Podcast transcript: How businesses can cope with rising tax controversy around the world

Introduction

Susannah Streeter

This is the EY podcast Tax and Law in Focus, bringing you ideas for leadership from one of the world's top C suite advisors. I'm your host Susannah Streeter. The tax landscape before us is one of shifting sands and swirling tides. The deal calling for a global minimum tax that was agreed by the G7 and G20, groups of nations grabbed the headlines, with the UK’s Financial Times calling it the starting point on the road to global reform. The agreement to implement a truly multinational plan to tax in market though was also criticized for having loopholes and for setting the bar too low. The fact that newspapers devoted so many column inches to that deal is significant. And arguably, this interest demonstrates the increasing economic and social pressure placed on administrations to ensure companies pay their fair share in tax. It comes at a time when governments are trying to work out how to address public finance deficits created by the emergency spending brought on by the pandemic. They're likely to turn even more of their focus to tax collection. And with this comes the increasing potential for tax enforcement and controversy. Just over half of all businesses questioned in a recent EY survey said they expect greater enforcement over the next three years. In this podcast, we'll also discuss how technology is both shaping the debate, but also providing private sector companies with better ways to manage things in this fast-evolving landscape. Just what should organisations do to future proof their tax operations and help ensure compliance in a world of increasing complexity and controversy. And I'm really pleased to say we have three eminent thought leaders in this field to guide us through all of these topics. But first, please remember, conversations during this podcast should not be relied on as accounting tax, legal investment, or any other professional advice. Listeners must of course, consult their own advisors.

We will be discussing and probing a whole range of issues –so first I am very pleased to be joined by Marlies de Ruiter - who is talking to us from Rotterdam in the Netherlands. Hi Marlies. It’s great to meet you and to find out more about your view as EY’s Global International Tax and Transaction Services Policy Leader.

Marlies de Ruiter

Hello Susannah. Very, very happy to be here.

Streeter 

Also joining us from Birmingham in the UK, I'd like to introduce EY partner Paul Dennis from the Tax Controversy and Risk Management Division. Hi there, Paul. 

Paul Dennis 

Hi, Susannah. Great to join you today.

Streeter 

And finally, we're going to get the tax low down from EY's Tax Controversy Leader Luis Coronado, who's in Singapore. Hi there, Luis.

Luis Coronado

Hi Susannah from sunny Singapore. Looking forward to our discussion.

Streeter 

So, let's start looking at the impact of the pandemic. Tell me Luis, are we facing a perfect storm at the moment, do you think? Are we seeing a double whammy of high levels of country indebtedness due to the COVID crisis and high pressure on business to bounce back and deliver long-term sustainable growth?

Coronado 

Well, definitely we are seeing that the governments are doing all that they can to keep the economic activity afloat, right, there's been stimulus, there's been support provided in various locations throughout the world. And governments eventually need to make up for that spend and whether they're going to do it in the way of squaring up their budgets or whether they're going to be replenishing the reserves that they might have spent, they do need to increase their collection. That's going to come in various ways, either applying the current legislation and perhaps having new interpretations of it, but also in the creation of new taxable events that could increase their collection, right. So, we do expect to see a lot of activity both in the legislative side, but also in the activity of the government. And taxpayers should start to get ready for that. They should be expecting that this is going to come and this is the right time just before the storm starts to start seeing how they're going to prepare themselves and have all the tools necessary for it.

Streeter 

Okay, Luis, thank you very much. Well, let me bring in Paul. Paul, what do you think the main risks in this evolving global tax environment are and what kinds of companies do you think need to be particularly vigilant?

Dennis 

Yeah, it was informative towards the end of last year. EY conducted the Tax Risk and Controversy Survey where we had respondents from almost 1,300 large businesses. The number one risk for them was seen to be transfer pricing and by some distance, with withholding taxes at number two, and digital services taxes at number three. So, the large multinationals and particularly those in the technology sector, there are some significant risks for them to be addressing at the moment.

Streeter 

Okay, Marlies, we're already seeing increased demand for transparency and country-by-country reporting even before the pandemic, so how should organisations deal with this increasing complexity that they're facing?

de Ruiter 

Yeah, indeed, Susannah, transparency for a while now has been very high on the agenda of governments, which is illustrated by a growing level of reporting to these governments. Think about country-by-country reporting, but also, for example, mandatory disclosure rules. And if we look at the current situation, what we see is that there's a new trend, what we see now is that tax is included in the ESG, non-financial reporting standards. As a second trend, what we are seeing is that regulators are moving towards mandatory public tax reporting. So this brings very important challenges for businesses first, to ensure that they get to coherent and consistent reporting, which is not easy, because all these different standards, and they asked for different things. So, businesses need to make sure they align and bring kind of coherent messages to the governments and to the public. And then the second is embedding this reporting, the tax reporting the mandatory reporting into a wider reporting strategy of the company. And that could be a wider tax reporting strength strategy, looking at ‘what do I want to tell the different stakeholders that I'm talking to?’, but also alignment with, for example, the wider ESG reporting strategies that businesses may have. So indeed, a lot happening in this area at this moment.

Streeter 

And what about data in particular Marlies?

de Ruiter 

Yeah, that's important, right? To get to coherent reporting, you need to make sure that you have high-quality and unambiguous data at the foundation of all the reporting that you're doing. That's the only way in which you can secure that there is unambiguous reporting, consistent reporting to all the stakeholders. So, data quality is key to all of this.

Streeter  

It's really interesting, Marlies. Let me bring in Luis, do you agree with what Marlies is saying? Do you consider also that providing data that's as reliable as possible is increasingly important right now?

Coronado 

Yeah, absolutely. I think that first of all, we are living in a world that is no longer based on trying to resolve audits from a starting position of information asymmetry, or documentation asymmetry. I think more and more governments are sharing information through formal programs or informal programs, and even the ability that the OECD has had, to bring together countries, right, the inclusive framework has more than 130 countries. There are a lot of informal discussions happening between the governments. So taxpayers shouldn't be surprised that the authorities have started this multilateralism phase, in that a lot of their information is being shared, like it or not. I think that it's not uncommon that a lot of positions that are being negotiated and agreed, then potentially could become case studies for governments to discuss in the water cooler or during the lunch breaks at their international meetings, or even their breaks now that they're having some discussion. So definitely an area that is very important and that taxpayers need to do more to internally control what is being put together and presented to governments and how they can actually build up their own files for submission that they can actually control, what is the data access that they have, in a way that they will know what is available out there to the governments. And don't be surprised when a case is being built up just because information was shared.

Streeter 

It's really interesting. I'm looking forward to those water cooler moments once more. Let me bring in Marlies, I'm sure you are as well. Let's talk about advanced pricing though now because I just want to find out what kind of situations is it advisable for companies to apply for advanced pricing agreements. These allow businesses to explain proposed arrangements to tax authorities in advance. So, what are the benefits of this approach?

de Ruiter 

Just going back to what Luis just said, I think that the easy answer is that it provides a possibility to cope with the uncertain and multilateral environment that Luis just referred to. And all the risks that comes with that environment. In a multilateral environment, you need multilateral solutions, and advanced pricing agreements at this time, is one of the few opportunities to have that dialogue in advance, instead of only when you have had the controversy at the end of the process, when you would go to a multilateral agreement procedure to resolve the issue between government. So, it's a very strategic way to search for a holistic approach worldwide of your tax issues and if you have tax authorities agreeing to it, then you will see that the others will also follow. And it's also a way to mitigate risks. Because of that, these different positions by different authorities, they create kind of uncertain tax positions that you need to report them, they have financial consequences. So, for some companies, this has actually meant that they have been able to seriously mitigate their uncertain tax positions, which also save them money. So, several reasons to look for APA going forward.

Streeter 

Yes. And I'd like to pick up on that point, you're stressing the benefits of this dialogue in advance. Paul, let me bring you in here. Just how important do you think it is to establish a regular dialogue with tax authorities? Do you think discussing complex transactions and developing the relationship over time will lead to less likelihood of future tax investigations?

Dennis 

I think it's worth making the point initially that the approach of tax authorities can vary quite considerably around the world. So, it's, it's important to start by understanding the best strategy in each country in which you operate, but unquestionably where it is possible to have a more proactive real-time engagement with the revenue authority, this can undoubtedly reduce the likelihood of audit.

Streeter 

So, Luis, are you seeing this playing out, the need for approaches to be specifically tailored in in respect to different regions?

Coronado

Yes, Susanna, definitely this is something that we see playing out. Taxpayers are moving more from resolution and trying to be more proactive, they're looking at insurance programs, they're looking at certainty programs, and just getting governments to have a position agreed with them upfront, rather than carry that uncertainty, right. In certain parts of the world, depending on whose authorities are you getting the approval from, or the agreement with that might carry some weight as well, given what we discussed this earlier around the cooperation and the sharing of information. So, APAs are one of the important aspects. The other one is international compliance assurance program, or ICAP. That although is a recent program from the OECD, taxpayers are looking at it in order to have more certainty. And I think eventually as well, as we move in to the BEPS 2.0 initiative, they are some self-provided areas for dispute resolution that that bring nuances that taxpayers should be looking into, when they're looking at resolving their tax issues up front, it is a much more different environment, trying to resolve with the authority in an open field and an open conversation, rather than when you're going in for resolution, even MAP, you're playing catch up with what is already a position taken by the authority.

Streeter 

And do you think, Luis, you're seeing more C suite executives becoming more involved in managing the organization's tax profile? Has this developed over the past few years?

Coronado 

Yeah, definitely. I think the C suite is concerned not only with the potential financial risk that is not being disclosed. And so, looking at provisions in locations where there are uncertainties or even controversies already started, but also other aspects such as criminal penalties that could be out there, if they don't feel that they have been spending enough time looking after their tax affairs. The other point here is reputational. And I think that the last thing companies would want is that given now the fact that you hear and read about tax in any newspaper, it’s no longer just the financial newspapers or even the technical tax newspapers. It's a layman's issue now then you get to see that the last thing you want to do is to have a boycott on your products because there is an issue of reputation. So, I think definitely boards are looking at those three points, financial reputation, and even potential criminal penalties that might come in on top of financial penalties.

Streeter 

Well, let me bring in Paul on that point about reputation and how serious an issue do you see reputational risk for companies? Do you think it's increasing, given that the media and public opinion now have this kind of razor-sharp focus on this subject?

Dennis 

Yeah, undoubtedly that risk is growing and Luis touches on a few points there, including the fact that we just see tax mentioned on the front of the newspapers far more than we probably ever did in the past as well. So, you mentioned at the outset Susannah, this focus on really trying to determine what is the fair amount of tax to be paid not just the right amount of tax to be paid. And once again, we've talked a bit about the C suite interest here as well. And this was reflected in our survey, where 66% of respondents said that their C suite are also showing more interest in tax matters as a result.

Streeter 

Luis, do you think we're seeing a trend for tax authorities to even name and shame non-compliant businesses?  Do you think this is focusing minds as well?

Coronado 

I think we're progressively getting there in certain locations. I think in Nordic countries you see the publishing of names of non-compliant taxpayers. As I mentioned, I think it's also a question of access to information and so on. Right, I think the media has started to recognize that tax is becoming an area of interest for the political motivation that it has for at the moment in COVID, the stimulus that the government, what are they going to be spending on creating jobs, preserving jobs, etc. So, I think it's just natural that the media is going to be requesting as well, that information.

Streeter 

And now all of this shows doesn't it, Paul, that that we have a rapidly evolving global tax environment. Do you think companies really do have wide visibility on all the potholes they might face in the road?

Dennis 

From many conversations with multinationals on this, the response is to a point. So, the feedback tends to be that they feel that they have a good handle on emerging tax risks where they have a large presence and a dedicated tax team in a territory. But as they get to those territories, where they maybe have a smaller presence and don't have dedicated tax personality, it can be really very much harder to keep a handle on all of the emerging risks. And as you mentioned, with that rapidly evolving global tax environment that challenges only grow.

Streeter 

Marlies let me bring you in here. Do you think given the whole range of risks we're now looking at, that it's really concentrating the minds of boards right now?

de Ruiter 

Yes, that is clearly the case. If you look at the current situation, the times are gone, where tax was at the end of the board's agenda, right before any other business, and then dedicated five minutes. Because what you do see is that in the current environment, there are significant and relevant risks to manage. Think, for example, about regulatory risks, there are huge changes ongoing in the current environment, you already mentioned, BEPS 2.0, the global kind of reset of the international tax rules, but also the pandemic and the spending is bringing plans to governments on additional taxes. So definitely high on the agenda, regulatory risk, but also reputational and controversy risk, which Luis already discussed, which also, of course, links to the whole transparency and reporting area. And then we have the compliance and operational risk. Because of course, as a board, you need to be in control, you need to make sure that each and every entity in your operations, complies with their tax obligations, and has the same tone to, for example, tax authorities. So quite a few risks to manage. And what we do see is that in current times, wards are on top of that. 

Streeter 

Yeah, it's interesting how all of this is evolving. Paul, you talk about how companies need to demonstrate what they're doing, they may be ticking all the right boxes, but do you think they need to be more proactive in actually showing, shouting out loud in effect, what they're doing to contribute to tax and the wider society.

Dennis 

Yeah, absolutely. And I mentioned earlier about being proactive on revenue authority engagement. And I'd say the same here too, with the interest from many stakeholders in the tax contribution of businesses, it's really important to consider how your tax contribution aligns with the organization's stated purpose and indeed, any statements about the contribution that it makes to the societies in which that business operates, and in doing so then build a strategy around tax transparency that aligned with that approach too.

Streeter 

Now this whole topic really does feed into how tax has been fed into new regulatory standards. Marlies as part of the ESG reporting strategy, how do you see all of this evolving?

de Ruiter 

What we are seeing at this moment is that, indeed, tax is more and more included as one of the elements of ESG reporting. There are a number of voluntary standards in this area where tax is mentioned. Think, for example, about the GRI where one of the biggest voluntary standards around the just added tax in I think 2019, to the standards. And what you see that that creates a new dynamic, because that creates the dynamic for businesses to align their tax reporting strategies with their wider ESG reporting strategies. And, of course, at the current time sustainability and environment is key and often drives the purpose of businesses. So, you want that to be aligned. And then that also, again, brings back the point that we already made before about consistency in the reporting both the touch and the feel as the actual message. You want to make sure that you give a coherent message to your stakeholders. So, definitely, this is going to be something that we will be relevant for the coming period. And what we are also expecting is that when you look at non-financial reporting standards, there are many out there and it's very fragmented. So, what you do see now is that there's this drive for more mandatory and more uniform standards, and tax will also be part of that. So, there's still quite a bit to happen in that area.

Streeter 

Let me bring in Luis right now because in this environment, companies are facing an increasing number of E-audits, what are the implications do you think, for scrutiny to be multi-sided and groupwide in this respect, and which regions? Do you think this is becoming much more of a regular occurrence?

Coronado 

Well, first of all, I think this goes back to the point that Marlies and I tried to make earlier about the information and the quality of the information, you will no longer even have an ability to influence that information or make changes to that information, because it's going to be reported directly by the government, and then they will extract what they need, make their computer calculations, and in many situations, you will have an immediate tax receipt to pay right, we do see that more and more in the indirect tax front where transactions are being immediately having the tax consequences that apply to them, perhaps for corporate taxes on is still on a monthly basis, etc. But we see that more and more, and I believe that there's a jump that you would see from locations that perhaps would have not been identified as leading in the area of IT, but particularly Russia, Brazil, Mexico, you will see them at the forefront of the basic changes in the tax administration to become much more electronic to become more ready with systems and so on and, and there are the front end of it, I think that managed to cut red tape that managed to make them a lot more efficient, and to manage their finances in a more real-time basis. So definitely, you will see more and more of that. We do know that a number of governments want to introduce more and more transformation to make their tax function a lot more efficient. And that's through the implementation of IT systems and having a longer buck for their for their money on investment not only on human resources, but also on technology that can help them to collect an audit in a more immediate way. And in a more efficient way.

Streeter 

You're talking about advances in technology. Paul let me bring in you on this because what do you think the impact is on tax teams have advanced and predictive analytics, which are highly forensic reviews, what implications do you think they have?

Dennis 

Yeah, I think as a result of this technology, what we're already seeing is that the level of review in audits is just so much broader, with data analytics tools, enabling revenue authorities to review really significant tranches of data, a real move away from providing paper documentation and analyses to simply providing huge rafts of data. And that's not just numerical data I should add as well. For example, we see requests for email communications to enable the data analytics tools to be able to review and find individual emails. And as a result of all of that, what we therefore see is much more onerous audits with huge amounts of data being provided. And following from that less certain outcomes.

Streeter 

I just want to remind you are listening to the EY podcast Tax and Law in Focus with me, Susannah Streeter and our panel of thought leaders in the tax world we have Marlies de Ruiter, Paul Dennis and Luis Coronado. So, we scanned the horizon and spotted the landmarks which made this issue such a hot topic. So how should we deal with the risks? Marlies let me ask you, do you think this is an ideal time for companies to get their house in order? Or do they simply not have any other choice?

de Ruiter 

Yes, I think it is an ideal time, but there will also be a time where there will not have any other choice and that is coming soon. But in the current time, what you see is that clearly, we're living in transformative times, there's so much going on, digitalization, environment, etc. And what you do you see is that is creating a dynamic in society. And of course, businesses are part of that society, they are answering to demands from the public on their behavior, and they are looking for their purpose. So, in that context, if you look at that broader perspective, of course, tax is an element of that, and should be taken into account. And then in order also to, to cope with the current transformative times, including kind of the environmental elements of it, where tax also plays a relevant role. You also want to be in control, right, you want to be in control of what's happening in your business. So that also is a reason to put your issue in order to create kind of your tax control frameworks to look at your risk management processes. And then the final question is, of course, what are you controlling? What's your strategy? How do you set your tax strategy? What are your values? Which things don’t you allow your entities to do? So indeed, an ideal time to make sure that your tax approach is fully aligned with your commercial approach, and with the purpose you’re driving at.

Streeter 

And Paul, there was an expectation of a bit of a lag before tax authorities returned to a full pre COVID-19 audit environment. Do you think this still provides businesses with a bit of breathing space with a significant opportunity to prepare and to get ahead of the game?

Dennis 

So, my advice here would be not to rely upon any lags in revenue authority activities to delay in building your strategy. In truth, revenue, authorities responded as quickly as businesses did to the COVID-19 challenges. And those delays are not really being seen any longer.

Streeter 

So, what should companies do, Luis? Is one route developing perhaps less centralized business models to help reduce complexity? And in what ways could this bring benefits?

Coronado 

I think this is gonna be driven by businesses, as always, and tax will follow. But I do see that many more companies are breaking from the centralized model that they used to have and trying to be closer to where their markets are. And I think you're starting to see less than high dependency, for instance, in manufacturing in certain parts of Asia and trying to bring it back to certain components of Europe and the Americas and so on. So, by doing that, I think you will also have a multi-hub model right where we you no longer will have just a central entrepreneur globally, but you'll be able to share things that are associated with high value the entrepreneurial activity, and functions that are located in multiple countries. And that's how you're going to be splitting the benefits that come out of that. That might make the transfer pricing a bit more complex, but it will certainly reduce hopefully areas of controversy, because you'll be able to have smaller circles than to have just a centralized model, so I do think that taxpayers will probably break it up in in circles or in in various parts of the world activities in this way.

Streeter 

And Marlies what do you think is happening in terms of policy developments? Which might have an impact here?

de Ruiter 

Yeah, what do you see is that the policy developments are going into the same direction. So, if you look, for example, at the worldwide tax reform, or BEPS 2.0, what you do see is that there's this this minimum tax requirement. So, if you have activities in any country, you should pay a minimum amount of tax. But besides that, also, there's this trend to allocating more profits to the market, as Luis already also referred to. And that is, of course, emphasized also by the transparency notion that kind of you want to show that everyone is getting their fair share of tax where you have your activities. And then the final thing that we also shouldn't forget that if you look at the whole environmental area, there will be taxation, but there will also be carbon border adjustment mechanisms. So, in the in that sort of an environment where local norms and local taxes will be applied, but also, if you trade into those unions, you will have to pay taxes, what you will see is that some of the supply chains will become more local. So indeed, the trends are strengthened by the policy environment.

Streeter 

So, Luis let me bring you back in again. Do you think too many organisations wait until a tax controversy occurs before taking action and so miss out on early opportunities to deal with tax risks in the first place. And if they are doing that, how can they change and become much more proactive rather than reactive?

Coronado 

Yeah, thanks, Susannah. And I think, yeah, it's a clear reflection of what we had seen historically many taxpayers waiting for a solution as pointed out earlier, but we do we do see that things can be changing and they can start looking at this more proactively right? There is a lifecycle of controversy that you can practically break up and start to have a different perspective on it the normal components that we see our taxpayers, break it up into this tax risk assessment, where they fails, we'll have a look at what are their positions throughout the world, what the potential exposures are, etc, what are some of the legislative changes that might need to be taken into account and try to act on them, then, by acting on them, you have another phase of tax risk management and try to look into cooperative compliance programs, try to look at ICAP, as mentioned before APAs and so on, right. And then lastly, you will have situations where you will have audits, but you can manage them much better if you proactively would be creating positions within the group. If you have a setup that is similar in various locations, for your distribution, for your services, for your manufacturing, you could probably then have ways to defend those positions in an organized fashion in a consistent fashion. And take into account what we've said as well in the earlier part of the podcast regarding the sharing of information of the government. So that consistency will probably only play to your favor. And all of that has to be supported by tools and technology. And that's going to create the ability to have the reports that are going to be created from the systems the ability to have a dashboard that gives you a visibility of what you have globally, etc. So, I think that definitely, there is an opportunity here to start moving more proactively and really, to a degree making the controversy function within the company a lot more specialized because that's the demand that we're seeing, given the activity from the from the government.

Streeter 

So, Paul, given the changes that Luis is proposing, do you think this means root-and-branch reform of tax control departments or tinkering around the edges of current ways of working?

Dennis 

My experience is that businesses can be at either end of the spectrum and indeed anywhere in between as well, that there are still very many businesses that when it comes to controversy, see responding to an ad hoc and very reactive way as it arises. But my advice here is to be more strategic to take a step back and consider many of the emerging trends that we've been talking about today, consider some of the leading practices that are evolving in the management of controversy, and really form a view on where you are at the moment and where you would like to be to, to identify that gap analysis and determine really how much reform and change you might be looking at in the tax function.

Streeter 

Okay, Paul, thank you very much. And before we go, I do want to ask all of you to list one key takeaway to help tax teams, and to help them really manage tax controversy. What one action should they start thinking about right now? So, Paul, what is your number one suggestion?

Dennis 

Yes, I've mentioned a number of times now that the theme of being proactive here, and whilst every business's response to these challenges will vary depending on their own circumstances. My number one suggestion is to formulate that strategy now and secure the C suites backing to your approach so that you can understand what the future looks like in your tax controversy department.

Streeter 

Okay, Paul, thank you very much. So, Luis, let me bring you in here. What's the one action that you would propose?

Coronado 

Well, I think it comes down to being proactive. And I think that taxpayers can start looking into this compliance programs, insurance programs and not wait just for resolution. Inevitably it will become a resolution discussion. If there is an audit, you can prevent yourself 

from having one in most locations. But if you have a proactive approach to it, ICAP, APAs and any other insurance programs that are out there for different taxes, then taxpayers will probably have more control of where they may end up in situations where they have a review from the government

Streeter 

and Marlies tell me what's the top of your list?

de Ruiter 

For me, I think the most important would be that you have a future-looking perspective. Because we know that there's a lot kind of new development coming. And this is probably also a very difficult task, but that retaining the oversight of what's coming is going to be key to be in control in the future.

Streeter 

Okay, well, thank you so much to all three of you, Marlies, Luis and Paul. It's been really great to gather all of your really valid valuable insights into these shifts in the tax risk and controversy environment. For more information you can visit ey.com. And a quick note from the legal team. The views of third parties set out in this podcast aren't necessarily the views of the global EY organization nor its member firms. Moreover, they should be seen in the context of the time in which they were made. I'm Susannah Streeter, I hope you join me again on the next edition of Tax and Law in Focus brought to you by EY.