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Developing trends in global tax disputes

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There is a range of emerging trends that are shaping tax disputes in the UK and globally. To build a picture of those themes, I have drawn insight from several sources, including surveys undertaken within KPMG’s internal network and externally with multinational businesses, as well as webcasts and seminars attended by tax administrations and organisations like the OECD.

A global view of tax authority activity

At the end of 2016, 270 multinational business spanning 30 countries contributed to a Global Tax Disputes Benchmarking Survey report which asked heads of controversy, heads of tax or CFOs for details of what they were experiencing when dealing with tax authorities around the world.

The responses revealed consistent trends in the following areas:

  • more frequent contact from tax authorities and requests for information outside of formal enquiries;
  • evidence of tax authorities sharing information with each other and using technology to gather data for risk-assessing to identify issues on which to raise enquiries;
  • increased aggressiveness in raising assessments and penalties;
  • reducing use of new dispute resolution techniques available to tax authorities; and
  • reducing appetite for negotiated settlement with increased rejection of taxpayer’s proposals and increasing difficulty in reaching resolution.

From a UK perspective, some of these trends were familiar with experience of HMRC increasing the use of formal information powers, discovery assessments and routinely challenging the behaviours leading to any inaccuracies in tax returns. An apparent narrow application of the principles of HMRC’s litigation and settlement strategy was contributing to a high proportion of taxpayer settlement proposals being rejected by HMRC’s tax disputes governance as revealed by the annual tax assurance commissioners’ reports.

The hot topics under enquiry

In 2017, an internal of our global tax disputes network obtained details of the top five areas of tax authority challenge. Of the 64 countries that responded 33 were within EMA, 9 in ASPAC and 22 in the Americas.

The greatest area of challenge by far was transfer pricing with 81% of countries confirming that tax authority enquiries into the arm’s length pricing of goods, services, intangibles and financing arrangements were most common. The next four most common areas of challenge were:  

  • permanent establishment issues – 39%;
  • interest deductibility (domestic) – 38%;
  • penalties – 34%; and
  • group reorganisations – 33%.

Again, these statistics mirrored the experience in the UK. HMRC’s own published figures have confirmed an increase in resources focused on transfer pricing, and the new diverted profits tax from which HMRC was reporting record amounts of compliance yield obtained from these enquiries.

In the last couple of years, the Australian government has introduced a multinational anti-avoidance law, a diverted profits tax, anti-hybrid mis-match rules and several other measures designed to target cross-border transactions by multinationals. 

In addition, considerable additional budget has been allocated to the ATO to recruit and train significant new resources to form part of a multinational anti-avoidance task force. It is worth noting as well that the Australian Senate inquiry into corporate tax avoidance continues, which has brought these issues to the forefront from a media, public and government perspective, and has driven a lot of the changes.

Global collaboration

In April of this year, at a global tax disputes client conference in New York, several speakers provided insight as to the extent that tax authorities around the world are collaborating to share information and develop practices to tackle tax evasion, avoidance and non-compliance.

We heard from HMRC about a number of ongoing initiatives, including:

  • country by country reporting: how some 3,000 reports shared by other tax authorities will support HMRC’s risk assessment of cross-border arrangements;
  • Joint International Taskforce on Shared Intelligence and Collaboration (JITSIC): how this has expanded since being established in 2004 to now include 38 tax administrations committed to have more effective and efficient ways to tackle tax avoidance;
  • exchange of tax rulings: how the agreements with the OECD and EU will result in the exchange of a huge amount of information between tax authorities;
  • mandatory disclosure rules (MDR): how MDR will require the reporting of arrangements which have the effect of circumventing the common reporting standard rules; and
  • the international compliance assurance programme (ICAP): how the current pilot is enabling multiple tax administrations to engage simultaneously with multinational businesses.

The extent of these initiatives corroborated the activity that multinational businesses had identified in the first survey mentioned above.

Technology enabled tax administrations

This year, a further internal survey of our global tax disputes network, which is due to be published soon, obtained details from 41 countries of the extent of use of technology by their revenue authorities. The headline findings included:

  • 58% of respondents said their tax administration had made significant investments in technology;
  • 66% rated the technological skills of tax officials in their countries as either moderately or highly skilled;
  • 46% had seen an increase in the use of data analysis including artificial intelligence; and
  • 61% reported that technology-based systems are being used for risk-assessment purposes.

These findings were endorsed at the KPMG EMA tax summit in Rome in September when a panel of tax professionals discussed the use of technology by tax administrations. There are examples of some tax administrations, such as France, undertaking e-audits or electronic enquiries. The most striking example of a tax authority converting to an almost wholly electronic enquiry process is Brazil.

At the summit we heard how, over a period of more than tenyears, the Brazilian tax authority has developed an automated enquiry process where company accounts and electronic books are sent to the tax authority. That information is then subject to data analysis and testing for errors. The business will not be aware if or when the electronic records are being tested by the tax authority and the first time they become aware may be when a demand is issued in respect of additional tax, interest and penalties for any errors found. Some 97% of Brazilian enquiries are now conducted electronically in this way with a high rate of accuracy.

Another emerging trend from the use of technology is the automatic sharing of data with tax authorities at the point transactions are undertaken, for example through electronic cash registers.

In the UK, HMRC has invested heavily in technology. HMRC wants to encourage compliance and to make it easier for taxpayers to file accurate tax returns, and HMRC would argue that the making tax digital programme is intended to enable that.

HMRC has also invested in technology to support their risk profiling activities. For a number of years HMRC has been using a 'Connect’ database into which multiple sources of data are entered and analysed with the capability to connect transactions to individuals or businesses to identify risks.

This technology is enabling HMRC to effectively target resources at appropriate risks which are worthy of detailed enquiry. There is evidence that HMRC’s approach of encouraging compliance whilst effectively targeting non-compliance is working as the UK tax gap at 5.7%, is one of the lowest in the world.  

We have also seen this in Australia where the top 1,000 taxpayers are going to be subject to a streamlined assurance review. It is a truncated risk review process largely involving provision of significant amounts of financial, accounting, tax data over which the ATO runs its risk identification software and compares taxpayer data to data from other sources. This will drive who is selected for more comprehensive compliance activities, such as risk reviews and audits.

An emerging trend in HMRC tax enquiries is the increasingly forensic nature of reviews in many areas, including:

  • The robustness of business systems and processes and testing of ability to produce accurate tax returns to provide information for risk assessment purposes, supporting HMRC’s strategy of resourcing to risk (i.e. accepting tax returns from most taxpayers and focusing enquiries in areas where there is most likelihood of unpaid tax)
  • Requiring production of the underlying evidence to test explanations that taxpayers have provided, often involving the forensic review of emails, interviews with staff and third-party evidence obtained from business customers. This approach is reasonable where there is a significant amount at stake and HMRC needs to show it has checked what it has been told, but it can sometimes go beyond this and involve HMRC filling in evidential gaps with assumptions
  • Examining the underlying behaviours which gave rise to inaccuracies as well as looking for improvements to systems and processes that might prevent the recurrence of similar inaccuracies    

Where are we heading?

Global tax administrations are collaborating and using increasingly innovative techniques to identify risks and tackle areas of non-compliance. Where risks are identified, tax administrations are adopting forensic approaches to test the evidence and will raise assessments to secure additional tax and penalties. It seems inevitable that technology-enabled enquiries will become more prevalent as tax administrations around the world continue to be tasked with tackling non-compliance with tight budgets and resources.

It will be interesting to see the next developments that emerge from what tax authorities learn from working together within the ICAP pilot, with one anticipated form of increased collaboration being joint tax audits. It is conceivable that the tax enquiries of the future, particularly in areas like transfer pricing, could involve multinational businesses managing multi-tax authority disputes.

This might seem a daunting prospect but, if managed effectively, it might be a better alternative to managing several separate un-coordinated enquiries by tax authorities with the potential need for Mutual Agreement Procedures (MAP) to be invoked before a business can achieve certainty on their tax position.    

Kevin Elliott is a tax disputes director at KPMG in the UK