Many businesses — of all sizes, but especially the very largest — have not fully adjusted to ongoing, dramatic changes in tax authority scrutiny of their affairs, according to respondents to the 2021 EY Tax Risk and Controversy Survey. And change may be far from over: 53% of tax leaders expect greater enforcement in the next three years, especially as governments begin to address budgetary pressures arising from responding to the COVID-19 pandemic.
It’s not only external scrutiny that tax leaders are facing. Our survey found C-suite executives are demonstrating more interest and oversight of tax in 75% of companies with annual revenue of more than US$100 billion, and just 20% of all respondents say a lack of C-suite support is stopping them from raising the profile of tax risk and controversy management in their company.
It seems clear the tax leader’s role is evolving, and this series seeks to identify critical answers and actions to help them reframe and protect the future of their organizations. After all, it’s not just traditional risk and dispute mitigation that today preoccupies executives: tax leaders are playing an increasingly strategic role, shaping how businesses create, measure and report long-term value.
That’s why we recommend they pursue three key actions:
- Recognize the part tax plays in long-term value creation for the business and the risk tax disputes present to both the bottom line and company reputation
- Align people, processes and technology to help the business not only manage but predict and pre-empt inquiries, disputes and litigation
- Understand that taking a proactive, forward-looking approach may require fundamental change: creating the tax controversy department of the future through the implementation of three solution areas.
- Tax risk assessment: predicting and addressing tax disputes before they occur by sustaining the comprehensive assessment of all tax risks facing the enterprise.
- Tax risk management: establishing a framework to prioritize and mitigate the impact of tax risks that do arise, noting any potential knock-on effects.
- Tax audit, dispute and litigation management: mitigating financial and reputational risk to the enterprise by using a range of tools to secure quick and effective resolution of disputes.
Time is of the essence. The pace and volume of tax change is relentless, and digitalization is disrupting the decades-old tax compliance life cycle. The way in which tax auditors collect information, risk-rate businesses and then select and audit them has and is shifting, with human interpretation being supplemented by data analytics, machine learning and artificial intelligence.
Survey respondents also say that they now see a far more diverse tax risk environment. This spans a spectrum — everything from the scrutiny of routine, commercially sound activities to major, billion-dollar settlements in court. But it also includes a middle ground of sorts — the opportunity for more open, transparent and collaborative relationships with revenue authorities.
Looking forward, a second crescendo of tax enforcement change is building. Concerns about the efficacy of untested dispute resolution processes related to potential new ways to tax cross-border activity may add to future tax risks. At the same time, unprecedented pressure on governments to decrease budget deficits arising from their responses to the COVID-19 pandemic is already creating new hazards in many jurisdictions.
All things considered, there is an urgent need for tax leaders to respond, and this report details exactly how they can take the initiative — by building their tax controversy department of the future.
Taxing new demands
Tax authorities have become exponentially more sophisticated in the six years since cross-border tax rules began to be significantly overhauled. Survey respondents say authorities are collecting and analyzing fresh data from new transparency and disclosure submissions, sharing that information with each other via automatic information exchange protocols, thus extending their view across the entire footprint of the business.
And tax authorities everywhere, from the most mature to those in emerging markets, are digitalizing, transforming their ability to understand complex value chains and using data analytics to examine companies from every angle. In some cases, tax authorities know more about a company’s tax or customs activities than the company itself.
About this survey
EY professionals interviewed 1,265 tax and finance leaders across 60 jurisdictions and 20 industry sectors during the fourth quarter of 2020. Survey fieldwork was conducted after the October release of Pillar 1 and Pillar 2 Blueprints under the OECD/G20 project on Tax Challenges Arising from Digitalisation — known by many as “BEPS 2.0.”
This increased scrutiny comes at a time when businesses are seeking to satisfy all stakeholders, both by answering their calls for disclosure and continuing to deliver long-term societal value. Tax is now a central part of that strategy, with many businesses maintaining a clear policy around external publication of tax strategy, policies and other data. In some countries it’s a legal requirement, while in others, businesses are making a proactive and prudent decision to do so.
“By developing a clear narrative about their tax profile, companies have the opportunity to give stakeholders the full picture of the contributions they make to public revenues and social services through the taxes they pay,” says Kate Barton, EY Global Vice Chair – Tax. “Being proactive on this will help the company advance its broader focus on creating long-term value for shareholders, customers, employees, and the communities it serves.”
The stakes for tax leaders are high. From the perspective of the wider business, those who fail to prepare may face new financial exposure from higher tax assessments, double taxation and penalties (often punitive), interest and surcharges resulting from challenges to new and existing ways of operating.
Reputational risks associated with tax controversies can also spill into the public domain, creating a deeper impact on business, particularly for those with well-known brands or focused on building long-term value. In fact, 35% of respondents expect higher levels of reputational risk for business in the next three years.
At the operational level, tax leaders of affected businesses will have to divert attention away from core tax function purpose, instead responding to inquiries and managing disputes. Perhaps of even more concern is that around four-in-ten respondents in both Asia-Pacific and Central and South America say they are concerned about possible tax-related criminal charges being imposed — something that is already occurring in a growing number of countries.
The value of tax technology
Tax technology can be an effective tool in supporting global tax risk and controversy management.
All tax leaders should have access to dashboards listing and visualizing all active inquiries, disputes and litigation. Without them, the prioritization of disputes — critical to both effective tax risk assessment and tax risk management — cannot be provided. Reaching such a state requires finding and then implementing tools that have broad functionality and flexibility, allowing incoming inquiries to be logged, responses largely automated, case facts stored, and possible future disputes identified via the analysis of all available data.
Such systems are no longer out of reach. Leading practices in this area include building them or leveraging tools provided by their professional services providers, such as the EY Tax Audit and Controversy Management (TACM) solution that integrates people, process and technology.
Businesses at the top end of the tax risk and controversy management maturity model are also finding tax data collected for compliance and reporting purposes is valuable for predicting future disputes. It can contribute to a more informed understanding of financial health, making it an important part of the sustainable business practices underpinning long-term value.