In response to the economic impact of COVID-19 quarantines and lockdowns, governments around the world have offered unprecedented fiscal support and stimulus packages to assist businesses and protect jobs. Because many took on additional debt to provide this relief, it is reasonable to expect they will eventually return their focus to tax increases and tax collection. With this comes increasing potential for tax enforcement and controversy.
In order to minimize their risks, businesses should consider taking steps now to establish internal best practices and develop robust working relationships with tax authorities.
The global tax landscape is complex and multi-faceted. In addition to new laws providing fiscal support and stimulus packages, many tax authorities worldwide relaxed tax compliance obligations – albeit temporarily – to help businesses overcome the challenges arising from the pandemic. In some instances, physical audits and court hearings were paused or suspended.
The key objectives of such measures were to give businesses more time to comply, more time to pay, not to penalize them for late tax filings or payment, and in some cases to lower their tax bases or allow businesses to carry back their losses more generously. The overarching aim was to help ease cashflow and relieve staffing issues.
Yet approaches varied from jurisdiction to jurisdiction. Singapore, Thailand and Vietnam, among others, allowed deferral of tax payments for instance, while Australia, Germany, Japan, Malaysia and the UK, along with other jurisdictions, also waived penalties and interest on late payments to help businesses.
Indirect taxation measures included postponement of general sales tax or value- added tax (VAT) filing obligations in jurisdictions such as Denmark, Japan and the Philippines. Deferred payment of these taxes was allowed in Australia, Taiwan and Vietnam among others. In Mainland China, there were exemptions for small-scale VAT taxpayers in Hubei, and reduced VAT collection rates for those in other regions.
This varied and constantly shifting landscape continues to be reflected on an ongoing basis in EY Tax Controversy COVID-19 Response Tracker [https://www.ey.com/en_us/tax/how-covid-19-is-causing-governments-to-adopt-economic-stimulus–], a comprehensive and regularly-updated compendium of measures taken across 138 jurisdictions around the world.
Businesses who weren't able to operate normally welcomed the government support they received in the areas of both direct and indirect taxation. Those measures also helped ease the burden on the governments themselves, with many tax authorities suspending their public-facing services at the height of the lockdowns.
However, with massive support and stimulus packages having been enacted around the world in order to aid economies and businesses, governments now need to shore up their treasuries, recoup their investments by way of increased tax revenues; action of this type may already be underway. Indeed, a number of juridictions have introduced tax incentives to bolster inbound investments, including Malaysia, Mainland China and Indonesia.
We also see that tax authorities have resumed activities in the past few months and have begun sending letters querying tax submissions. This is not to say that tax audits have increased but rather that tax authorities are making up for lost time.
The fact that there is likely to be a lag before tax authorities return to a full pre-COVID-19 audit environment provides businesses with a significant opportunity to prepare and get ahead of the game – to be proactive and prevent audits from occurring in the first place.
There are a number of steps which, if taken now, can help businesses avoid or at the very least minimize tax controversy and build good working relationships with their tax authorities. Investing in these now may save time, money, stress and potential sanctions further down the line.
Ensure complete accuracy
Making sure that everything is correct and error-free is one sure way to give tax authorities nothing to query. This means investing in accounting and tax submission processes. Ask where errors or inaccuracies could creep in and strengthen the way in which work is carried out, so that information is easily retrievable and verifiable.
Establishing leading practice and being able to demonstrate to tax authorities what the business has done can help build trust and remove tax controversy from management's to-do lists, allowing them to concentrate on the post-COVID recovery of their businesses.
Utilize advance tax rulings
Where there could be doubt over the tax treatment of a particular structure or transaction flow, early dialogue with tax authorities can be valuable. This is particularly true for businesses with activities across a number of jurisdictions among which tax treatments may vary.
Obtaining an advance tax ruling-where available – can save uncertainty, misunderstanding and potentially cost at a later date. This will also show tax authorities that the business is focusing on tax issues and is keen to "do the right thing". This is especially the case where COVID-19 disruptions to businesses have introduced additional payments or costs which can pose tax deductibility issues to the payers and taxability issues to the recipients.
Take advantage of advance pricing agreements
Complex transactions, typically in relation to transfer pricing for international transactions, can be controversial. They may give rise to investigations that can prove costly in both time and money. It may be advisable to apply for an advance pricing agreement (APA), so that a business can explain its prospective transactions or proposed arrangements to tax authorities in advance and gain a ruling on their treatment. An APA can help avoid an audit of the price attached to particular goods or services, and can enhance dialogue and trust, and minimize misunderstandings at a later date.
Participate in "co-operative compliance" programs
Many jurisdictions, including Singapore and Australia, offer special compliance programs and there are benefits to be had from participating, not least because doing so establishes a regular dialogue with the tax authority. This means the business and the authority know each other, which can lead to agreements on tax treatment being forged well in advance of the possibility of a tax audit or investigation being triggered.
Engage with the tax authority
Not all tax authorities offer such programs, so it can be worthwhile establishing a relationship through regular dialogue. Discussing complex transactions and effectively developing and enhancing the relationship over time leads to less likelihood of future tax surprises and investigations.
Implement a tax governance framework
Tax authorities around the world are increasingly keen to ask businesses to put tax governance frameworks in place. These, like other governance measures, establish procedures and processes and appoint the board and management to take responsibility for all tax matters within a business. Having established such a framework, it is always available to demonstrate to tax authorities the seriousness with which the business treats its tax obligations.
There is a significant internal benefit for businesses too – that of being in full control of tax risk and being able to report on it to stakeholders in the business, such as shareholders, lenders and regulators. This enables enhanced control of reputational risk arising from tax risk, especially in jurisdictions where tax authorities may publicize non-compliant businesses.
Increasingly, tax authorities are equipping themselves with cutting-edge technology to assist in retrieving lost or errant tax revenues. This involves use of wide-ranging and powerful tools to track business activities across a variety of national and international data sources. It also includes exchanging account and tax information with authorities in other jurisdictions – global initiatives encouraged by the Organization for Economic Co-operation and Development (OECD) and the G-20.
On a more granular level, the use of software and algorithms to explore company accounts and ledgers is becoming more common place among tax authorities. It makes sense from a tax compliance perspective, therefore, for a business to ensure that when tax authorities call for a set of data, it is in a position to provide it, with confidence, often in near real time.
A new world
In summary, keeping abreast of the kaleidoscopic international tax landscape is a huge data collection and analysis job for any business. The more geographically spread its operations are, the more complex and rapidly changing the rules are likely to be. As tax authorities resume operations post-COVID-19, they will be tasked with being as efficient as possible in generating revenues, helping to defray the cost of government support and stimulus.
It is therefore vital that businesses are proactive but also flexible in adopting new tax laws, new internal procedures and new adaptions to the way in which they manage tax. Installing robust systems, processes and governance will go a long way toward avoiding tax controversy – and regular dialogue with tax authorities plays an important role too.
Prevention of tax controversy is far less damaging and time-consuming than trying to cure a problem once it has occurred. Thorough and timely preparation is, as ever, the key to solid tax risk management.
The views in this article are the writers' and do not necessarily reflect the views of the global EY organization or its member firms.