TP directors question the “compliance overload” brought by reporting requirements, including country-by-country reporting (CbCR) and Directive 2018/822 (DAC6), claiming the OECD’s pillar two project to be the most efficient policy against harmful TP practices.
“In a nutshell, there is increasing demand for tax transparency, and in addition, the requirement comes from other sources. It is tougher than ever to be a good compliance corporate taxpayer,” said Sanna Jäälinoja, group head of TP at Outokumpu. Some large companies are paying a high price for compliance and the administrative burden is a distraction from the core focus: creating shareholder value. This is leading many companies to expand their tax functions.
“We see a number of our clients increasing the size of their tax departments to deal with compliance, and compliance is just one thing – they are even expanding their tax teams to deal with controversy across the globe,” added Rachit Agarwal, TP director at DLA Piper.
Corporations are increasing their tax teams by hiring more talent, but tax transparency policies including CbCR and DAC6 could continue to pose compliance difficulties, according to tax directors.
Scoping problems
Taxpayerscan expect more pressure as greater tax transparency continues to gain political support. The compliance burden may continue to get worse, and the reputational risks of opening up arrangements to public scrutiny are not going away.
While the European Union (EU) is pushing to make CbCR public to increase corporate tax transparency, TP directors are questioning the effectiveness of the reporting requirement, initially aimed at supporting tax administrations in identifying harmful TP practices and BEPS-related risks.
The information requested by tax authorities is too wide, according to tax directors, leaving companies with a significant compliance burden and tax administrations with unnecessary data.
“Politically, it easy to call for greater transparency and submission of data but for the taxpayer the biggest issue is the additional compliance cost. Are you telling anything to tax authorities that they didn’t already know? said Don Shackley, head of TP at Burberry.
“There are increased standards for the quality of TP documentation post BEPS but it often feels like many tax officials would rather just write a letter full of questions without reading the TP documentation and accounts they have in their possession,” said Shackley.
DAC6, which requires taxpayers to report aggressive tax events to their jurisdiction, presents a similar challenge. Taxpayers have previously condemned the administrative burden brought by DAC6 due to the large amount of data being processed.
“The scope of DAC6 – the scope of a reporting obligation is too wide, there is a lot of over information that you are receiving as a tax authority. It makes it hard to perform data analysis or case analysis for this information,” said Frederik Boulogne, tax lawyer at BDO and lecturer at the University of Amsterdam.
“What I’ve seen in the vast majority of cases where something had to be reported on a DAC6, what had to be reported was very unlikely to be seen as tax avoidance. This is an example of when a mandatory exchange of information by tax authorities in which the information produced is fairly usable,” said Boulogne.
“DAC6 has made producing information and sharing it an important task because penalties are so high, but the information is not always valuable” he added.
The broad scope of these tax transparency mechanisms has resulted in a “compliance overload”, according to Jäälinoja, in which corporations have been challenged by layers of documentation requirements topped with other tax contribution reports.
Tax authorities that have been overfed with information are becoming more robust with their investigations, which has, in turn, led to a lack of trust between tax administrations and corporations.
The compliance burden, combined with an absence of trust between the taxpayer and tax administration, mark a significant issue in tax transparency today. Corporations’ fear of being targeted by authorities has led to many invest in their TP teams, leaving tax directors question the necessity of the vast data being shared. Tax authorities risk facing more scrutiny as tax transparency regulations continue to strengthen.
