Prevention is better than cure
Externally, many tax authorities offer a variety of programs that may help a taxpayer achieve higher levels of tax certainty (but not necessarily legal certainty) that the positions they take on their tax return won’t be audited.
These programs span both pre- and post-filing phases. Pre-filing programs include securing tax rulings or APAs, where 80% say that securing one or more APAs would deliver some or significant value. That’s not surprising given the number of companies that are actively trying to secure new APAs in advance of Pillar Two’s implementation.
Also available in the pre-filing period are various cooperative compliance programs, both at the national level (such as the Dutch horizontal monitoring program) and multilaterally, in the case of the OECD-supported International Compliance Assurance Programme (ICAP), now adopted by 22 jurisdictions. But less than half of respondents (48%) say they currently execute a clearly defined, proactive, cooperative compliance strategy.
Tax disputes will often occur even after all best efforts to prevent them have been exhausted. Here, the breadth and scope of documentation required by tax authorities is rapidly expanding, but tax and finance executives indicate that work remains if business is to keep pace with the authorities’ demands. Some 54% of respondents, for example, say they don’t currently create and maintain substance or business activity-based tax documentation files that can be called upon if a transaction is audited. Coincidentally, the same proportion say they select key transactions and periodically review the supporting documentation. This is one area in which survey respondents may wish to consider investing more time.
Both the existence and the outcome of a tax dispute can dramatically reduce tax certainty. Proactive tax leaders therefore tend to consider what can be done to increase tax certainty at both the outset of and during a dispute itself. Tax and finance executives say, for example, that their leading priority is to try to better understand the tax authorities’ concerns and objectives before a tax audit commences. They will also put processes in place to help ensure that any settlement considers the potential multiyear, multijurisdictional “red flags” and knock-on effects. Finally, proactive tax leaders will enter each audit or dispute with as much knowledge of the local audit process and cultural approaches as possible.
It’s never too late to look for resolution
When disagreements do result in new tax assessments, dispute resolution programs can also contribute to higher levels of tax certainty. Central to resolving cross-border double taxation disputes and obtaining relief from double taxation is the Mutual Agreement Procedure (MAP).
MAP is one of the main tools available to companies for resolving such disputes, and peer reviews (under BEPS Action 14) have spurred changes regarding the structure and organization of competent authorities, streamlining their processes for resolving MAP cases in a timely manner.
The results of the OECD’s work are only slowly starting to be more visible; 37% of tax and finance executives (one percentage point higher than in our 2021 survey) say they use MAP, though this figure does grow among the largest companies. However, many businesses may not be aware that MAP can be used to address a spectrum of issues concerning taxing rights, beyond transfer pricing and profit allocation. Given Pillar Two and other developments, consideration of MAP will become even more important.
When agreement between taxpayer and tax authority is simply unachievable, tax litigation may be the only way to proceed. But nearly two-thirds (64%) of respondents say they don’t have a defined tax litigation strategy.
Looking ahead – to Pillar Two implementation, public CbCR and the implementation of a multitude of new local transparency and disclosure requirements – any efforts to achieve higher levels of tax certainty will be paramount.
Certainty in an uncertain world
Many tax functions are now moving to centralize and combine more of their controversy processes, localizing policies and controls and putting in place well-defined tax controversy roles. These activities are designed not to withdraw responsibility from local professionals, but to collaborate more closely in identifying and managing risks and avoiding exposures.
Any degree of tax certainty that can be secured in an uncertain world is safer, smarter and more strategic than sitting back and hoping for the best. A tax function that is better connected to the business through a robust tax governance framework and that makes use of the latest data capabilities will be in a position to contribute more value to the organization’s overall objectives, be they related to ESG, long-term value or protecting the enterprise. And that turns risk into opportunity.