Organizations need a global perspective and policies that cover all jurisdictions in which they do business.
Until recently, tax administrations had little or no information about an organization's operations outside of their own jurisdiction. A local tax dispute stayed local. Today, however, the global landscape for tax administration is undergoing a major transformation that is significantly altering taxpayers' approach to risk management.
Tax administrations are going digital, moving to a system where businesses file data electronically on a regular or even real-time basis, giving governments additional insight into an organization's tax affairs.
At the same time, governments around the world are adopting tax reforms through which businesses must share more details about their operations, including country-by-country (CbC) reports that list revenue, profits, income tax paid, taxes accrued and employees for each tax jurisdiction in which the organization does business.
Governments worldwide are collecting and sharing taxpayer information at a rapid pace. Furthermore, tax policy and legislative changes in one jurisdiction – such as enactment of tax reform in the United States – can trigger changes across the globe as countries seek to remain competitive and protect their tax base. Tax has become increasingly connected and companies must act so that their people, policies and systems are keeping pace.
Tax controversy: a typical scenario
How are companies experiencing this interconnectivity? Take, for example this increasingly common scenario. A multinational firm is confronting many tax controversy challenges around the globe including:
- A transfer-pricing dispute with the German Federal Central Tax Office
- Argentine authorities that are considering revoking an operating license
- A Southeast Asian nation preparing to "name and shame" the company in the newspapers
- Several ongoing contentious disputes in multiple jurisdictions where the company has operations
In addition, the company is about to undertake a corporate restructuring in Russia, adding another layer of tax exposure. By the end of the year, this organization is facing controversies with dozens of different tax authorities – and its leadership is looking to the vice president of tax for a strategy to manage and resolve existing controversies and to mitigate future controversies.
The company is experiencing first-hand how the tax information collection and sharing process has accelerated, triggering an increase in tax controversy. Governments worldwide are collecting more from corporations, and they are using a combination of multilateral transparency reforms, digitization, vast data collection, and enhanced data analysis to identify and act on tax issues.
Connectivity – amplified
This increased information sharing and interconnectivity means that tax controversy in one country can now quickly spread and intensify as tax authorities collaborate across borders. Collaboration is being aided by digitization and the volume of information gleaned from country-by-country reports and the master file that large companies must submit to all relevant tax authorities.
Enhanced tools are allowing tax authorities to develop a more comprehensive global picture of companies' operations, employees, sales, intangibles and tax transactions. They are also marking the "slow death" of the annual cycle that once framed the tax function. While companies still file an annual tax return that is still viewed and evaluated only by a tax authority, making that tax data available to the public is under consideration in several jurisdictions, and the traditional tax return may eventually give way to real-time reporting.
The result is that tax controversy is rapidly evolving from two-sided disputes in specific countries into a multi-dimensional, multi-country dynamic. As noted by EY Global International Tax Services Leader Alex Postma: "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."
In this environment, companies need a holistic end-to-end approach to tax controversy that provides a line of sight into the issues at stake and the potential for future conflicts. They need a centralized strategy for managing tax controversy that includes deploying policies on a globally consistent basis. Should disputes arise, having resources that can act as a "bridge" between the tax authorities and the company is essential, helping them navigate complexities and resolve matters quickly and efficiently.
While executives increasingly indicate they understand this, the numbers show there is still more work to be done. In EY's global 2017 Tax Risk and Controversy Survey, which gathers the views of tax and finance executives in 69 jurisdictions across more than 17 industries, almost half (46%) of respondents said they have no visibility over active tax disputes.
The chart below shows that most businesses are somewhat, very or extremely concerned that tax transparency initiatives and information sharing could lead to a higher level of tax enquires.
This need for visibility isn't limited to the tax department. "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," says Rob Hanson, EY Global Tax Controversy Leader.
The course of action is clear. Businesses need a global perspective and policies that cover all jurisdictions in which they do business.
This includes a comprehensive approach that lets organizations identify potential issues that could later evolve into disputes. And they need a centralized strategy to manage tax controversy based on these global policies.
Managing the risk: steps to take now
- Adopt a top-down, end-to-end global approach to tax controversy with policies and procedures that facilitate oversight and early identification of global tax controversies
- Determine whether you have the right people, with the right skills, in the right jurisdictions to prevent, manage and resolve tax controversy issues – these individuals must understand how addressing an issue in one jurisdiction can trigger controversy in another
- Evaluate whether existing systems can provide a complete picture of tax controversies in all jurisdictions in which you operate
- Integrate tax with business planning to facilitate proactive management of tax controversy that takes into account a company's entire tax footprint
- Stay connected with global legislative, regulatory and tax administration changes
As we continue to shift from a world of separate relationships to a connected one in which data is shared and authorities exchange information in real time, successful companies will be those that remain nimble and open to new ways of thinking about tax, tax data, and tax controversy management. Because companies cannot opt out of this increasingly interconnected tax environment, the time to act is now.
The views reflected in this article are the views of the author and do not necessarily reflect the views of the global EY organization or its member firms.