Greater regulation of businesses calls for strategic tax responses
Businesses are concerned about greater regulation and the resulting impact of increased enforcement actions and fines where they operate. The area of tax is no exception. More companies will be audited by more taxing authorities and likely will find themselves caught in cross-border controversies between governments seeking what they consider their ‘fair share’ of a company’s total tax revenues. It’s no wonder many businesses are thinking about how to manage the growing number of tax audits and disputes around the world.
The increase in tax audits and enforcement actions is influenced by a number of factors—the Organisation for Economic Co-operation and Development (OECD) base erosion and profit shifting (BEPS) project, the related tax fairness debate, public scrutiny and rhetoric, and the need to close budget shortfalls. Of particular concern is the heightened potential for cross-border disputes that could translate into double taxation.
Tax authorities also are requiring businesses to provide additional information about their global tax footprint. As a result, companies’ ability to harness data has become a necessity. New information reporting, particularly on transfer pricing, will be used by tax authorities to conduct tax risk assessments and bring challenges to companies’ reported tax positions. Some countries are seeking additional tax information through informal requests before an audit is open—an interaction for which the corporate tax function should be prepared.
Simply put, the global political climate means that companies should re-evaluate their current strategies to manage their regulatory obligations and determine whether existing processes to respond to tax authorities, regulators, and other stakeholders (such as non-governmental organizations and the public) meet their needs.
In this environment, what should your company do differently?
It is increasingly important for companies to engage in strategic risk assessments to identify key tax exposures in the countries where they operate before the audit begins. Companies can then act to mitigate identified risks by negotiating pre-filing rulings such as APAs, proactively discussing their risk profile with tax authorities, building pre-audit defense files, and conducting mock audits or course-of-conduct reviews.
Companies can best cope with aggressive audit practices by becoming familiar with the practices and formulating a plan to respond. Proactive management of local country audits is essential. Careful implementation of risk mitigation, audit defense, and dispute resolution strategies can help resolve issues efficiently, reducing future controversy costs and unexpected tax liabilities that may affect financial results adversely.
Where should your company start?
Performing a strategic risk assessment starts with data. The ability to harness the explosion of data now available to businesses—and specifically to the tax function—can enable companies to unlock the power of data and better manage and mitigate their tax risk.
The tax function’s access to real-time, relevant information provides a strategic advantage when evaluating global tax risks and developing audit-ready defense files. Technology-enabled solutions can help break down and appropriately channel large volumes of information, manage multiple information requests, track the status of audits around the world, and connect people across functions.
Once a core strategic plan is in place, continued improvements inevitably will be necessary to address evolving business operations as well as the dynamic global tax audit and controversy landscape. These investments should be well worth it, however, because up-front planning and defensive efforts can help reduce future costs, time-consuming audit processes, and unexpected liabilities down the road.
Fully capitalizing on the power of data can lessen the likelihood that a tax audit or controversy will adversely affect your business. It’s time to start.