The latest reforms in taxing policy have built a solid foundation for controversy between taxpayers and tax authorities. Due to these reforms, businesses around the world are re-evaluating their supply chains and policies. According to a survey of all concerned parties conducted in 2017, both taxpayers and tax authorities agreed that the scope for tax controversy was rising drastically. The driving reason between any controversy is the lack of understanding between taxpayers and authorities. According to Ernst and Young’s (“EY”) Global Director of Indirect Tax, Gijsbert C. Bulk, taxpayers are likely to face controversy if they do not understand the concerns of the tax authorities.
The following article focuses on the possible causes of tax controversy and recommendations on how to handle these pressing issues.
- Transfer Pricing
EY’s survey in the year 2017-18 found that taxpayers perceive transfer pricing as the highest form of risk in tax controversy issues. Organizations use transfer pricing to account for all transactions between different divisions of the same multinational organization. In this scenario, the divisions are in control of their own profits. Transfer pricing refers to the prices set for transactions between these divisions. Transfer prices are not very different from the retail prices of the same product. Tax regulations use what is called an arm’s length transaction methodology on transfer pricing. This states that the organization must decide these inter-division prices based on a transaction of a similar nature between the organization and a third party. Organizations need to provide more transparency based on current reforms. The problem lies in the fact that some companies use transfer pricing to transfer profits to an international area with lower tax rates. These differences in the perspectives of taxpayers and authorities can lead to controversy.
- Aggressive auditing.
The current reforms also brought the trend of aggressive auditing by tax authorities. With the rapid advances in technology, authorities can go through tons of taxing data and process it very quickly. Over the years, tax authorities have taken steps to improve their capabilities in collecting and analyzing data. With this improvement comes real-time monitoring of organizations. This places the burden of providing and catering to the demands of the tax authorities on the taxpayers while giving them very little time to collect and organize the same information. Relief from the IRS for your taxes can come from programs like fresh start, which help organizations by giving them a little bit of wiggle room. However, as long as organizations are struggling to catch up to the same level of resources that the government authority has access to, there will always be a scope of tax controversy due to aggressive auditing.
- Taxation of intellectual property
The taxation of intellectual property after the tax reforms has become excessively complex. These reforms include global income earned by foreign subsidiaries and tax incentives for foreign-derived income by organizations in the United States. The reforms also reduced the corporate tax rate from 35 percent to 21 percent. The IRS and authorities had to complete work before the deadline of June 2019 and navigate and publish guidelines around these reforms. However, with the increase in complexity and advances in IP and the digital world, the deadline is not nearly enough time for ensuring clarity between the taxpayers and the authorities. The reforms make the United States a more competitive market and make owning intellectual property harder than the rest of the world.
- Programs to resolve tax disputes like Advance Pricing Agreements and Cooperative Compliance Agreements
Dispute resolution programs exist to prevent the rise of tax controversy. These include Advance Pricing Agreements (APA) and Cooperative Compliance Agreements. Advance Pricing Agreements refer to an advanced agreement between companies and the tax authorities to set a suitable transfer pricing value and methodology for a pre-decided time interval. Organizations use Cooperative Compliance Agreements to ensure that they are completely compliant with all taxes. It is an agreement between the organization and the Office of the Revenue Commissioners. The agreement highlights a system that allows the company to stay tax compliant as well as analyze high-risk regions to target first. This is an optional system.
However, these systems do not guarantee complete avoidance of tax controversies. Depending purely on them without tax advisers can lead to the organization encountering a tax controversy.
How to avoid tax controversies
- Your organization must maintain updated technology.
With advances in technology that the tax authorities use, comes a rapid increase in the requests for information regarding taxation. Organizations can only keep up with these requests by maintaining up to date technology that can handle these requests. A system that can prioritize requests and allocate sufficient resources to each request is what an organization requires to handle real-time or near real-time requests and audits.
- Take a global approach and ensure transparency.
When setting up the organization’s tax policies, keep in mind the global rules and standards. Ensure that all policies are completely transparent as the company’s global reputation is on the line when a tax controversy occurs.
- Build a strategy on a case-by-case basis.
Each scenario calls for a different kind of dispute resolution arrangements. Whether it is an Advance Pricing Agreement or a Cooperative Compliance Agreement, no one agreement fits all cases. Analyze each case and build an appropriate strategy for the same. The initiative seeks to reduce the gap between taxation for multinational organizations that move their operation base to a country with lower tax rates. Analyze and detect the BEPS points to stay on top of these reforms.
- Monitor changes and reforms to stay abreast of the changing environment.
Finally, an organization must monitor and keep track of all changes in policies that affect or have the possibility of affecting the company. One country’s reforms could influence changes in others, so a global approach towards monitoring these shifts is essential. The larger the change, the higher the chances of tax controversy. Based on the reforms put in place, a multinational company must observe and adapt swiftly to stay clear of any controversy.
The main solution to staying far away from tax controversy is to keep your organization aware of all the changes and reforms occurring in this complex field. Maintain a dedicated team to analyze trends in the tax reforms and detect any possible risk factors in the organization’s policies. Use appropriate dispute resolution techniques for each of your cases to stay protected. Remember, prevention is better than cure.
This is a guest post by Jessica Smith. This post has been edited for syntax and grammar. The Law offices of Jay Leiderman is not responsible for the accuracy of the content herein or any opinions or ideas expressed herein. This post is for entertainment and literary value and is not intended as legal advice. This post does not establish an attorney-client relationship of any sort. If you have legal questions about ideas presented herein please contact a lawyer knowledgeable in this field of practice.