8 minute read 8 Dec 2020
Businesswoman holding file and talking on smart phone in office

Why multinationals need a tax controversy function fit for the future

Authors
Luis Coronado

EY Global Tax Controversy and Transfer Pricing Leader

Vast cross-border experience. Well-versed in international tax. Thought leader in tax policy and controversy and transfer pricing.

Joel Cooper

EY Global Tax Desk Leader – Transfer Pricing Controversy

Vast cross-border experience. Thought leader in transfer pricing and related international tax controversy. Former advisor to governments on international tax and transfer pricing.

8 minute read 8 Dec 2020
Related topics Tax

Constantly evolving tax regulation will lead to increased risk of tax controversy. As such, organizations need to plan now for the future.

In brief
  • Ongoing changes to the global tax landscape are putting organizations at increased risk of tax controversy.
  • In order to meet this challenge, organizations need to build a “tax controversy department of the future.”
  • This entails ensuring that people, processes, technology and data are not only optimized internally, but are also aligned with tax authorities.

Today’s international tax landscape is dramatically different to that of a decade ago. There is far more uncertainty, as governments respond to economic and social pressure to ensure companies pay their “fair share” of tax, whatever that may be.

Government responses have taken the form of a combination of global and regionally focused coordinated tax policy and administration measures introduced by the Organisation for Economic Cooperation and Development and the European Commission. But such rules have by no means been implemented or policed consistently. Unilateral actions by individual jurisdictions and increased tax audit activity contribute further to increased risks of tax controversy.

There is also more transparency around business taxation, much of which is a result of country-by-country reporting and enhanced transfer pricing documentation obligations, new mandatory disclosure requirements and the greater use of automatic tax information exchange. The combination of such trends with the new and innovative business models of the last decade and significant tax revenue shortfalls expected in the next is resulting in a situation where multinational enterprises (MNEs) worldwide are experiencing increased levels of tax controversy — across all taxes, but particularly with respect to cross-border transactions.

Technology is also shaping the future tax controversy backdrop in dramatic ways. Advanced and predictive analytics (i.e., highly forensic reviews) and an increasing number of e-audits showcase new tax administration skills that result in a higher number of audits and in greater depth than using human resources alone. Often in such audits the focus is not on one transaction or particular issue, but instead takes the form of a multi-sided, group-wide perspective, putting an issue in the context of the wider tax and compliance attitude of the corporate group, its tax risk management processes and its wider tax control framework.

Those looking beyond today and toward the future see these trends not only continuing but both growing and made more complex and immediate as a result of COVID-19. All things considered, there is but one overall direction for the growth of tax controversy — more disputes, more breadth and complexity within such disputes, and the need for companies to manage their dispute caseload in multiple geographies concurrently.

Developing your global tax controversy strategy

Ensuring your enterprise possesses a well-defined, commonly agreed global tax controversy strategy that is actively implemented and followed is the best way to handle the increasing number and complexity of tax disputes facing groups today.

Developing and documenting such a strategy helps to ensure consistency in the approaches taken by the tax department globally (and across all functions — planning, compliance and controversy) and by the group’s external advisors.

Such a strategy needs to be tailored to the specifics of each group, considering a range of factors such as tax profile, industry, available resources, geographic footprint, audit history, culture and values. In developing such a strategy, tax controversy leaders around the world are asking themselves how they should:

  • Develop a policy and processes to assess, manage and mitigate controversy risk
  • Keep abreast of changes in tax policy and administration, as well as changes in their own business
  • Deal with the need for consistency in the positions taken and approaches adopted around the globe
  • View cooperative compliance programs, advance pricing agreements, rulings, voluntary disclosures and forms of proactive engagement with tax authorities
  • Ensure learnings from prior tax controversies inform the decisions of other parts of the tax function and influence business change
  • Approach disclosure requirements and the provision of information during audits in this new area of heightened tax transparency
  • Devise and adopt sustainable tax models
  • Monitor or contribute to tax policy debates
  • Approach sensitive issues that may shape tax controversy strategy (e.g., commercially sensitive information)
  • Ensure that the company’s tax strategy can be explained and that any apparent contradictions to publicly available information are addressed
  • Manage any interaction between tax disputes and negative media coverage for the company
  • View litigation – including knowing when they are prepared to litigate
  • Evaluate potential settlements, to ensure that any broader implications are considered
  • Build and leverage their relationships with competent authorities and other revenue authority stakeholders

In addition to thinking about their overall tax controversy strategy, and in light of the ever-changing tax world, those responsible for tax controversy management should take time to ensure they are adopting the right approaches with respect to any ongoing disputes.

When it comes to data collected internally and representations made, those responsible should consider a “trust but verify” approach, ensuring guardrails to mitigate data risk are followed. They should also adopt leading practices to ensure that every engagement with a revenue authority starts with clear thinking about the approach to be taken. This can include taking “show, not tell” and “ask and offer” strategies to help ensure alignment on key facts and the avoidance of misunderstandings.

Building the tax controversy department of the future

It is not surprising that given the trend toward larger, more visible tax disputes, many groups are taking proactive steps to create what we are describing as the “tax controversy department of the future.

Such steps are typically being taken across four key areas: people, processes, data and technology.

People

Groups are increasingly trying to ensure they have in place teams that have (or have access to) both the necessary tax technical knowledge, but also non-traditional tax skills including financial analysis, data analysis, valuation, advocacy, negotiation and strategy development. In addition to ensuring the current team has, or has access to, this knowledge and experience, we increasingly see groups put in place legacy and contingency management solutions to help manage the rotation and turnover of key individuals, helping ensure that legacy knowledge is not lost. Where there is not already a defined tax controversy leader in place, we are increasingly seeing a new role being created or this role being defined for an existing member of the tax function.

Processes

Given the number, breadth and depth of tax controversies faced by many MNEs, it is important to have in place a clear and defined processes for determining what is a routine versus non-routine enquiry, what issues should be handled centrally and when issues should be escalated within the organization (e.g., to the central team, VP of tax or even C-suite members). This process should also define how and when other functions should be engaged (including public relations and legal counsel) and the level of signoff required for key decisions (settlements, appeals, litigation, use of the cooperative compliance programs, etc.).

In addition, the “tax controversy department of the future” will increasingly possess a well-defined and structured role in terms of proactively inputting into the design, implementation and operation of an MNEs tax structure. Examples of how MNEs are taking such an approach include establishment of cross-functional project teams and committees that discuss issues including significant changes to the group’s structure or operating model, its transfer pricing documentation strategy, and its approach to compliance, disclosure and reporting. Additionally, an increasing number of MNEs are setting up processes to monitor external media, evaluating any activity that may herald the start of reputation risk.

Many MNEs are also testing their controversy preparedness by conducting mock audits or risk reviews, drawing on known risks and the focus areas of tax authorities in the countries in which they do business.

Data

Tax authorities are increasingly requesting significant amounts of data during a tax audit. These requests typically include financial data, legal agreements, emails, board minutes, meeting minutes, employment contracts, job descriptions and invoices, to name but a few.

Ensuring the appropriate processes, policies and technology for scrutinizing and checking data before it is submitted and then retaining it (where that is legally required and where it is necessary to support key positions), is critical to the success of the “tax controversy department of the future”. An increasing number of groups are taking important steps in this area, particularly those with an eye to the future, where e-audits and the use of technology by tax administration for analyzing large amounts of data are set to increase.

Technology

To function most efficiently, the “tax controversy department of the future” will need to make well thought-out usage of technology. Increasingly, groups are using tools that allow them to track and manage their inventory of tax controversies worldwide. This allows them to index repositories of tax positions taken and information collected during an audit. It also helps ensure efficiency and consistency of positions taken and monitor and assess tax risks, so that controversy trends can be proactively identified before disputes occur.

Summary

Ongoing changes to the international tax landscape – driven by global, regional and local country developments – along with increasing use of resources and technology by tax authorities worldwide, mean that multinational groups must take steps to ensure that they are preparing today for the tax controversies of tomorrow. That entails developing a global strategy that, at its heart, focuses on creating the “tax controversy department of the future,” best-positioning an enterprise to effectively deal with the upward trend in tax controversy.

About this article

Authors
Luis Coronado

EY Global Tax Controversy and Transfer Pricing Leader

Vast cross-border experience. Well-versed in international tax. Thought leader in tax policy and controversy and transfer pricing.

Joel Cooper

EY Global Tax Desk Leader – Transfer Pricing Controversy

Vast cross-border experience. Thought leader in transfer pricing and related international tax controversy. Former advisor to governments on international tax and transfer pricing.

Related topics Tax