Conversations with Rob Hanson, EY Global Director, Tax Controversy; Howard Adams, who leads the EY Global Tax Controversy Desk; and Jean-Pierre Lieb, EMEIA tax policy and tax controversy services leader at Paris-based Ernst & Young Société d’Avocats, indicate that controversy is on the rise for international businesses of all shapes and sizes. However, the risks rise significantly for companies displaying any of the following attributes:
- The business is large. In Hanson’s view, “it’s fairly clear from what we’re seeing that governments [the world over] tend to target the largest enterprises for tax and especially transfer pricing audits.” This makes sense, says Hanson, “because naturally, this is where the cash flows are greater and more value is at stake, so it warrants their investing greater resources and focus.”
- The business has significant global operations. The rise in tax controversy “really is a global phenomenon,” says Hanson, who leads a worldwide network of tax controversy professionals. Where some individual nations are proving more aggressive than others, there are also entire regions where controversy is on the rise, including much of Europe and Asia — and in particular, emerging markets. Generally speaking, he explains, “controversy today can arise almost anywhere.”
- The business has extensive cross-border flows between affiliates. Authorities are laser-focused today on transfer pricing. As Adams explains, for tax authorities, “it’s a lot easier to make a transfer pricing adjustment than to deal with complex technical issues” .Moreover, as tax authorities gain greater access to data, for example, via base erosion and profit shifting (BEPS)-driven Master Files and CbC reporting, their efforts are becoming more targeted. Consequently, “transfer pricing is [becoming the tool of choice] for most revenue authorities — it may be a blunt instrument but for their purposes, it’s quite effective.” Making matters even more challenging, says Hanson, is the fact that tax jurisdictions are becoming much more active in sharing taxpayer data with one another. This “increasing frequency of simultaneous audits involving multiple jurisdictions” is adding fuel to both the frequency and complexity of controversy
- The business is “virtual” or uses high levels of intellectual property (IP). “Technology companies are [relatively] high-risk subjects due to the virtual nature of their businesses and almost by definition, their reliance on and use of intellectual property,” says Hanson. The pharmaceuticals industry also faces relatively heightened scrutiny due to similar levels of IP and also “significant cross-border cash flows.”
Reducing the risks
Tax authorities are absolutely within their rights to demand that businesses apply tax rules appropriately. But at the same time, that means businesses themselves must become better prepared to prevent, manage and resolve tax controversy.
Appropriate preparation requires attention to myriad issues: