What are the benefits of a proactive approach to TP controversy management?
Properly implemented, a proactive approach to TP controversy management can mean risks are identified in real time rather than in hindsight, with disparate responses replaced by well-considered, globally consistent, and fully supported submissions.
This may reduce the resourcing burden on local tax teams and the evidentiary issues that may arise under a reactive only approach. Further, in a world with increasing levels of information sharing between tax authorities, proactive controversy management can help taxpayers ensure they don’t make inconsistent representations to different tax authorities in respect of materially identical arrangements.
Put simply, adopting a proactive TP controversy strategy can help to head off potential hazards, remedy weaknesses, and help ensure that taxpayers are defining the parameters of their own disputes.
Whilst some level of risk may always exist, the aim is to ensure that only the truly unreconcilable issues reach the point of disputes and litigation, as mistakes, negotiable positions, and peripheral risks have all either been pre-empted (controversy-focused planning), planned for (guidebooks and governance), or resolved (APAs).
How to transition from reactive to proactive TP controversy management?
While a proactive TP controversy strategy may provide a potential panacea, it can also require significant investment. The reality is that many taxpayers already face a backlog of historic controversies, including extensive information requests, multi-year TP audits, MAP cases and, of course, litigation. Breaking down the management framework into a series of incremental steps can make the transformation more manageable, impactful and sustainable – not to mention being an easier business case internally.
For example, building on work being done within existing TP audits to proactively prepare for similar scrutiny in other jurisdictions can produce key learnings to be built into future commercial structuring considerations or included in the frameworks for potential ways to manage issues and prepare responses.
By investing a little more into an on-going audit process, perhaps by including a second or third set of eyes, guidebooks can be populated, containing both TP technical and evidentiary material that ranges from benchmarking studies and successful APAs through to affidavits, personnel charts, and board minutes.
Further, guidebooks could include resources for local teams to leverage – procedural maps for dealing with information requests, standardized answers to common questions, compilations of global case law, or outlines of potential dispute resolution tools.
When resolved, why not also explore recasting or “memorializing” the audit result into an APA and securing lasting benefits? Or perhaps even consider a bilateral or multilateral APA for added security and consistency? All these potential benefits can be derived from essentially standardizing, centralizing, and leveraging work that would have already been done, thus maximizing one’s time investment.
There are also numerous smaller activities which cumulatively can play a big part in reshaping the tax department’s approach to TP controversy management, ranging from including a tax controversy update on the team agenda, sharing learnings between local teams, through to putting in place processes for learnings from past controversies to be shared with core teams and considered in future structuring exercises or compliance activities. These relatively minor alterations to existing processes can create appreciable and valuable returns in the longer term.
The future of TP controversy is likely to be marked by the increased intensity, complexity, and multilateralism among tax authorities as governments seek to strengthen public finances in the wake of the COVID-19 pandemic5 and the Organisation for Economic Co-operation and Development continues to pursue its Base Erosion and Profit Shifting agenda.6
Coupled with a growing trend towards these forensic, whole-value-chain focused “show, not tell” audits and an increasing use of exchange of information between revenue authorities within TP audits (as well as joint and simultaneous audits),7 this rapid change is driving many companies to carefully consider their approach to TP controversy.8
Some level of proactivity must sit at the heart of any such redesign if it is to be successful. Whilst the tax controversy department of the future will not be one size fits all, the taxpayers best prepared to handle this ever-more globalized TP risk environment will be those able to identify what and where their risks are and how and when to resolve them.