapid pace of tax law changes worldwide creates more risk and uncertainty
The world’s biggest companies are also concerned about rapidly changing tax laws around the world. Seventy-five percent of tax directors in companies with more than $5 billion reported heightened risk or uncertainty around tax legislation. The figure rises to 78% for companies based in Brazil, Russia, India and China. Additionally, companies cited emerging markets as the source of their greatest risk related to legislative change.
Vladimir Gidirim, Partner, International Tax Services, says: “cross-border tax planning activity by multinationals has to adjust to those new global controversy challenges. Old-fashioned approaches seeking mere tax minimization and lacking a holistic and comprehensive alignment with company's overall strategies more often than not result in costly tax litigation. Recent tax cases across the world, especially in APAC region set a clear scene for anti-tax avoidance challenges to be pursued by fellow tax administrations. Multinationals must reconsider their tax risk management function by incorporating it into the strategic management process stretching across the whole value chain. Tax directors should be supported by management boards in adopting a global approach to tax controversy and risk and in allocating adequate resources to those. Substance considerations and business purposefulness of international transactions become key factors in managing tax controversies successfully.”
Seventy-three percent of companies in the survey said entering or operating in these and other emerging markets significantly increases their risk of tax controversy. And 92% of China-based and 62% of Brazil-based companies say they’ve been audited more frequently and aggressively in the last three years.
Weinberger said the survey also reports some encouraging trends: for example, taxpayers and the tax administrators are working harder to prevent unnecessary conflict by building stronger relationships and creating processes to provide for dispute resolution on an expedited basis. The survey reports more interest by companies and administrators to develop these enhanced relationships, which follow good-faith guiding principles and behaviors on the part of the taxpayer and the tax administrator in a quest to achieve fairness and efficiencies for both parties.
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