How should businesses respond to enhanced tax transparency measures and new reporting requirements? We offer six steps to consider immediately.
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. That is the clear message from the 901 tax and finance executives in 69 jurisdictions who participated in the EY Tax Risk and Controversy Survey.
“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.
The enhanced transparency measures and new reporting requirements, many brought about by the base erosion and profit shifting (BEPS) project of the Organisation for Economic Co-operation and Development (OECD), 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.
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.
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.
“In short,” said Rob Hanson, EY Global Tax Controversy Leader, “the task of managing tax risk and controversies is more difficult than ever. It is arguably even more challenging than some may have envisioned … when the BEPS recommendations were published and the implementation phase began.”
We recommend that businesses immediately consider six issues that should be considered to adapt to the riskier compliance environment and meet demands for more transparency in a productive fashion.
Strategic approach to tax risk management
The survey shows that long-anticipated drivers of tax risk have become a reality, so businesses should 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.
Tax and reputational risk
To cope with enhanced reporting and disclosure requirements driven by BEPS and greater audit scrutiny, work to give your tax department adequate knowledge, staffing, budget and other necessary resources to meet the new demands on the tax function.
Assess reputation risks that may arise and confirm that 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 doing so, 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 consistently.
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: Reduced audit risk, Greater control over audits involving sensitive issues, Proactive management of tax controversy, and increased knowledge-sharing.
Digital tax administration
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 understand tax authority data requirements, be able to 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.
….Culled from E&Y
