5 minute read 9 Sep 2020
Businesswoman working on digital tablet in office

Seven steps for tax as governments pivot from stimulus to collection

By Siew Moon Sim

EY Asia-Pacific Tax Policy and Controversy Services Leader

Actively participates in internal and external activities to promote tax as a career. Builds strong and resilient families as a council member of Families for Life. Happily married. Mother of five.

5 minute read 9 Sep 2020

Prevention of tax controversy is far less damaging and time-consuming than trying to cure a problem once it has occurred.

In brief
  • Tax authorities are resuming normal operations to recoup the costs of COVID-related support and stimulus.
  • Companies should take steps now to build good working relationships with tax authorities, which can minimize tax controversy.
  • Accurate, readily available data is a must for companies, as tax authorities have increasingly sophisticated digital tools to track tax information.

In response to COVID-19, governments around the world offered unprecedented fiscal support and stimulus packages to assist businesses and protect jobs. Many also relaxed tax compliance obligations – albeit temporarily. In some instances, physical audits and court hearings were paused or suspended. The overarching aim was to help ease cash flow and relieve staffing issues.

But because many governments took on additional debt to provide this relief, it is reasonable to expect they will eventually return their focus to tax increases and tax collection. With this comes the increasing potential for tax enforcement and controversy. To minimize their risks, businesses should consider taking steps now to establish internal best practices and develop robust working relationships with tax authorities.

A kaleidoscope of support and stimulus measures

Support and stimulus approaches varied by jurisdiction. Singapore, Thailand and Vietnam, among others, allowed deferral of tax payments for instance, while Australia, Germany, Japan, Malaysia and the UK, along with other jurisdictions, also waived penalties and interest on late payments to help businesses.

Indirect taxation measures included postponement of general sales tax or value- added tax (VAT) filing obligations in jurisdictions such as Denmark, Japan and the Philippines. Deferred payment of these taxes was allowed in Australia, Taiwan and Vietnam among others. In Mainland China, there were exemptions for small-scale VAT taxpayers in Hubei, and reduced VAT collection rates for those in other regions.

Businesses who weren’t able to operate normally welcomed the government support they received in the areas of both direct and indirect taxation. Those measures also helped ease the burden on the governments themselves, with many tax authorities suspending their public-facing services at the height of the lockdowns.

However, with massive support and stimulus packages having been enacted around the world in order to aid economies and businesses, governments now need to shore up their treasuries, recoup their investments by way of increased tax revenues; action of this type may already be underway. Indeed, a number of jurisdictions have introduced tax incentives to bolster inbound investments, including Malaysia, Mainland China and Indonesia.

Tax authorities have also resumed activities in the past few months and have begun querying tax submissions. This is not to say that tax audits have increased but rather that tax authorities are making up for lost time. There is likely to be a lag before tax authorities return to a pre-COVID-19 audit environment. This gives businesses an opportunity to prepare and prevent audits from occurring.

Businesses who weren’t able to operate normally welcomed the government support. But governments now need to shore up their treasuries via increased tax revenue.

Seven steps to minimize tax controversy

There are several steps which, if taken now, can help businesses avoid or minimize tax controversy and build good working relationships with tax authorities. Acting now may save time, money and stress and help avoid potential sanctions.

1. Demonstrate complete accuracy

Making certain that everything is correct and error-free is one sure way to give tax authorities nothing to query. This means investing in accounting and tax submission processes. Ask where errors or inaccuracies could creep in and strengthen the way in which that work is performed, so that information is easily retrievable and verifiable.

Establishing leading practices and being able to demonstrate to tax authorities what the business has done helps build trust and remove tax controversy from the agenda, allowing management to concentrate on business recovery.

2. Utilize advance tax rulings

Where there could be doubt over the tax treatment of a particular structure or transaction flow, early engagement with tax authorities can be valuable. This is particularly true for businesses with activities across multiple jurisdictions among which tax treatments may vary.

Obtaining an advance tax ruling – where available – can save uncertainty, misunderstanding and potentially cost at a later date. This will also show tax authorities that the business is focusing on tax issues and is keen to “do the right thing”. This is especially the case where COVID-19 disruptions to businesses have introduced additional payments or costs which can pose tax deductibility issues to the payers and taxability issues to the recipients.

3. Leverage advance pricing agreements

Complex transactions, typically related to transfer pricing for international transactions, can be controversial. They may give rise to investigations that can prove costly in both time and money. It may be advisable to apply for an advance pricing agreement (APA), so that a business can explain its prospective transactions or proposed arrangements to tax authorities in advance and gain a ruling on their treatment. An APA can help avoid an audit of prices attached to particular goods or services, enhance dialogue and trust, and minimize misunderstandings at a later date.         

4. Participate in co-operative compliance programs

Many jurisdictions, including Singapore and Australia, offer special compliance programs that help establish a dialogue between a company and the tax authority. Both get to know each other, which can lead to tax treatment agreements well before audits or investigations might be triggered. 

Establishing leading practices and being able to demonstrate to tax authorities what the business has done helps build trust and remove tax controversy from the agenda, allowing management to concentrate on business recovery.

5. Engage with the tax authority

Not all tax authorities offer formal co-operative compliance programs, but it can still be worthwhile to establish an informal relationship through regular dialogue. Discussing complex transactions and effectively developing and enhancing the relationship reduces the likelihood of tax surprises and investigations.

6. Implement a tax governance framework

Global tax authorities are increasingly asking businesses to implement tax governance frameworks. Like other governance measures, these frameworks establish procedures and processes and appoint the board and management to take responsibility for all tax matters within a business. Establishing such a framework demonstrates to tax authorities the seriousness with which a business treats its tax obligations.

There is a significant internal benefit for businesses too – that of being in full control of tax risk and being able to report on it to stakeholders in the business, such as  shareholders, lenders and regulators. This enables enhanced control of reputational risk arising from tax risk, especially in jurisdictions where tax authorities may publicize non-compliant businesses.

7. Go digital

Tax authorities increasingly have cutting-edge technology at their disposal to assist in retrieving lost or errant tax revenues. This involves use of wide-ranging and powerful tools to track business activities across a variety of national and international data sources. It also includes exchanging account and tax information with authorities in other jurisdictions – global initiatives encouraged by the Organization for Economic Co-operation and Development (OECD) and the G-20.

On a more granular level, the use of software and algorithms to explore company accounts and ledgers is becoming more common place among tax authorities. It makes sense from a tax compliance perspective, therefore, for a business to ensure that when tax authorities call for a set of data, it is in a position to provide it, with confidence, often in near real time.

A new world

In summary, keeping abreast of the kaleidoscopic international tax landscape is a huge data collection and analysis job for any business. The more geographically spread its operations are, the more complex and rapidly changing the rules are likely to be. As tax authorities resume operations post-COVID-19, they will be tasked with being as efficient as possible in generating revenues, helping to defray the cost of government support and stimulus.

It is therefore vital that businesses are proactive but also flexible in adopting new tax laws, new internal procedures and new adaptions to the way in which they manage tax. Installing robust systems, processes and governance will go a long way toward avoiding tax controversy - and regular dialogue with tax authorities plays an important role too.

Prevention of tax controversy is far less damaging and time-consuming than trying to cure a problem once it has occurred. Thorough and timely preparation is, as ever, the key to solid tax risk management.

This article was first published in the Women in Business Law Expert Guide 2020 edition.

Summary

With the acute economic phase of the pandemic now receding, tax authorities are resuming operations. To help defray the cost of COVID-related support and stimulus, they will soon focus on tax increases and tax collection. Businesses must get ahead of potential tax controversy by solidifying internal systems, implementing governance frameworks and communicating openly with tax authorities, including co-operative compliance programs where available.

About this article

By Siew Moon Sim

EY Asia-Pacific Tax Policy and Controversy Services Leader

Actively participates in internal and external activities to promote tax as a career. Builds strong and resilient families as a council member of Families for Life. Happily married. Mother of five.