Many businesses — of all sizes, but especially the very largest — have not fully adjusted to ongoing, dramatic changes in tax authority scrutiny of their affairs, according to respondents to the 2021 EY Tax Risk and Controversy Survey. And change may be far from over: 53% of tax leaders expect greater enforcement in the next three years, especially as governments begin to address budgetary pressures arising from responding to the COVID-19 pandemic.
It’s not only external scrutiny that tax leaders are facing. Our survey found C-suite executives are demonstrating more interest and oversight of tax in 75% of companies with annual revenue of more than US$100 billion, and just 20% of all respondents say a lack of C-suite support is stopping them from raising the profile of tax risk and controversy management in their company.
It seems clear the tax leader’s role is evolving, and this series seeks to identify critical answers and actions to help them reframe and protect the future of their organizations. After all, it’s not just traditional risk and dispute mitigation that today preoccupies executives: tax leaders are playing an increasingly strategic role, shaping how businesses create, measure and report long-term value.
That’s why we recommend they pursue three key actions:
- Recognize the part tax plays in long-term value creation for the business and the risk tax disputes present to both the bottom line and company reputation
- Align people, processes and technology to help the business not only manage but predict and pre-empt inquiries, disputes and litigation
- Understand that taking a proactive, forward-looking approach may require fundamental change: creating the tax controversy department of the future through the implementation of three solution areas.
- Tax risk assessment: predicting and addressing tax disputes before they occur by sustaining the comprehensive assessment of all tax risks facing the enterprise.
- Tax risk management: establishing a framework to prioritize and mitigate the impact of tax risks that do arise, noting any potential knock-on effects.
- Tax audit, dispute and litigation management: mitigating financial and reputational risk to the enterprise by using a range of tools to secure quick and effective resolution of disputes.
Time is of the essence. The pace and volume of tax change is relentless, and digitalization is disrupting the decades-old tax compliance life cycle. The way in which tax auditors collect information, risk-rate businesses and then select and audit them has and is shifting, with human interpretation being supplemented by data analytics, machine learning and artificial intelligence.
Survey respondents also say that they now see a far more diverse tax risk environment. This spans a spectrum — everything from the scrutiny of routine, commercially sound activities to major, billion-dollar settlements in court. But it also includes a middle ground of sorts — the opportunity for more open, transparent and collaborative relationships with revenue authorities.
Looking forward, a second crescendo of tax enforcement change is building. Concerns about the efficacy of untested dispute resolution processes related to potential new ways to tax cross-border activity may add to future tax risks. At the same time, unprecedented pressure on governments to decrease budget deficits arising from their responses to the COVID-19 pandemic is already creating new hazards in many jurisdictions.
All things considered, there is an urgent need for tax leaders to respond, and this report details exactly how they can take the initiative — by building their tax controversy department of the future.
Taxing new demands
Tax authorities have become exponentially more sophisticated in the six years since cross-border tax rules began to be significantly overhauled. Survey respondents say authorities are collecting and analyzing fresh data from new transparency and disclosure submissions, sharing that information with each other via automatic information exchange protocols, thus extending their view across the entire footprint of the business.
And tax authorities everywhere, from the most mature to those in emerging markets, are digitalizing, transforming their ability to understand complex value chains and using data analytics to examine companies from every angle. In some cases, tax authorities know more about a company’s tax or customs activities than the company itself.