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Digitalisation could lead to increased tax controversy after COVID-19

Digitalisation and tax transparency could lead to more tax disputes post-pandemic

Taxpayers are revising their outlook on tax controversy after seeing more disputes in the EMEA and APAC regions. Most businesses are anticipating digital tax administration and transparency to drive the next wave of litigation.

The COVID-19 pandemic has forced many organisations to restructure business models and supply chains, which has also changed in-house considerations on managing tax controversy.

Large businesses need to revise their tax governance strategies, including how to build relationships with tax authorities and manage public image on total tax contributions. This is just as tax authorities are using digitalisation efforts to uncover evidence that could increase tax litigation.

“For all the rapid developments in tax law and tax authority behaviour along with all the major economic shocks and events out there, what is happening in-house is causing the most anxiety since it is seen as a driver of risk,” said Samir Yahiaoui, international tax director at Deloitte UK, at ITR’s Managing Global Tax Disputes Summit.

“If you dig a little deeper, it is about incremental changes in service centres or the head office, or even senior executive behaviours and introducing tax technologies that are driving those concerns.”

Some taxpayers are already starting to see the consequences of such incremental changes within their business during the pandemic in 2020.

Almost 43% of taxpayers at ITR’s Managing Global Tax Disputes Summit said they faced an increase in controversy in the EMEA region and 22% of taxpayers saw an increase in the APAC region too. An overwhelming majority of respondents (83%) agreed that the COVID-19 pandemic and its after-effects will continue to increase tax controversy issues in the longer-term.

The business’s tax governance model is going to become even more important to avoid costly mistakes, such as oversharing sensitive tax details from the front-office function, under an increasingly digital tax environment with real-time reporting.

A reinforced tax governance framework is especially important under a global increase in tax transparency measures such as country-by-country reporting (CbCR), which already triggers questions from tax inspectors.

How tax transparency complicates tax controversy

The in-house tax profile has significantly changed in the last five years because of tax transparency too, and businesses need to be more conscious of tax risk and the details involved in handling tax affairs across different functions, which contribute to the overall tax strategy.

Tax transparency includes more than traditional tax affairs, it also involves officer accounting activities, point of sale certifications, and corporate criminal offence rules.

As more businesses are changing supply chains and pivoting to digital operations amid the pandemic, some direct tax sensitivities relevant to tax controversy include IP management, IP valuation, and royalty payments.

Taxpayers also singled out banking, treasury, and M&A operations as a ‘fertile ground’ for tax inspectors to raise questions and potential challenges.

One tax leader at a large oil production company said: “While everyone is trying to just get through this [pandemic] now, attitudes will soon change. We shouldn’t lose sight that two to three years later not being able to prove where goods have come from, how they entered your jurisdiction, and who approved what expenditure and for what purpose will be a source of significant controversy.”

“With all that taking place alongside tax authorities digitising, we will need to ask ourselves whether we can cope and I think many of us will be playing catch up,” he added.

Managing tax disputes

More companies than ever before are opting to control their tax narratives early and protect their public image. In some cases, companies are disclosing their tax strategy under frameworks such as the Global Reporting Initiative’s GRI 207: Tax standard.

The Enel Group is the latest multinational business to introduce similar tax governance standards by joining the B-Team’s Responsible Tax Principles. However, the majority of businesses still prefer more privacy when it comes to tax matters.

The Managing Global Tax Disputes Summit found that 27% of taxpayers are publishing breakdowns of their tax contributions, while 52% of respondents are not doing so.

Tax experts at the conference also suggest utilising a tax controversy model to manage the incoming tax controversy risks from the pandemic. The suggested model includes three levels starting with strategic direction on tax governance and individual roles and responsibilities.

The other two levels include breaking down key activities under the tax department such as negotiating advance rulings and finding ways the department can support the overall business infrastructure through functions such as better data management.

“What I see over the last couple of years is that tax is about building relationships and collaboration,” said one EMEA tax leader at a coffee company. “Not just internally, but definitely collaborating with the authorities and making sure tax controversy issues do not come as a surprise,” he added.

“And authorities want to have an open relationship too, so we share our business strategies and forecasts with HMRC in the UK and authorities in other large countries where we do business,” explained the tax leader.

As more tax transparency measures emerge globally to aid authorities in data-driven tax inspections, taxpayers need to better align their own digital operations and other in-house changes with the overall tax governance strategy to avoid costly disputes in the longer-term.

Better collaboration internally and externally is one key takeaway from ITR’s Managing Global Tax Disputes Summit that can help taxpayers navigate the post-pandemic tax controversy environment.

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