5 minute read 20 Nov 2018
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Dimming the glare: trends in tax controversy

By

Rob Hanson

EY Global Tax Controversy Leader

Frequent lecturer on legislative and regulatory tax policy issues.

5 minute read 20 Nov 2018
Related topics Tax controversy

Amid rapid advances in technology, businesses must have a cohesive approach to managing tax risk and controversy.

The changes to the international tax framework related to base erosion and profit shifting (BEPS), along with more assertive tax administration and enforcement (fueled in part by revenue pressures related to the 2008 financial crisis), have fundamentally changed the tax authority-taxpayer dynamic. Many businesses are rethinking how tax decisions will affect their reputation, brand and communications with internal and external stakeholders.

In this new world order, it is critical that businesses have a cohesive approach to tax risk and controversy management. The BEPS initiative has given tax authorities new tools to combat perceived abusive tax structures and emboldened them to be more aggressive in challenging tax positions.

Tax risk has become a primary concern for the C-suite and for boards. There is more interest than ever in preventing disputes, containing the ones that do arise and resolving issues quickly.
Rob Hanson
EY Global Tax Controversy Leader

As governments continue to implement the BEPS Action items at varying speeds (and in sometimes inconsistent ways), and with tax authorities developing more sophisticated ways to obtain taxpayer data and enforce tax compliance, the international tax climate is likely to remain volatile for at least the next several years. This, in turn, means that businesses should expect to see more audits, more tax controversies and a higher possibility of double taxation.

Given this more-encompassing tax environment, it is evident that businesses are, in general, taking a more proactive approach to managing tax risk and controversy and are implementing more robust tax compliance processes.

“Tax risk has become a primary concern for the C-suite and for boards,” says Rob Hanson, EY Global Tax Controversy Leader. “There is more interest than ever in preventing disputes, containing the ones that do arise and resolving issues quickly.”

More than half (55%) of all respondents to our Tax Risk and Controversy Survey said that tax controversy management has become somewhat or significantly more important for their business in the past two years. Among large businesses (i.e., global businesses with more than US$3 billion in annual revenues), that number jumps to 64%.

Three steps to take

In today’s uncertain and unsettled tax environment, businesses need to take steps to prevent controversy while at the same time be prepared to manage and resolve disputes that do inevitably arise. Here are some ways to approach the new challenges.

1. Prevent tax controversy

Stop controversy before it occurs with top-down governance, systems and processes that enhance monitoring and compliance. An effective tax risk operating model should enable businesses to identify the tax risks in all of the jurisdictions in which they operate.

To maintain global consistency, businesses should have in place a documented tax strategy setting out the business’s approach to compliance, planning and interactions with tax administrations.

In light of the BEPS reforms and tax authorities’ increased enforcement efforts, businesses should revisit their transfer pricing documentation and defense files, as well as re-evaluate tax provisions to reflect retroactive risks that might arise from aggressive inquiries and the dynamic approach taken by most countries to interpreting the BEPS amendments to the Organisation for Economic Co-operation and Development (OECD) Transfer Pricing Guidelines.

Businesses with complex and/or high-risk transfer pricing models may want to consider making greater use of bilateral or multilateral advance pricing agreements to reduce future risks and controversies. Businesses with inherent permanent-establishment risk should consider an operating model redesign.

2. Manage tax controversy

Businesses should have tools and processes in place that allow them to manage ongoing and potential tax controversies at a global, strategic level. Implementing a global compliance and reporting framework can help businesses track and manage controversy by providing a multijurisdictional overview of controversy in a centralized repository.

To increase oversight, businesses should consider adopting a tax corporate governance framework, which formally documents a business’s policies and procedures and provides for an overview of tax risks by senior management and/or the board.

Information is at the heart of tax controversy management. The head of tax can’t be expected to know the unknown, and the best way to get ahead of nasty surprises is to have an understanding of the issues as they emerge, and then have a plan as to how they are dealt with and whose responsibility it is to handle them. Good governance at the planning stage will lead to fewer controversies, and mapping all controversies will minimize balance sheet impact.

3. Resolve tax controversy

Businesses should develop a plan that sets out the circumstances under which disputes will be resolved, litigated or otherwise handled, which will help allow for faster resolution so businesses can resume focus on their core mission.

Businesses should evaluate the pros and cons of various dispute resolution mechanisms (appeals, mediation, arbitration, litigation and the mutual agreement procedure) and strive to build better relationships with tax authorities.

Adapting to the new environment

Corporate taxation has been under an intense and sustained public relations spotlight for the last several years, and our survey shows that businesses are responding accordingly to dim the glare. Rapid advances in technology and unprecedented leaps in multilateral cooperation among tax authorities have fundamentally and permanently altered the rules of engagement.

Businesses’ best approach is to prevent controversy in the first place. However, it is inevitable that some disputes will arise, so having processes in place to contain and efficiently resolve them will be critical. In this new tax risk environment, being proactive is the best defense for businesses that seek to limit uncertainty and minimize the potential for significant controversy.

dimming the glare

Summary

BEPS has fundamentally changed the authority-taxpayer dynamic, and businesses are taking a more proactive approach to managing controversy.

About this article

By

Rob Hanson

EY Global Tax Controversy Leader

Frequent lecturer on legislative and regulatory tax policy issues.

Related topics Tax controversy