1. Changing tax regulations
The global landscape for tax laws and regulations remains dynamic, with a number of macroeconomic and geopolitical forces influencing domestic monetary policy and tax policy.
Indeed, policymakers are being pulled in multiple directions at the same time – be that dealing with the impact of the war in Ukraine, facing rising energy prices and interest rates, addressing inflation, or raising revenues to close budget gaps.
While the tax landscape is always shifting, the increasing speed and volume of changes can be challenging for organizations. In many cases, changes to tax rules have been in progress for some time, giving organizations time to plan. But the current economic climate has also prompted some swift legislative responses such as the US Inflation Reduction Act enacted August 2022 and the EU’s recent introduction of a ‘solidarity tax’ on companies with activities in the field of crude petroleum, natural gas, coal and refinery sectors.
In such a fluid environment, tax teams must remain vigilant in tracking latest developments to ensure timely consideration of new laws and regulations in the jurisdictions in which their organizations operate.
The tax accounting response
Companies must account for changes in tax laws and other new regulatory guidance in the period in which laws are (substantively) enacted or other new regulatory authoritative guidance is issued. It’s essential, therefore, that tax teams monitor global tax developments and assess potentially significant developments prior to enactment. These include potential impacts to the provision for income taxes and cash taxes, as well as data, systems and process requirements to calculate and report the effects of new laws and other regulatory guidance. Remaining proactive will enable tax teams to account for current and deferred tax effects, as well as any uncertain tax positions/treatments related to new tax laws and other regulatory guidance.
Additionally, tax teams should consider whether tax risk factors and qualitative tax-related financial statement disclosures provide sufficient information on the impact of enacted and pending tax developments.
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2. Tax controversy
The tax controversy landscape has evolved considerably in recent years. Interagency and cross-border tax information sharing, expanded tax disclosures, and digitalization of taxes have enhanced the transparency of tax matters and enabled tax authorities to look beyond traditional tax compliance filings to the underlying transactions, data, and issues driving taxable income.
Additionally, the use of risk-based assessments and remote audits have changed the way that some tax authorities manage controversy. Companies are expected to respond to controversy inquiries in an increasingly shorter timeframe. Tax teams should anticipate future tax controversy when calculating the tax provision and contemporaneously prepare documentation to support positions claimed on tax filings.
The tax accounting response
The growing number of taxes is making tax filings more complex and voluminous. This is prompting more questions from tax authorities. As such, companies should proactively plan for tax controversy to avoid duplication of analysis and inefficiencies related to compiling information. In anticipating controversy, tax teams should prepare “exam-ready” compliance and reporting workpapers to enable consistent and timely responses to inquires from tax authorities.
Tax teams also should consider implementing tax risk management systems to track tax reporting and tax controversy activities globally to ensure visibility to required tax filings, open tax years, and ongoing tax controversies. Tax risk management systems should plan for increased tax examinaton activity and enable remote tax examinations and digital responses.
3. Transactions and business developments
Beyond innovation and competitive disruptions, macroeconomic and geopolitical shifts are driving dynamic business changes. New products, services and business models are emerging daily, and companies are reassessing and updating strategies, capital structures, supply chains, and operating models. Often response to business change involves acquisitions or dispositions, internal restructurings, refinancings and deployment of capital to new focus areas of the business.
Tax teams must stay ahead of transactions and business changes to avoid unanticipated tax compliance and reporting consequences. New strategies, supply chains and operating models can alter existing tax structures and transfer pricing. New capital structures and changes in capital deployment can impact tax obligations and tax filing requirements. Acquisitions, dispositions and restructurings can have significant impacts on tax accounting and reporting. Discrete effects of business changes and transactions must be accounted for and changes to business as usual forecasts must be incorporated into projected effective tax rates and cash taxes.
The tax accounting response
Business developments and transactions can impact, among other things, historical assertions on measurement and realization of deferred tax assets, reinvestment of subsidiary earnings, recognition and measurement of uncertain tax positions, and transfer pricing. Tax accounting and reporting for these changes often disrupts routine tax accounting and reporting processes and strains tax teams that are already stretched to meet demands of their routine processes.
Tax teams should have a seat at the table when business developments and transactions are being evaluated, to ensure tax considerations are included in strategic decision-making and tax effects of these changes are timely evaluated and accounted for.
4. Sustainabilty and tax reporting
Sustainability, or ESG, commitments and initiatives are central to Board and C-suite strategies. Investors, employees, customers, suppliers and other stakeholders are demanding companies establish and achieve sustainability objectives. And while responding to climate change, ensuring supply chain integrity, and promoting social justice are prominent on companies’ ESG agendas, tax is an integral component of the sustainability journey.
Increasingly, governments are using tax policy to drive sustainability targets and investments. Carbon taxes and behavioral taxes (e.g., plastic, meat and sugar taxes) are among the more than 4,000 green taxes enacted or proposed across the globe. Also tax rebates, grants and other incentives are tools to encourage innovation, clean energy and other sustainable investments. And beyond new taxes and incentives, stakeholders are demanding greater transparency on companies’ social and governance tax responsibilities.
Local jurisdiction reporting requirements and global ESG reporting standards now demand a mix of mandatory and voluntary disclosures on companies’ tax strategies, approaches to tax controversy, transfer pricing policies, country-by-country tax results and total tax paid. Companies’ tax contribution to the communities they service and in which they operate is an important measure of companies’ social contribution, and companies’ compliance with tax laws and regulations, and commitment to tax transparency are important indicators of effective governances.
Now more than ever, companies are expected to go beyond traditional compliance and reporting to provide greater insight into the tax profile and affairs of their organizations to demonstrate their commitment to supporting sustainable outcomes.
The tax accounting response
Tax teams should understand the intersection of tax and sustainability, and engage in the sustainability agenda. Carbon, behavioral and green taxes are introducing additional reporting requirements and tax obligations. Many of these taxes require new data points that extend beyond traditional financial sources, including for example, the amount of carbon embedded in products or emitted into/extracted from the environment, weight of plastics, sugar content, etc. These new data points will require tax teams to engage differently with the business to understand the source, reliability and completeness of information needed to comply with green tax reporting.
Beyond new tax filings and obligations, tax teams should understand the mandatory and voluntary local and global sustainability disclosure requirements and align their company’s tax disclosures with the company’s overall sustainability agenda. Although country-by-country tax disclosures and total tax paid currently are not mandatory sustainability tax disclosures, these voluntary disclosure standards are in-line with broader tax policy initiatives on public country-by-country tax disclosures and increased tax transparency.
Tax teams should prepare now for the increasing scope and demands of tax reporting and incorporate the demands into data, system, process and technology investment plans to the capabilities to comply with these requirements are in place to meet the emerging demands.
5. BEPS 2.0 – Pillar Two
And finally, as companies look beyond their year-end tax provisions, BEPS continues to be in the tax policy and legislative spotlight around the world. While delays to local jurisdiction enactment have elevated uncertainty, there has been a series of recent developments that provided some clarity and foreshadow further developments.
At the end of 2021, the OECD released the Pillar Two Model Rules which define the scope and key mechanics for a global minimum tax regime. In March 2022, the OECD released the Commentary to the Model Rules and illustrative examples to clarify application of the Model Rules. At the time of writing, we are awaiting the OECD’s release of the Pillar Two Implementation Framework which will provide additional guidance and clarity. Meanwhile, several countries have initiated public consultation on potential legislation to initiate the legislative process to enact the Model Rules.
The tax accounting response
Tax accounting for Pillar Two will depend on substantively enacted tax law, which at the time of this writing has not occurred. Although the global minimum tax is not yet enacted, companies that may be impacted by Pillar Two should not delay preparing for eventual enactment.
First, it’s critical that organizations monitor developments in relevant jurisdcitions around the interpretation and enactment of the global minimum tax rules to avoid being surprised by enactment of new laws to adopt the global minimum tax.
Second, companies should assess the technical requirements of the Model Rules, as well as the corresponding new data, systems and process demands of the rules. The Model Rules represent a complex new global tax regime that is significantly different from traditional corporate income tax. The rules will require companies to compile many new data points to calculate minimum tax liabilities and facilitate new compliance and reporting.
Finally, companies should model the financial impact of the Model Rules and develop workplans to prepare for eventual enactment of these rules. For most companies impacted by the Model Rules, implementation of the rules, including interim and annual tax provisioning, tax compliance and tax controversy, will require significant changes to data gathering, tax reporting workflow, and tax processes and controls. Companies are encouraged to be prepared to meet any compliance requirements under the new enacted law.
We are entering a new age of tax reporting shaped by business disruption, evolving tax policies and sustainability. It is a landscape that is evolving at speed.
These tax reporting requirements require innovative and progressive thinking from tax teams. Not only will teams need to comply with new reporting requirements and handle additional tax controversies, teams must stay on top of evolving tax legislation, sustainability standards and continually changing business circumstances to ensure accuracy in tax reporting and deliver value to the business by capturing new opportunities that arise.