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.
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.
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.