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. Our survey of 901 tax and finance executives in 69 jurisdictions across more than 17 industries finds that the business of tax is undergoing a fundamental shift on a global scale, and the primary driver is the explosion of new transparency and reporting measures that have swept over the global landscape in recent years.
The enhanced transparency measures and new reporting requirements, many brought about by BEPS, have had profound implications for businesses’ tax compliance and reporting functions, audits and controversies, and reputational risk, which in turn have increased the need for companies to develop a cohesive approach to tax risk and controversy management.
“In short, the task of managing tax risk and controversies is more difficult than ever. It is arguably even more challenging than some may have envisioned in October 2015, when the BEPS recommendations were published and the implementation phase began.”
— Rob Hanson, EY Global Tax Controversy Leader
At the same time, tax administrations are harnessing the power of digitalization to make better use of limited resources and extract more value from the information they receive. Tax authorities are increasingly relying on digital methods to collect taxpayer data and are using data analytics to mine this data to help them boost tax collections, target compliance initiatives and improve overall efficiency.
Tax authorities are making strategic use of data analytics to make compliance and audit determinations and are increasingly sharing this data with tax authorities in other jurisdictions. This exposes businesses to more risk if their people, processes and systems are dated or out of sync with government requirements and expectations.
And just as companies are adjusting to the rapid changes to tax policy and enforcement brought by BEPS and the digital revolution, a wave of political uncertainty has added a new wrinkle to the tax risk environment. These “unknowns” — such as the tax implications of Brexit and the question of how, and whether, the new US Administration will take tax policy in a new direction — have prompted many businesses to analyze the potential impact these events could have on their tax strategy and business operations.
US Supreme Court Justice Louis Brandeis famously called sunlight the greatest disinfectant. But sunlight can also harm those who aren’t prepared to face the intensity of the sun’s rays. Our survey indicates businesses around the world are currently regarding the compliance environment as a prism through which they interpret demands for greater transparency.
The sunlight is being dispersed into a spectrum of red, orange, yellow, green, blue, indigo and violet. Each color deserves its own contemplation. And those who step into the light should consider the risks and take the necessary precautions before stepping into this new (and hostile) environment.
Steps to take
Adopt a strategic approach to tax risk management: The survey shows long-anticipated drivers of tax risk have become a reality, so it’s important that businesses be prepared to confront whatever form it takes, from responding to aggressive audits or challenges to transfer pricing arrangements, to managing tax-related reputational concerns or examining existing business and cross-border structures.
An integrated, holistic, global and end-to-end approach can help businesses stop controversy before it occurs through the use of top-down governance, systems and processes that enhance monitoring and compliance. This approach also helps businesses track for visibility, oversight and risk assessment so they can better manage controversies that do occur.
And choosing the most appropriate dispute resolution mechanism — whether it’s exam management, appeals management, arbitration or litigation — allows for faster resolution so businesses can resume focus on their core mission.
Be proactive in managing tax and reputational risk: To cope with BEPS-driven enhanced reporting and disclosure requirements and greater audit scrutiny, ensure your tax department has adequate knowledge, staffing, budget and other necessary resources to meet the new demands on the tax function. Assess reputation risks that may arise and ensure the board and C-suite stakeholders fully understand that their company’s tax profile is both a financial and reputational issue.
Develop, with the board’s advice and consent, a clear policy explaining the company’s approach to tax planning. In developing this policy, keep in mind that the board, CEO and company representatives must be comfortable with making the policy available publicly and, if necessary, be prepared to defend it.
At the same time, decide how transparent your business wants to be in terms of disclosing the amount of taxes you pay in the countries where you do business; once a decision is made, develop a plan for communicating it to external stakeholders and tax authorities in a consistent way.
Adopt a global approach to managing tax controversy: In a world of increased information sharing among tax authorities, aggressive tax enforcement and associated reputational risks, maintaining a global perspective on all the jurisdictions in which your business operates is critical. Implementing a globally coordinated approach enhances your ability to manage and prioritize risk and could help mitigate the impact of controversy.
Creating a global tax audit management framework, a global compliance platform, a tax controversy management reporting framework and making use of pre-filing tools and economic modeling can bring clarity, confidence and more certainty. A global approach can deliver benefits across the enterprise: a reduced audit risk, greater control over audits involving sensitive issues, a proactive management of tax controversy and increased knowledge-sharing.
Close the digital tax administration readiness gap: With many governments requiring near real-time reporting and performing increasingly sophisticated data analytics, tax authorities are gaining global visibility. Businesses need to enhance their digital capabilities so they can meet the demands of this new world of digital tax administration.
Putting in place a new digital operating model is an essential step. This means that businesses need to ensure they understand tax authority data requirements, can format source data for local country requirements and have the appropriate tools to prepare digital tax submissions.
Businesses should also perform analytics on data before filing and put in place a process for archiving digital files for audit purposes. Business should consider developing a real-time compilation of data for audit defense and other potential controversy, as well as a regional or global tax portal to monitor and track audits and collections.
Use alternative dispute resolution (ADR) mechanisms strategically: Evaluate the various pre-filing tools (APAs, pre-filing agreements, cooperative compliance agreements) to determine if any might be an appropriate method for your company to reduce future risks and controversies, taking into account the costs and benefits such tools entail. Work to build better relationships with tax authorities (a good working relationship with the tax authority is a critical success factor for any ADR processes).
Also evaluate the pros and cons of dispute resolution mechanisms that are available if disputes cannot be avoided — including appeals, litigation, mediation, arbitration and MAP. As cross-border tax disputes with tax authorities increase, consider accessing MAP sooner to resolve potential tax disputes. Develop a consistent philosophy of controversy: under what circumstances will disputes be resolved, litigated or otherwise handled?
Get the most out of your people/ processes/technology: Establish clear frameworks for tax internal control, controversy management, digital tax administration and communications. If some tax matters aren’t directly managed by the tax function, be sure there is good coordination between the tax function and the business unit(s) handling those tax matters.
Ensure your tax function has clear audit management processes and the appropriate technology and software tools to monitor your company’s global tax compliance and reporting obligations and can respond quickly to tax authority demands for data (in particular, new digital data requirements).
Ensure that your documentation processes are BEPS-compliant and meet the specific country tax schema. Provide periodic briefings and management dashboards regarding the company’s tax risks and controversies to the CEO and board, as well as other business units (as appropriate).
The future of tax reporting and transparency
With the greater demands for transparency emerging as a key driver of risk, the business of tax is undergoing a fundamental global shift. Earlier, we wrote that tax compliance is the prism through which more transparency — or sunlight, to use Justice Brandeis’s metaphor — is viewed. Depending on the angle with which businesses view the prism, the transparency’s light bends and refracts; the optical density shifts. This series strives to help all stakeholders view the rainbow in all its splendor.
Our next report will take a deeper look at the risks businesses report in responding to BEPS. The third will use survey results to explore more deeply the emerging trends in tax controversy. Finally, we’ll examine the best practices leading businesses are following to manage tax risk and thrive.
We hope you will find the series insightful and illuminating.