Organizations Prepare for a New Era of Tax Risks as Scrutiny Intensifies

• Half (50%) of the surveyed companies’ senior tax leaders operating in Asean (global 51%) expect to experience more tax disputes in next two years
• Cross-border tax reforms top list of risks for companies operating in Asean, with 58% of the surveyed Asean companies’ senior tax leaders (global 53%) forecasting global tax reforms to increase their overall tax costs
• Indonesian taxpayers to fully prepare in addressing their tax risks, given the country's numerous new tax laws and regulations
• More than eight-in-ten (82%) of the surveyed Asean companies’ senior tax leaders (global 75%) lack complete visibility across their tax disputes globally

JAKARTA, 27 JUNE 2023. The number of tax audits that companies experience is expected to increase by more than a third over the next two years, according to the 2023 EY Tax Risk and Controversy Survey. Half (50%) of the surveyed senior tax and finance leaders in Asean (global 51%) are preparing for an era of intense scrutiny on tax issues after a pause in disputes during the COVID-19 pandemic. EY teams canvassed the views of more than 2,100 tax and finance leaders across 47 jurisdictions, including 127 in Asean (comprising Indonesia, Malaysia, Philippines, Singapore and Vietnam) and 20 industry sectors during the first quarter of 2023, making this the largest sample in the survey’s 20-year history. The survey results were launched at the EY Asean Tax Forum in May 2023.

The survey reveals tax enforcement as the main concern for senior tax and finance leaders, with respondents (Asean 39%, global 35%) citing it as their largest tax risk over business risk (Asean 28%, global 26%) and legislative and regulatory matters (Asean 25%, global 30%). Driving these concerns is the expectation of an enhanced focus on cross-border taxation issues, uncertainty around tax legislation and a significant increase in the number of detailed information requests from tax authorities over the coming two years.

Globally, leaders are already dealing with a litany of tax issues. An overwhelming 97% of the surveyed senior tax leaders in Asean (global 95%) revealed that their organization currently manages at least one tax dispute, with 29% of Asean respondents (global 52%) overseeing disputes of US$1 million or more.

Luis Coronado, EY Global Tax Controversy Leader, says:

“After significant disruption to tax audits and litigation during the COVID-19 pandemic, executives across the world are anticipating a period of intense scrutiny as a new wave of global tax reform takes hold. With authorities empowered by technological advances, enhanced data-gathering powers and global collaboration, this is a new era for tax enforcement. Tax and finance functions should consider investing in global coordination of their tax risk and controversy management approach if they want to reduce the exposure to disputes, and the possibilities of financial and reputational penalties.”

Cross-Border Tax Issues Dominate Risk Concerns

Cross-border tax is likely to drive the most disputes, with 58% of responding tax department leaders in Asean (global 53%) expecting more tax authority focus on international tax and transfer pricing issues. Transfer pricing once again secured the top spot as the largest source of tax risk among global respondents, securing almost double (63%) the number of votes compared to the second and third sources, tax incentives (35%) and deductibility of costs (31%). In Asean, the top sources of tax risks are tax incentives (50%), deductibility of costs (50%) and transfer pricing (42%).

The implementation of the 15% global minimum tax rate, developed by the Organisation for Economic Co-operation and Development (OECD) and G20-led Inclusive Framework BEPS 2.0 project, is a concern for companies, with 56% of Asean respondents (global 55%) believing it will increase tax costs and almost half (Asean 42%, global 45%) saying it will increase the likelihood of new audits and disputes.

As a result, the need for global alignment in managing tax risks has become a priority for tax department leaders. Ninety-one percent (91%) of Asean respondents (global 84%) say that either implementing or improving an existing global governance framework approach to tax risk and controversy management would add value to their business in the next two years. More than one-third of businesses surveyed (Asean and global 36%) say they have already centralized the management of tax disputes, with only 2% of Asean respondents (global 7%) leaving the handling of most tax disputes to local teams. Nevertheless, 82% of the businesses surveyed in Asean (global 75%) say they lack complete visibility of their companies’ tax disputes globally.

Angela Tan, EY Asean Tax Policy and Controversy Leader, says:

“Companies operating in Asean clearly understand that enhancing their approach to tax controversy should not be delayed. Economies in Asean have largely leveraged tax incentives extensively as a way to attract and retain inbound investment. As we move toward a global minimum tax, companies operating in this region should be thoughtful, ensuring that any incentives currently utilized will not create future controversies as countries adopt this major new reform.”

Indonesian Taxpayers to Fully Prepare in Addressing Future Tax Risks

Yudie Paimanta, EY Indonesia Business Tax Services Partner, elaborates:

“With the enactment of numerous new tax laws and implementing regulations since 2020, Indonesian taxpayers must be proactive to comply with the latest tax regulations.  The Indonesian Directorate General of Taxes (DGT) have taken initiatives to improve their business process and law enforcement by, among other things, implementing Core Tax Administration System (information system with the latest technology platform), Compliance Risk Management of taxpayers (to map compliance level of taxpayers) and Data Analytics on Web Based Taxpayer Profile.  These initiatives by the DGT will force taxpayers to be better prepared in addressing their tax risks.”

Statistic shows a major increase in the number of tax controversy cases in Indonesia, hence a taxpayer must be able to manage the potential tax risks. The following are some important action points to be considered:

1.     Undertaking full compliance with tax laws and regulations

2.     Early preparation by ensuring proper and complete documentation is in place to anticipate future tax audit

3.     Having a clear oversight of the existing and potential tax issues

4.     Deploying the best team in dealing with tax matters from inception.  A tax diagnostic review where the taxpayer conducts tax due diligence on itself should be performed regularly to identify and address any tax risks well in advance.  All major documents and agreements should be reviewed regularly to ensure they are still fit for purpose.

Tax Governance Takes Center Stage for Business Leaders

Further, organizations are already making changes to adapt to the post-COVID-19 tax risk and controversy environment, with 82% of Asean respondents (global 69%) expecting their focus on tax governance to grow in the coming years. This is reflected in tax authorities’ growing focus on testing the efficacy of tax governance as a way to risk rate companies.

With respondents noting the growing number of both formal and informal requests for information, 90% of Asean (global 86%) are looking to be more proactive in identifying and managing risks before they become a dispute.

Organizations Dedicate Increased Resources to Tax Risk

To deal with the plethora of tax risks, leaders are investing in resources, creating new roles and job functions. Many respondents (Asean 41%, global 38%) reveal that their organization has named a dedicated tax risk or tax controversy leader in the last two years, with 87% of Asean respondents (global 80%) believing such a role would add significant value to their business. Forty-two percent (42%) of Asean respondents (global 80%) say that their company has created a tax risk and controversy “Committee” or “Center of Excellence” or enhanced an existing similar working group over the course of the last two years.

Luis Coronado, EY Global Tax Controversy Leader, concludes:
“With governments across the world intensifying tax enforcement and demands for transparency of tax data increasing, organizations are doing all they can to increase tax certainty. Whether it’s investing in talent or reconfiguring their global approach to managing tax risk and controversy, executives are now taking a far more proactive approach to monitoring, documenting and evaluating their tax risk. However, the survey also reveals that having the right policies is just one step. Seamless collaboration, execution and alignment between global and local operations is crucial to effectively manage tax risk and controversy. Those who get that right are likely to be rewarded by a reduced risk tax profile and the likelihood of fewer disputes in the coming years. This seems to be of particular importance for companies operating in Asean.”

To learn more about the 2023 EY Tax Risk and Controversy Survey, visit: www.ey.com/taxrisksurvey.

                                                                                                              ENDS

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