Multilateralism rising: How tax administration is going global
Luis Coronado of EY evaluates the growing trend of multilateralism in the administration of tax, and suggests how MNEs can make themselves ready for the anticipated changes.
Amid many years of heated debate, I believe the global tax community does agree on something, at least – that the administration of tax has changed significantly and continues to experience spectacular transformation.
Cross-border taxation in particular is experiencing its own period of profound disruption across the dimensions of both policy and administration. Activities such as the BEPS project, the potentially imminent next phase of international tax reform, increasing information exchange, and the rapid rise in the capabilities of revenue authorities globally provide ample supporting evidence.
I also believe that today represents only the end of the beginning, not the beginning of the end, of change. Though long-term predictions are always a challenge, EY’s 2021 Tax risk and controversy survey found that among very large multinational enterprises (MNEs) (those with more than US $50 billion of annual revenues), 65% foresee higher levels of tax enforcement in the coming three years. 60% expect direct tax increases, and 51% expect transparency and disclosure requirements to grow.
Indeed, all signs point to tax administrations becoming exponentially more empowered, sophisticated and connected than before. That is not surprising, given the high level of political focus on tax that has characterised the last decade and more, a focus that is resurgent today.
With inequality, climate change and new methods to tax multinationals all at or near the top of policy-makers’ agendas, interest in where and how much tax MNEs pay is unlikely to wane any time soon.
While it is tempting to focus only on individual trends in global tax administration – including the ‘revolution’ in transparency and disclosure, the advent of automatic information exchange and disruptive tax authority digitalisation – there is a far broader phenomenon (and resulting impact) of which MNEs should be aware: that the very administration of tax is rapidly becoming ‘multilateral’ in nature. In effect, tax – both policy and administration – can no longer be called an exclusively sovereign business.
Instead, multilateralism and collaboration among revenue authorities are both widespread and accelerating rapidly. A great coming together has occurred, fostered and sponsored by the OECD, other global organisations (such as the International Monetary Fund, United Nations and World Bank) and most especially by, regional groupings such as the African Tax Administration Forum (ATAF), the Commonwealth Association of Tax Administrators (CATA), the Inter-American Center of Tax Administrations (CIAT), the Intra-European Organisation of Tax Administrations (IOTA) and the Study Group on Asian Tax Administration and Research (SGATAR), among others.
Why go multilateral?
There is a simple answer to the question of why. The answer reflects globalisation, increasingly complex supply chains and the ability of some MNEs to deliver goods and services with limited physical presence, and centres upon the desire of tax authorities to gain a wider view of a business’ value chain in order to increase tax revenue collected.
The growing impacts of tax multilateralism can easily be confused with those of a tax authority that is developing its capabilities more generally, and they therefore require careful identification and assessment.
Broadly, I believe there are three key areas where the practical outcomes are most apparent:
Demands for more detailed information from taxpayers is growing, whether through statutory transparency and disclosure requirements or during an examination, risk review or tax audit. In this area, 57% of large MNEs expect a growing number of ‘uncertain tax positions’-like requirement to be imposed in the coming three years;
Tax audits are becoming increasingly forensic, multi-country and whole-of-group-focused. 31% of large MNEs report having experienced such analysis of their tax affairs in our survey. I fully expect that figure to grow when we repeat the exercise in two years’ time; and
Digital disruption is occurring, effectively bringing the decades-old ‘traditional’ tax compliance process and lifecycle to an end. A full 75% of survey respondents report that this has increased their overall tax risks in the past three years.
In this article, I will select a series of activities that I believe best represent this growing multilateralism in the administration of tax. As with tax as a general mechanism, multilateral activities include both ‘carrots’ and ‘sticks’. Likewise, some multilateral activities occur at the beginning of the tax controversy lifecycle, while others represent the fast-growing phenomenon of multilateral dispute resolution – itself an important pre-cursor to the imminent BEPS 2.0 changes. My objective is not to explain each activity in detail; rather I will describe them at a high level, explaining how each aligns to the broader trend of multilateralism.
I will conclude with some final thoughts about the longer-term responses that MNEs should consider making as they ready themselves for a future model of tax administration that will be far more connected, digital, and potentially more intrusive than that of the past.
What are the evolving multilateral activities?
Increasing effectiveness of tax administration groupings
I refer to the plethora of tax authority communities operating today. One group I focus on as a leading example of multilateralism at work is the OECD’s Forum on Tax Administration (FTA). The FTA brings together Commissioners from 53 advanced and emerging tax administrations and is a forum through which jurisdictions identify, discuss and influence relevant global trends and develop new ideas with the objective of increasing the efficiency and effectiveness of tax administration, tax compliance and tax certainty.
Organised into a series of networks, the FTA focuses on the delivery of time-limited and action-oriented projects and pilots, as well as the publication of a range of reports.
Benefits of networking
The FTA’s influence can be hard to gauge from the outside, but I would like to point to two examples. The first is anecdotal; a member of a mature market tax administration explained to me his personal experiences of FTA participation over a five-year period.
“The first meeting I went to, I didn’t know anyone at all. I was introduced to many people, shook a lot of hands and forgot many names.”
“At the second meeting,” he continued, “I nodded at a few faces I recognised and ended up at one of Singapore’s food markets with a group from Singapore’s IRAS and Australia’s ATO. At the third meeting, a year later, I had good relationships with at least a dozen people, covering maybe eight countries, including those people I’d met previously from the ATO and IRAS.”
“And now?” I asked. “Oh, it’s easy,” he responded. “Whenever I see something that doesn’t quite look or feel right, I just call up my contact at the ATO and we chat it through. We’re not talking about specific taxpayers, but we do talk about the planning arrangements we’re seeing, contractual and legal arrangements, and what new structures we see companies coming up with.”
So there you have it. Not formal exchange of information, but rather the informal exchange of insight and intelligence.
Tax administration technology
A second example involves tax administration technology. One of the most active FTA sub-groups focuses on this and collaboration, the exchange of leading practices and potentially even of tools is key on the group’s agenda. I am joined by many EY colleagues in my belief that the strategic goal of many tax commissioners is to eventually connect their systems directly to the MNEs’ enterprise resource planning (ERP) systems.
“EY’s 2021 Tax risk and controversy survey found that among very large MNEs, 65% foresee higher levels of tax, enforcement in the coming three years. 60% expect direct tax increases, and 51% expect transparency and disclosure requirements to grow.”
A first step in this direction is already being piloted by FTA countries Hungary, South Korea, Russia and Slovakia via their connected cash registers pilot, where such registers are connected to tax authority data lakes in real time.
Perhaps surprising to many, Russia (who chair the FTA e-services and digital delivery group) is in my view a leader in tax administration technology. Look to their systems, as well as those of both Brazil and Mexico if you want to understand what might be coming elsewhere in the coming three to five years.
Exchange of taxpayer information
Another area illustrating the flattening world of tax administration is the exchange of information (EoI). I now regularly tell clients that they should fully expect that information shared with tax authority A will rapidly be available to tax authorities B, C and D.
Powering this rising multilateralism is what the OECD has termed a ‘revolution in transparency’ between taxpayers and tax authorities that includes new rules such as DAC6 (MDR) in the EU, country-by-country reporting (CbCR), transfer pricing (TP) master file and local file requirements and countless national requirements, as well as multilateral agreements that provide the legal basis for automatic/spontaneous, multilateral exchange.
According to the Global Forum on Transparency and information exchange for tax purposes’ 2020 report, these developments have helped identify around €107 billion (approximately $127 billion) in additional tax revenues. In total, 105 jurisdictions were due to exchange information in 2020, and the network of exchange relationships has expanded in a dramatic way recently, from 6,100 at the end of 2019, to 7,000 currently, a 15% annual increase. Those are significant results.
Indeed, sharing between revenue authorities has also expanded, in large part due to the groupings such as the FTA that I mentioned. It has moved beyond taxpayer data and into the realm of insights, knowledge and leading practices – all secured as simply as picking up the phone.
Trends in multilateral dispute prevention and resolution
As much as these trends (especially when coupled with new digital approaches and the use of data analytics) have driven a rise in tax administrations’ capabilities and a subsequent expansion in the scrutiny of taxpayers’ affairs, they are also resulting in an explicit shift in how tax disputes between an increasing number of countries (often concurrently) are being prevented and resolved.
APAs go multilateral
A key indicator of multilateral dispute prevention comes in the area of transfer pricing. Here, a distinct shift in the form of advance pricing agreements (APAs) is apparent, centring initially on a move away from unilateral and to bilateral agreements.
Multilateral APAs, meanwhile, are far less developed as a global concept (outside of financial services organisations) but significant country interest is growing, and a project exists at the OECD level to study how they might be useful to MNEs with complex supply chains.
I was heartened to also hear that the OECD workstream is looking at whether a non-TP, APA-type instrument could be developed by jurisdictions and the OECD, potentially addressing a far broader range of tax issues.
Creation of ICAP
The International Compliance Assurance Programme (ICAP) is a voluntary tax risk assessment and assurance programme designed to facilitate simultaneous, co-operative and multilateral engagement between MNEs and tax administrations in multiple jurisdictions. It utilises a group’s country-by-country (CbC) reports, TP master file and local files and other information provided by the MNE to try and provide an efficient, effective, clear and coordinated approach to achieving early tax certainty and assurance.
March 2021 saw the OECD publish a list of 19 jurisdictions who at that time had confirmed their participation in the third phase of ICAP, itself representing a move from pilot status to full programme. The 19 included Singapore, a new entrant, and have subsequently been joined by Poland (who participated in the second pilot phase) as well as Argentina and Colombia (who did not). I applaud the OECD and these emerging markets for joining up.
ICAP’s scope covers the assessment and assurance of TP risk, permanent establishment risk and other categories of international tax risk as agreed by the MNE and tax administrations, including issues such as hybrid mismatch arrangements, withholding taxes or treaty benefits.
In return for participating in the open and transparency risk assessment exercise, the MNE may receive assurance (but not legal certainty) that if their low risk status is agreed (and resolution of any open issues can actually occur within the ICAP process), then they will not experience compliance interventions for a defined period of time – typically two years, plus the year of risk assessment.
ICAP can provide multilateral comfort on both a retrospective and prospective basis. According to the OECD, a risk assessment involving between four and eight tax administrations is ideal, potentially representing a solid return on time invested for some (but perhaps not all) MNEs.
The number of tax audits involving two or more countries is growing
Joint and simultaneous tax audits involve two or more tax administrations joining together to examine an issue or transaction(s) of one or more related taxable persons (both legal entities and individuals) who have cross-border business activities in which the tax administrations have a common or complementary interest.
Under the approach, the tax authorities will typically proceed in a pre-agreed and coordinated manner in engaging with the taxpayer, enabling the taxpayer to share information with them jointly. It can be both conducted cooperatively with the taxpayer, but also non-cooperatively, against the will and without the involvement of (or even communication to) the taxpayer.
Such programmes are slowly but surely growing in usage, with certain country pairings (especially in Europe) responsible for large portions of global activity. Around three in 10 respondents to the survey say they have participated in one in the last three years. Again, I expect that figure to grow in future surveys.
The mutual agreement procedure (MAP) might be considered as the most important international tax dispute tool available. In fact, a MAP can go beyond its typical use for TP and be used to address other tax disputes; it is unfortunate that it is not used more often to do so.
At their December 2020 Tax Certainty day, OECD Centre for Tax Policy and Administration members discussed that while most tax administrations have little current experience in this area, there are high levels of interest in developing a go-forward plan.
A further workstream has therefore been convened, studying issues such as definitions and examples, the legal basis for initiation of a multilateral MAP, and procedural issues, including whether a specific process should be designed for such instrument.
With the possibility that multilateral treatment can potentially go beyond just TP issues and include permanent establishment, residency issues, and the use of hybrid instruments – and also taking into account the number of disputes likely to arise from BEPS 2.0 in the coming years – I believe that the availability of a multilateral MAP approach will be a positive for MNEs. Next steps by the OECD may include making specific recommendations and publishing a handbook.
Without wishing to sound over-dramatic, we have already entered a new period of how tax is administered. New responses and approaches will be needed if MNEs are to engage with the resulting tax enforcement practices with appropriate levels of confidence.
As tax authorities everywhere build their tax administration of the future, MNEs will need to do the same, shifting gears and creating their own ‘Tax controversy department of the future’ – one that is aware, aligned and capable of managing not only this multilateralism, but other seismic changes.
Within tax multilateralism many of the activities I outlined come down to data and information. Tax administrators and tax auditors have more information than before, whether sourced from their peers or from MNEs themselves; more information is being demanded during an audit; entry into programmes such as multilateral APAs, multilateral MAPs or ICAP will centre upon information – both making sure that the MNE has the requisite information to enter the programme in the first place, but also the confidence in that data will not be causing collateral damage if it is exchanged, which it surely will be.
It has often been said that we are in the age of information, but I think we’ve gone past that – perhaps the age of information management is more fitting.
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Luis Coronado is a partner and global tax controversy leader and Asia-Pacific transfer pricing leader based in Singapore. He has more than 25 years of advisory experience in international tax, TP, tax policy and controversy issues.
Before relocating to Asia, Luis spent several years serving domestic and multinational companies in Latin America. He advises companies on the negotiation of bilateral advance pricing agreements and competent authority resolutions with a range of countries. In the past, he has advised the Inter-American Development Bank, the UN’s Economic Commission for Latin America and the Caribbean, and the World Bank on tax policy issues especially on transfer pricing policy and legislation.
Luis holds a bachelor’s degree from the Universidad Iberoamericana and a MBA from the University of Southern California.