EY - Feeling the heat of a global trend

Feeling the heat of a global trend

2014 Tax Risk and Controversy Survey

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In the last five years, companies have endured increasingly rapid changes to both tax policy and enforcement around the world.

The results of our 2014 survey of 830 tax and finance executives in 25 jurisdictions show that companies are experiencing and anticipating risks that make previous reports pale in comparison. Eighty-one percent of all companies surveyed agreed or strongly agreed that tax risk and tax controversy will become more important for their companies in the next two years.

Companies say their leading source of risk remains transfer pricing. This is consistent with findings in EY’s 2013 Global Transfer Pricing Survey, which found that 66% of companies identified risk management as their top transfer pricing priority.

In New Zealand, the IRD’s proactive approach to cross-border transactions is borne out by this survey.

New Zealand companies - feeling the heat of a global trend

  • Fifty-two percent of our largest companies feel tax authorities have increased their focus on cross-border transactions in the past two years, while 29% are reporting that tax audits have become more aggressive.
  • Companies’ major challenge is legislative risk and uncertainly – 78% ranking this number one,  higher than the 62 % globally.
  • A hefty 63 % have experienced an increase in disclosure and transparency requirements -  outpacing the 48% of companies globally.
  • In direct proportion to their escalating sense of vulnerability, 50% of New Zealand companies say they plan to introduce a role to their tax teams specifically to manage tax risk
  • Equally, 50% say they have experienced a tax administration seeking to develop a more open and collaborative relationship with their entity.

These findings leave us in no doubt that New Zealand companies are feeling the full weight of government moves to enforce corporates paying their ‘fair’ share of taxation. 

We have recently written in Tax Watch the key steps companies should consider when reviewing their tax risk management.

Risk increases around mobile employees and tax reporting

Dealing with policy and regulatory change is only one part of the landscape.

In second and third place as the major challenges faced by New Zealand companies are a more internationally mobile workforce (39%), and tax reporting operational or data challenges (35%).

Our survey shows that many companies may be using outdated tools in their everyday tax management – they may get the job done, but with less than optimal comfort.

When it comes to a mobile workforce, companies need to ask questions like “do we maintain a robust identification and tracking system for all members of staff and their immigration status?” to gauge whether their current practices are in line with ever-shifting immigration requirements and to ensure that they are safeguarding their most crucial asset - people.

Connectivity of Tax with the business increases

  • Seventy-nine percent compared with 82% of companies globally believe their tax function has significant or adequate involvement in the general business strategy and planning process.
  • Forty-six percent report that their company’s CEO and/or board of directors have increased their oversight relating to tax risk and controversy management over the past two years; for 50% it has remained the same
  • A high 87% of large companies regularly provide briefings or advice to the CEO and/or CFO on how tax risks and tax controversy are being managed

Further survey results

Where the tax function plans to spend its time

The top three focus areas for New Zealand companies in coming years are:

  • Strategic business transactions, first equal with effectiveness and efficiency of global tax compliance and reporting
  • Tax audit and controversy management
  • Internal control and remediation projects 

Technology use is rudimentary

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.

58% of all companies use no technology or rely on local personnel to manage tax audits and incoming data requests.

29% use internally developed software templates, e.g., Excel spreadsheets.

47% of all companies use no technology to manage tax modeling; similar to above, 24% use spreadsheets.

Results are similar for other areas of the tax function.

Revealed: how companies globally view the BEPs project

Nearly one-third (31%) of all companies surveyed predict the BEPS roll-out will be characterised by relatively limited coordinated action and by increased unilateral action by countries. Three-quarters (74%) of the largest companies surveyed (those with annual revenues in excess of US$5 billion) say they believe some countries already see the very existence of the OECD’s BEPS project as a reason to change their enforcement approach before any recommendations have passed into national law. The majority of these largest companies (61%) as a result fear that double taxation will increase in the next three years.

 It is clear from the findings of this survey that many companies may wish to consider enhancing their preparations and their tools in order to bridge the divide between current and future risk management frameworks.