More than half (53%) of responding business tax leaders expect greater tax enforcement in the next three years, particularly as governments look to remedy budget pressures and stimulate their economies during the COVID-19 pandemic, according to the 2021 EY Tax Risk and Controversy Survey. EY teams canvassed the views of 1,265 tax and finance leaders across 60 jurisdictions and 20 industry sectors during the fourth quarter of 2020, making it the largest sample in the survey’s history.
Business tax leader respondents highlighted issues around workers stranded overseas, treatment of financial losses linked to the pandemic, the claiming of tax refunds and even the receipt of stimulus measures as top pandemic-related tax risks. Respondents are also concerned about tax risk related to transfer pricing – skewed by the pandemic – and an acceleration in the digital transformation of tax authorities. Survey respondents say they anticipate a far more diverse tax risk environment spanning everything from scrutiny of routine business activity, to major, billion-dollar settlements in court.
As a result, managing tax risks and resulting disputes has rapidly risen in the corporate agenda. Two-thirds of respondents (66%) say it has already become more important to their tax department, while the same proportion (66%) confirm that C-suite executives are demonstrating more oversight and interest in tax issues.
Geographically, respondents view Europe as the region representing the highest tax risk to businesses in the coming three years with the Americas and Asia-Pacific close behind. Attitudes to tax enforcement vary by industry, with businesses in the Media and Entertainment (57%), Oil & Gas (59%), and Telecommunications and Life Sciences sectors (68%) all reporting results in excess of the 53% global average of businesses that expect tax enforcement to increase.
Transfer pricing leads global tax risks
Transfer pricing has once again been identified as the biggest source of tax risk, as per the last three biennial surveys. Respondents say they fear a broader spectrum of risks in this area in 2021 and beyond due to pandemic-related profit volatility and the challenges of creating transfer pricing benchmarks that tax authorities will find acceptable.
A further mix of tax challenges and disputes is also expected as a result of the pandemic, including financial losses, the claiming of tax refunds, and even the receipt of stimulus measures. Almost half of respondents (45%) highlight the risk of tax, permanent establishment, and immigration issues related to stranded business and expatriate workers as a result of travel bans and immigration changes. Almost a third (28%) see potential for new tax audits relating to support or stimulus as a result of the COVID-19 pandemic. Business tax leaders also expect to pay more tax in the coming three years: 51% globally expect higher direct taxes, while 44% foresee higher indirect taxes.
Unprecedented rates of global tax reform, tax authority digital transformation
Even before the pandemic, tax functions were experiencing an unprecedented rate of digital and legislative change, with three-quarters (75%) of respondents noting that local tax reforms implemented over the last three years had increased overall tax risk levels. Meanwhile, almost three-quarters (74%) say that tax authority digitalization has increased tax risk for their tax department, with advancements in data analytics, machine learning and artificial intelligence (AI), and cross-border information sharing all leading to increased scrutiny of companies. Respondents note that many tax authorities are so digitally advanced that they may know more about a company’s tax affairs than the taxpayer themselves.
Managing tax controversy and risk
To manage tax risk and controversy, half (50%) of survey respondents say they are already using a Tax Control Framework (TCF). However, only 47% actively track current tax policy developments on an international scale, 37% routinely test their own tax filings using data analytics, and 28% regularly conduct a program of mock audits. All the while, 40% say they execute a clearly defined, proactive cooperative compliance strategy, and 35% execute a clearly defined Advance Pricing Agreement (APA) strategy.
Kate Barton, EY Global Vice Chair – Tax, says:
“The COVID-19 pandemic has greatly amplified the tax risk profile of organizations. If organizations are to get ahead of tax risk and controversy, they must act now by investing in technology and implementing a global, centrally coordinated approach to tax risk and controversy management. Tax functions play a critical role in furthering an organization’s long-term value creation, building trust with all stakeholders and mitigating risk. As governments look to balance budget deficits, tax authorities are resuming suspended tax audits and litigation. Meanwhile, the digital transformation of the global economy – and the increasing volume of data and compliance requirements from tax administrations – means that organizations will inevitably face more risk for tough audits. Without a change in approach today, organizations face a real risk of financial penalties and reputational damage tomorrow.”
Luis Coronado, EY Global Tax Controversy Leader and Global Transfer Pricing Leader, says:
“The risks of non-compliance are high. Financially, there may be a greater risk of higher tax assessments, double taxation, penalties, interest and surcharges. As tax transparency and commitment to long-term value creation intensify in the public domain, tax controversy can create reputational harm, whereas operationally, tax controversy management can see internal resources redirected from other core tax department activities. Organizations must be proactive in building and sustaining tax-administration ready documentation that supports key transactions and tax positions. It is expected that by end of 2021, tax authorities will be enforcing tax policies at full strength, so it is imperative for organizations to act now, however incrementally, to reduce their tax risk profile.”