Governments around the world are confronting budget deficits due to the COVID-19 pandemic and corporate tax leaders are worried about higher tax assessments, double taxation, penalties, interest and surcharges.
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Multinational companies are seeing increasing demands from tax authorities around the world to crack down on tax avoidance, particularly by U.S.-based technology companies. Several countries have been threatening to impose digital services taxes, while pressing for tax changes through the Organization for Economic Cooperation and Development’s project on base erosion and profit shifting, also known as OECD BEPS, by multinationals.
“Tax continues to be a big issue for the C-suite,” said Kate Barton, global vice chair of tax at EY. “In most companies, they’re very concerned about it. They understand that governments around the world are revenue starved because of the global pandemic and the stimulus provisions that they issued. A lot of them are deficit spending, and it’s never a good thing for a company because governments will come back and get sharper in their enforcement of their laws and try to make sure that they get more tax dollars from those corporations, so they are expecting more enforcement.”
EY polled 1,265 tax and finance leaders across 60 jurisdictions and 20 industry sectors in the fourth quarter of 2020 for the survey, which was released Tuesday. It found that reputational risks for companies associated with tax controversies can spill into the public domain, creating a deeper impact on business, especially for ones with well-known brands. The survey found that 35 percent of respondents anticipate higher levels of reputational risk for business in the next three years.
“They’re trying to educate their legislative bodies in the countries in which they operate, making sure that they understand the ramifications,” said Barton. “We’re in a really delicate time right now. If a government moves too quickly to raise taxes, it could squelch the economic growth for the longer term in that country.”
The OECD BEPS project adds extra complexity and risks for businesses of various size. “Even a small entrepreneurial business typically has in their business plan that they want to go global, from the beginning,” said Barton. “We have two pillars in the BEPS project out there that continue to evolve in a multilateral effort with the best of intentions, trying to get more uniformity on major global tax concepts and guidelines. But that’s been politicized, unfortunately, and has been probably more difficult to get done during the global pandemic.”
Companies need to have a mechanism in place to stay on top of the law changes, she suggested. “You can only deal with what you know,” said Barton. “Companies that are operating in a lot of countries need to make sure they understand the stimulus that’s available to them for their operations, and how they can help their workers. They need to have somebody in-house and the right mechanisms because policies continue to change, and we’ve never seen anything like the pace of change in the last 12 months. Our survey said that only 45 percent of companies feel like they’re on top of the law changes. That’s kind of scary to me. That’s a very low percentage if less than half think they’re on top of it. You can leave a lot of good money on the table at a time when you’re most vulnerable.”
Some corporate executives are trying their best to persuade policymakers in various countries to be careful about raising taxes on their companies. “Make sure you’re modeling out the proposals and that you’re educating the legislators in the key countries that you’re working in so they understand what’s important,” said Barton. “Most countries want you to continue to employ their workforce.”
The pace and volume of tax change makes it hard to predict the future. Tax disputes arising years from now could be much different from those encountered today. “It’s absolutely crucial to refresh your tax risk and controversy management strategy, putting in place new strategies now,” said Luis Coronado, EY’s global tax controversy leader and transfer pricing leader, in a statement. “That’s how you get ready to provide answers in the coming years, when revenue authorities will request substantial amounts of detailed evidence about a specific structure or transaction you put in place today.”
Tax leaders can put themselves in a better position to spot risks before they become disputes by investing in improving their company’s tax technology so they can plan ahead for possible tax risks in the future. “A well-defined, commonly agreed, global tax risk and controversy management approach will incorporate as many leading practices as possible across the spectrum of tax risk assessment, management and dispute resolution activities,” said Jean-Pierre Lieb, EY’s EMEIA tax policy and controversy leader, in a statement.
Companies need to be wary of cross-border tax issues that could emerge from executives or employees working from home during the current pandemic in a foreign country or another state.
“One last nugget is the unintended consequences of workers who are working at their convenience, not their employer's convenience, in a location that’s not their primary residence,” said Barton. “That is having a lot of unintended consequences on corporations and also the individual. In most instances, the individual has more returns to file as a result. We’ve seen people whose primary residence may be London, but they’ll be working in a country home in Ireland or Scotland. They could be working in a second country, and if they’re senior enough, that could create a new taxable presence in a new country. We’re seeing it at the same time in the United States at the state level, fighting over who gets to tax what. Everybody sort of has their act together on business travelers, but I call this personal travel from your home office. That could cause unintended consequences to the company. It’s a big issue.”
