The volume of regulations and new tax laws is increasing, driven by the global focus on base erosion and profit shifting (BEPS). What is new is the speed with which tax information is being shared and the broad reach of the flow of information.
Tax authorities are also “reaching back” and reexamining prior transactions through today’s lens, challenging previously established norms and structures. As such, the effective impact of more aggressive tax administration is retrospective. A very visible example of that are the EU state aid investigations, with 10-year retrospective liabilities arising on tax rulings that might have been considered routine and secure at the time they were granted.
Moving at the speed of digital
Global tax authorities’ increasing use of digital methods to collect and analyze taxpayer data is adding to the challenges. Businesses are increasingly being asked to electronically submit a variety of data that goes beyond tax records, in formats specified by the government and on an accelerated schedule. Tax authorities use data analytics engines to find any discrepancies and compare data across jurisdictions and taxpayers, and make tax and audit assessments based on these analyses.
Businesses are often unable to keep pace with or match the digital technologies some tax administrations are using, resulting in less “polished”— and potentially less consistent — data submissions than in the days when they had time to perform multiple quality checks.
In this new transparent tax world, having outdated processes can add exponentially to the risk of more inquiries, penalties and disagreements with tax authorities. In fact, respondents to our 2017 Tax Risk and Controversy Survey Series identified a lack of processes or technology as the second-most influential source of an increased level of tax risk and controversy for their company (second only to the increase in the volume and/or complexity of tax legislation and regulations).
Compliance is further complicated by data submission requirements that can vary by country, not only in file format and timing for submissions, but also in the scope of taxes or transactions covered. In some cases, revenue authorities in emerging and developing countries are trailblazers in digital tax administration, adding to the risks businesses face through dated systems that can prevent them from being able to adapt quickly. (Of the top 10 jurisdictions our survey respondents cited for the greatest tax risk in the next 2 years, 4 were emerging economies, with China ranked second, India fifth, Brazil seventh and Mexico ninth.)
Businesses need to have the right people, processes and technology enablers in place that account for and manage these often disparate digital requirements. They seem, however, to be adjusting slowly to this new reality. Some 36% of total respondents to our survey (47% of large business respondents) said they leave monitoring and responding to new country-level digital requirements to their local or regional finance personnel, and 15% of respondents (17% of large business respondents) said they were not sure what efforts were being made within their company to address digital changes across countries.1