In the enforcement area, increased scrutiny, while widely expected by respondents, is likely to vary widely by country. Geographic hotspots will continue to present challenges, while many tax administrations are likely to move ahead with new digital data submission requirements and broader transparency and disclosure laws. Italy, Mexico, Poland and the United Kingdom have all seen new disclosure developments recently.
A number of countries are already known to be scrutinizing the largest MNCs more closely than before, looking for any tax uncertainties that may drive new tax audits and subsequent settlements. Several such countries have already announced tax settlements in the hundreds of millions, even billions of dollars, with extensive media coverage accompanying these developments. More countries may see that and follow suit.
New “forensic” tax audits and documentation requirements
Respondents’ concerns are based on real-world activity. In Japan, the resumption of audits in October featured fresh scrutiny of multinational companies’ cross-border transactions, as well as creating new requirements demanding near-forensic levels of supporting documentation.
Japan’s National Tax Authority also reports that transfer pricing adjustments have tripled in the last three years, from $2.2 to $6.6 billion.2 Japan is unlikely to be alone in doing so.
Transfer Pricing documentation is also being examined from a customs perspective in Japan, says Yoichi Ohira, a partner in the EY global indirect tax network, reflecting a broader move in this direction. Many tax authorities in Asia-Pacific are now asking importers to explain their approaches in far more detail, with Ohira forecasting heightened scrutiny of the origin certificates used to claim duty-free status bestowed by free-trade agreements.
Indirect taxes on the rise
While VAT fell in many countries during first months of the pandemic (albeit temporarily in some and in a very targeted manner in most, benefitting the travel and entertainment sectors and the purchase of both Personal Protection Equipment and basic foodstuffs), the direction of change was not universal. In May 2020, for example, Saudi Arabia announced it would triple its VAT rate from 5% to 15%, in effect abandoning a long-term plan to introduce VAT at a low level and raise it gradually.3 Colombia, Oman, Qatar and Ukraine similarly look set to have higher VAT rates in 2021.
Europe is also likely to experience a rising indirect tax burden in 2021, says Gijsbert Bulk, EY Global Indirect Tax Leader. “By eliminating reduced rates or exemptions, governments and authorities will broaden the base of VAT. They will also apply more scrutiny to what they’re seeing from taxpayers,” he says.