How general counsel can navigate tax controversy in a changing cross-border reality

Authored by - Osnat Nemetz, Senior Associate, Tax Litigation at EY Law

In brief

• Multinational organizations are operating in an environment marked by a widening gap between tax rules, codes and regulations.
• GCs that proactively familiarize themselves with these changes now can draw on their global view to mitigate related risks and provide value in this space.
• Start by adopting an integrated approach and connecting people from across functions and disciplines to work towards common goals.

If your organization operates in more than one country, an emerging mismatch between tax rules, codes and regulations could have a lasting impact on operations. As the world seeks to address global taxation at scale, GCs will want to become more familiar with these changes to reduce risk and provide value, since they may have a more global view than their local tax personnel. Doing so effectively requires an integrated approach that sees multidisciplinary specialists working together strategically towards common goals.

How is taxation changing for multinational organizations?

The Organisation for Economic and Co-operation and Development (OECD) established a number of initiatives seeking to bridge gaps between how corporate tax planning and compliance is conducted in different countries.

The last few years have seen myriad consultations and advances on a host of different guidelines, most recently the Base Erosion and Profit Shifting (BEPs) Pillar Two project. Specifically, in response to the Pillar Two global minimum tax (GMT) rules, 25 countries, including the majority of large EU member states, adopted the standards effective January 1, 2024. These rules represent a new parallel system of taxation that operates alongside existing country tax rules. More countries are expected to adopt these rules in 2024, keeping the January 1, 2024 effective date.

As proposed changes become increasingly realistic, organizations around the world are concerned about a potential corresponding uptick in tax controversy disputes. In the EY Tax Risk and Controversy Survey 2023,  some 45% of respondents said they believe Pillar Two will increase the likelihood of new tax audits and disputes. A further 55% said they expect Pillar Two will increase overall tax costs. Overall, more than half of global tax directors think tax authorities will focus more on cross-border tax issues in the coming two years. Transfer pricing is one of the main tax risks respondents saw looming.

At the same time, increased information sharing between taxing authorities in different countries in an ever-more digital world is also driving up the risk of a tax audit — all while individual countries are implementing the different OECD pillars in their own tax legislation domestic rules.

For instance, new documentation requirements are forthcoming for multinational organizations operating in the UK. Meanwhile, in South Africa, we’re seeing additional movement around advanced pricing arrangement (APA) programs and loan interpretations. Here in Canada, the APA program allows corporations to negotiate between different countries where a potential transfer pricing dispute may arise in future years.

What do these changes means for GCs operating in Canada?

This evolving reality has very real implications for GCs in Canada and around the world. Specifically, GCs will have a bigger role to play in reducing risk in this environment. For example:

1. APA submissions may require additional GC input from here on out. While GCs may not necessarily be deeply familiar with the intricacies of tax, their expertise will be required to complete these kinds of assessments. Focusing on these audits at the earliest stages is important so you can make an impact throughout the various stages of negotiations. Keep in mind: APAs are in respect of future years, not previous years (which would be subject to audit). This means GCs may have some insight into future business planning, as opposed to solely tax personnel.
2. Cross-jurisdictional requirements will need even more GC oversight. Because of the increasing global information exchange and rise of joint enforcements, no GC can afford to ignore mail in a given jurisdiction — even if that reporting jurisdiction was previously considered relatively small on the scale of multinational operations. Staying aware of joint efforts will be a big part of responding effectively in this environment. This includes confirming the mailing address and authorized representatives for each tax jurisdiction. Information will need to be provided to tax authorities in ways that are searchable and shareable, unlike in the past. You’ll need the platforms, systems and technology in place to deliver on that effectively.
3. GCs will need to maintain a clear and connected view of ongoing updates. So much change requires a new level of GC oversight. It can be difficult to track so many competing changes in legislative and regulatory requirements. You want to work with advisors who can help you keep a firm grasp on what’s changing, when and how so you can evolve reporting and risk mitigation efficiently. You don’t want to be caught behind playing catch-up. Surrounding yourself with the right intelligence and an always-on approach can help you be proactive and respond in a timely fashion when disputes do arise — saving time, money and potential risks in the long run.