EY Survey Reveals Increasing Tax Audit Presence Driven by BEPS

EY announced today the results of a new tax survey at its 35th Annual International Tax Conference, “Unlocking the future.” The survey revealed that, more than ever, companies are experiencing an increasing number of audits and more aggressive enforcement from tax authorities around the world.

According to the survey, nearly a quarter (23%) of tax directors said that they are currently under audit in more than 15 countries, an increase of 6% from 2015 and 10% from 2014. In line with this, 56% say the number of countries subject to an active audit has increased, up from 49% a year ago. Seventy-two percent say the enforcement posture and tactics of foreign tax authorities has become more aggressive, up from 66% in 2015.

“Tax directors are seeing increased scrutiny around the globe and need to make sure that they are prepared to respond to questions from auditors,” said Kate Barton, EY Americas Vice Chair of Tax Services. “As the digital age rapidly transforms the relationship between tax authorities and taxpayers, tax departments must look at the tax function through the lens of big data and data analytics. With an increasing focus on the preparation, documentation and presentation of this data stemming from BEPS, it is important to know the best reporting options and approaches for your organization.”

BEPS’ INFLUENCE

Just under half (49%) of all respondents are currently seeing tax authorities raise audit issues that reflect the BEPS focus areas, a jump of 16% year-over-year (YoY). Sixty percent selected transfer pricing as the top focus area being raised as an audit issue, with 54% saying it is also the top BEPS area affecting them through changes in law and reporting requirements.

Transfer pricing was also selected by 67% as the number one issue that arises as challenges in their foreign country audits. Transfer pricing related to tangible goods and services (the number one issue last year as well), was selected by 37% while transfer pricing related to charges for intellectual property, including exit charges was selected by 30%.

Country-by-country reporting and transfer pricing were tied as the BEPS areas that will have the greatest impact on respondents’ companies, with each selected by 29%.

READY, SET, ACTION 13

A significant trend in this year’s survey revolved around BEPS Action 13. When asked to select all of the ways the master file/local file framework for transfer pricing documentation will directly or indirectly affect their approach to transfer pricing documentation, respondents revealed the following:

• 67% stated it will require more exhaustive local file reports, an increase of 34% YoY;
• 56% said it will require quantitative and qualitative information regarding all participants in the supply chain, an increase of 29% YoY;
• 43% believed it will require the inclusion of all material intercompany agreements, an increase of 34% YoY;
• 52% stated it will require more local country comparable company or transaction benchmarking, an increase of 44% YoY; and
• 51% felt it will result in an increase in countries requiring that transfer pricing documentation be submitted with the annual tax return, an increase of 29% YoY.

“As countries the world over look to close their respective revenue gaps by tightening the reins on tax base erosion and profit shifting, tax and finance professionals are now facing an arguably more daunting and certainly more multi-faceted set of tasks,” said Jeff Michalak, EY Americas lead for International Tax Services. “Thinking holistically about the three pieces of Action 13 – country-by-country reporting, master file and local file – and the activities they generate represents a prime opportunity to create a sustainable, repeatable, controlled and efficient process that can be leveraged as part of the tax function.”

Other findings of the survey include:

• 89% of respondents expect upward pressure on their global effective tax rate within the next few years, 73% of whom see tax law changes as the primary contributor.
• 81% believe their organization’s new section 385 compliance requirements are moderate to significant. However, only 30% believe they have the sufficient resources to fulfill the new 385 compliance requirements.
• 61% anticipate a significant corporate transaction within the next 12 months, with 85% expecting an acquisition.
• 50% expect fundamental international tax reform to occur in the US, down 7% from last year.

About the survey

The 267 survey respondents represent senior tax executives from large public and private companies, 72% of whom are from companies headquartered in the U.S.

About EY

EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities.

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com.

This news release has been issued by Ernst & Young LLP, a member firm of EY serving clients in the US.