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The future of global tax disputes

The future of global tax disputes

The future of global tax disputes

Sharon Katz-Pearlman | Partner,

On a recent webcast, “Global disputes in a COVID-19 era: Revenue authority reactions, guidance and what to expect going forward”, I was joined by tax revenue authority officials from the US, UK, and Australia, as well as KPMG member firm colleagues, to discuss the current environment for tax disputes and trends we think are here to stay in the future. The purpose of our discussion was to help answer the question: how are tax administrations adapting to today’s conditions, and what might we expect going forward?

Future of tax authority relations

The sudden move to remote work has been one of the biggest shifts for the world’s tax authorities, including those from the UK, US and Australia with whom we spoke, who have been successfully operating with most staff working from home. The same appears to be true for other tax authorities that have previously digitalized aspects of their tax systems. However, tax authorities in some developing countries like India and Indonesia face greater challenges in implementing a remote workforce.

From an audit perspective, tax authorities have responded differently. With companies in “survival mode” and physical interactions like onsite visits and in-person meetings not possible, some tax authorities, such as Brazil’s, have temporarily suspended audit, enforcement and collections activity. The US Internal Revenue Service has continued those examinations which had started, but is not beginning new audits until at least mid-July 2020, although pre-audit case development is proceeding. The Australian Tax Office gave large corporate taxpayers the option to put ongoing audits on hold, yet the majority of companies opted to proceed which may suggest that companies do not want to delay the audits, as they seek to gain tax certainty. By contrast, regular audit activity continues for tax authorities in Mexico, Chile and Peru.

From the taxpayers’ perspective, dealings with tax authorities whose professionals are working remotely seem to remain effective. We polled over 425 tax and business leaders during our webcast and 56 percent of those in the midst of a tax authority examination responded that “the matter is proceeding well”. Only 22 percent reported “difficulty contacting or communicating with agents”. About the same number reported “problems getting information to respond to information requests”.

Many of the efficiencies gained from working remotely could endure. While in-person meetings will likely remain a feature of future tax authority examinations and negotiations, many jurisdictions are amending their processes to eliminate formal hard-copy document requirements, though it is unclear which of these new processes will become permanent. The OECD’s Forum on Tax Administration (FTA) has played a key role in allowing the revenue authorities to “meet” and leverage each other's experiences, as revenue authorities work through this difficult environment. The FTA’s Mutual Agreement Procedure (MAP) Forum, which is devoted to improving MAPs globally, is collecting and sharing such new leading practices through virtual FTA meetings and a centralized database of program improvements accessible to all FTA members.

Future of tax policy design

The current situation may be speeding up the evolving use of data in tax policy making. In our webcast, Jeremy Hirschhorn, Second Commissioner of the Australian Tax Office’s (ATO) Client Engagement Group described how the use of data in the tax world has evolved through three phases, and how the quick work of governments in designing and rolling out stimulus measures might take us to the next stage faster.
 

  • In the initial pre-data stage, it was impossible for tax authorities to access data at scale, so taxpayers were required to provide their own dataset on income tax returns.
  • The second stage saw tax authorities crossmatch information provided by taxpayers against other verifiable data sources.
  • In the third stage —which the ATO calls “datafication” — tax policy measures are developed around the data itself. Instead of designing systems and then scrounging for the data to support them, tax policy is set based on what the available data can provide.

This third approach was used with success to develop many of Australia’s COVID-19 stimulus measures. For example, Australia’s wage subsidy for small businesses was designed so that companies would only have to file their usual tax information, supported by Australia’s one-touch payroll tax reporting system. The subsidy was then automatically generated with no human intervention in almost all cases.

Future of tax dispute resolution

Tax disputes are likely to surge in the coming years as efforts to preserve and raise cash among tax authorities and taxpayers alike increase the potential for disagreement. Whether it will become easier to resolve these disputes remains an open question. While I would expect that negotiations with tax authorities which already have robust dispute resolution programs in place will continue to be reasonable, it may become more difficult to resolve matters with tax authorities that don’t have such processes in place.

Settlements with taxpayers might attract even more scrutiny from tax authorities than in recent years, which could in turn impede resolutions. Revenue authorities may have to balance the goal of truncating tax disputes against rising public and political pressure to collect the “fair share of tax” to help replenish government funds, especially from international companies.

Future of tax litigation

Litigation will likely remain a vital part of the tax disputes landscape. Even now, tax litigation continues through virtual means in some jurisdictions, such as Australia. In the United States, the Tax Court will be having only remote trial sessions in the fall of 2020.

To the extent tax court proceedings continue to be conducted remotely, litigants may need to adapt their approach. Tried and true advocacy methods might not work in the virtual domain, so parties may need to the rethink how they prepare and present evidence and how they can convey the subtleties of their arguments.

As often happens in a downturn, some companies facing large tax adjustments may be more inclined to roll the dice on less costly litigation. However, companies need to balance these costs against the costs of diverted resources, reputational risk and the inherent uncertainty of litigation.

Plan for uncertainty

Globally, it’s highly possible that international companies will face heightened tax uncertainty for the next few years, as governments in different jurisdictions take varied approaches to reviving their economies. Some may raise taxes to bring in more revenues, while others may reduce taxes to help increase business activity.

Our webcast poll shows tax and business leaders recognize these future challenges, with 85 percent indicating “concerns about what lies ahead”, and the “inability to obtain tax certainty in timely fashion, identified as the top concern for over half of respondents.

The clear advice from our panelists, to organizations in this environment, is to pay extra attention to documentation of transactions and maintain clear records. While this has always been a best practice, it is even more critical now. Moreover, companies should have a strategy in place to identify current tax risks as well as those that could arise later in a potentially more aggressive audit environment.

Assess your potential risks and opportunities in different locations, and understand where your organization is most likely to be affected, bearing in mind that different jurisdictions will require different approaches. With budget cuts expected for companies in many sectors, this review will be a big help in communicating potential issues to leadership and deciding how to best deploy limited resources to manage them.