Welcome to EY’s 2017-18 Tax Risk and Controversy Survey Series, where we collect and analyze input from taxpayers on what they are seeing in practice in a variety of aspects across the tax lifecycle of planning, provision, compliance and reporting. EY surveyed 901 tax and finance executives representing more than 17 industries in 69 jurisdictions. In part 3 of the series, Dimming the glare, we explore emerging trends in tax controversy management.
The report examines the challenges that businesses face in navigating a continually evolving tax landscape, as well as the ripple effects that tax risk is having on companies’ broader business activities. The report also explores how some businesses are becoming more cautious in their tax planning, how they are strategically addressing tax risk and how they feel about dispute resolution mechanisms.
Changing dynamics in tax risk and controversy
The BEPS-related changes to the international tax framework, along with more assertive tax administration and enforcement (fueled in part by revenue pressures related to the 2008 financial crisis), have fundamentally changed the tax authority-taxpayer dynamic and prompted many businesses to rethink how tax decisions will affect their reputation, brand and communications with internal and external stakeholders.
In this new world order, it is critical that businesses have a cohesive approach to tax risk and controversy management. The BEPS initiative has given tax authorities new tools to combat perceived abusive tax structures and emboldened them to be more aggressive in challenging tax positions. As governments continue to implement the BEPS Action items at varying speeds (and in sometimes inconsistent ways), and with tax authorities developing more sophisticated ways to obtain taxpayer data and enforce tax compliance, the international tax climate is likely to remain volatile for at least the next several years. This, in turn, means that businesses should expect to see more audits, more tax controversies and a higher possibility of double taxation.
Given this more-encompassing tax environment, it is evident that businesses are, in general, taking a more proactive approach to managing tax risk and controversy and are implementing more robust tax compliance processes.
More than half (55%) of all survey respondents said that tax controversy management has become somewhat or significantly more important for their business in the past two years. Among large businesses (i.e., global businesses with more than US$3 billion in annual revenues), that number jumps to 64%.
“Tax risk has become a primary concern for the C-suite and for boards. There is more interest than ever in preventing disputes, containing the ones that do arise and resolving issues quickly.” — Rob Hanson, EY Global Tax Controversy Leader
Steps to take
In today’s uncertain and unsettled tax environment, businesses need to take steps to prevent controversy while at the same time be prepared to manage and resolve disputes that do inevitably arise.
Stop controversy before it occurs with top-down governance, systems and processes that enhance monitoring and compliance. An effective tax risk operating model should enable businesses to identify the tax risks in all of the jurisdictions in which they operate. To maintain global consistency, businesses should have in place a documented tax strategy setting out the business’s approach to compliance, planning and interactions with tax administrations.
In light of the BEPS reforms and tax authorities’ increased enforcement efforts, businesses should revisit their transfer pricing documentation and defense files, as well as reevaluate tax provisions to reflect retroactive risks that might arise from aggressive inquiries and the dynamic approach taken by most countries to interpreting the BEPS amendments to the OECD Transfer Pricing Guidelines. Businesses with complex and/or high-risk transfer pricing models may want to consider making greater use of bilateral or multilateral APAs to reduce future risks and controversies. Businesses with inherent PE risk should consider an operating model redesign.
Businesses should have tools and processes in place that allow them to manage ongoing and potential tax controversies at a global, strategic level. Implementing a global compliance and reporting framework can help businesses track and manage controversy by providing a multijurisdictional overview of controversy in a centralized repository.
To increase oversight, businesses should consider adopting a tax corporate governance framework, which formally documents a business’s policies and procedures and provides for an overview of tax risks by senior management and/or the board. Information is at the heart of tax controversy management. The head of tax can’t be expected to know the unknown, and the best way to get ahead of nasty surprises is to have an understanding of the issues as they emerge, and then have a plan as to how they are dealt with and whose responsibility it is to handle them. Good governance at the planning stage will lead to fewer controversies, and mapping all controversies will minimize balance sheet impact.
Businesses should develop a plan that sets out the circumstances under which disputes will be resolved, litigated or otherwise handled, which will help allow for faster resolution so businesses can resume focus on their core mission.
Businesses should evaluate the pros and cons of various dispute resolution mechanisms (appeals, mediation, arbitration, litigation and MAP) and strive to build better relationships with tax authorities.
Adapting to the new environment
Corporate taxation has been under an intense and sustained public relations spotlight for the last several years, and our survey shows that businesses are responding accordingly to dim the glare. Rapid advances in technology and unprecedented leaps in multilateral cooperation among tax authorities have fundamentally and permanently altered the rules of engagement.
Businesses’ best approach is to prevent controversy in the first place. However, it is inevitable that some disputes will arise, so having processes in place to contain and efficiently resolve them will be critical. In this new tax risk environment, being proactive is the best defense for businesses that seek to limit uncertainty and minimize the potential for significant controversy.
Our next report will examine the best practices leading businesses are following to manage tax risk and thrive, and finally, we will publish a report on the findings of a separate survey EY conducted of tax authorities’ views of tax risk and controversy.