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, said EY recently when releasing results of a survey of 1,265 tax and finance leaders across 60 jurisdictions and 20 industry sectors during the fourth quarter of 2020.
- Survey respondents anticipate a far more diverse tax risk environment spanning everything from scrutiny of routine business activity, to major, billion-dollar settlements in court, EY said.
- As a result, managing tax risks and resulting disputes has rapidly risen in the corporate agenda, the firm added.
- 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, survey results indicate.
- 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, survey results indicate.
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, EY noted.
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 digitalisation 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.