Focusing on different risks
Taxpayers in our global 2017-18 Tax Risk and Controversy Survey told us they perceive transfer pricing as their top source of risk, followed by indirect taxes. Tax authorities inverted those priorities: they ranked indirect taxes their highest compliance risk, followed by transfer pricing, broadly defined to include goods and services, intangibles and financial services. Taxation of the digital economy was a close third.
It stands to reason that tax authorities are so concerned about indirect taxes — they represent a growing share of tax revenue in many countries and currently are equal to about 13.6% of gross domestic product in the European Union. And business shouldn’t lose sight of that, even as they focus on adapting to tax reforms on the income tax side.
“The disconnect here between tax authorities and taxpayers has the potential to lead to more controversy, because there will be an inherent mismatch of resources and priorities,” said Gijsbert Bulk, our Global Director of Indirect Tax. “If taxpayers don’t understand what authorities are most worried about, they might encounter controversy where they aren’t expecting it.”
But even among tax authorities, there were split perceptions about sources of risk, and the divergence correlated strongly with the size of a country’s economy, with G20 countries perceiving things differently than those with smaller economies. Both ranked indirect taxes as their top compliance concern, but the proportion was more pronounced in non-G20 countries. By contrast, transfer pricing was also a bigger concern for G20 countries, with the digital economy ranking third.
Furthermore, taxation of the digital economy ranked second among non-G20 countries identifying their highest compliance risk. And no non-G-20 countries identified transfer pricing of goods and services or financial services as a top risk; few said transfer pricing of intangibles was their highest compliance risk.
Tax risk associated with the digital economy continues to be a main focus in the EU, which released a report on 1 March outlining a collective approach to correcting what it said is a “mismatch between where taxation of the profit takes place and where value is created for certain digital activities.