Tax executives wary of risks from tax reform efforts

Tax executives are worried about some of the risks to their companies from the Organization of Economic Cooperation and Development’s Base Erosion and Profit Shifting project and U.S. tax reform proposals.

A recent survey by Ernst & Young polled 901 tax and finance executives in 69 jurisdictions around the world and found considerable wariness about OECD BEPS, along with other issues such as Brexit and U.S. tax reforms.

Fifty-eight percent of the survey respondents indicated they have experienced an increased focus by tax authorities on cross-border issues and/or transactions in the past two years, while 55 percent said they have experienced an increase in disclosure and transparency requirements, and 41 percent said they have seen an increase in the number or aggressiveness of tax audits. In addition, 18 percent said they have experienced an increase in the application of general anti-avoidance rules or specific anti-avoidance rules.

In many countries, the tax strategies of specific multinational companies have increasingly attracted criticism. While the percentage of survey respondents who said they have experienced the use of so-called “name and shame” techniques by tax authorities is small at only 8 percent of the companies surveyed, that represents 74 companies. The EY report called that an “eye opening” statistic, considering that “name and shame” has not become a widely implemented tool to date.

The report also found some differences within various industries, with tax legislation and regulation-related risks selected at significantly higher rates by businesses in the insurance sector (77 percent), power and utilities (75 percent), and media and entertainment (71 percent). Businesses in the life sciences (78 percent), mining/metals (78 percent), technology (77 percent) and health sciences (76 percent) industries had the highest levels of concern around transfer pricing-related risks.

The U.S. ranked number 1 among the top 10 jurisdictions that survey respondents expect will present the most significant tax-related risks in the next two years. That could be driven by the high level of uncertainty about the tax reform plans of Congress and the Trump administration.

“Tax reform is still a very active effort in both the House and Senate,” said Cathy Koch, Americas tax policy leader at Ernst & Young LLP. “For some taxpayers the idea of reforming the tax code creates some temporary uncertainty about what’s going to happen, and what should they be doing. New administrations come in and have different views of the world. This one certainly does relative to the last one, and it does create uncertainty.”

She pointed out that the statements and rhetoric may be far from what ultimately gets passed. “Until the House and Senate pass these ideas as bills, they really can’t become laws,” said Koch. “We’re in a position right now where people are waiting to see what it’s going to look like and if it’s going to pass. As a result there’s some uncertainty in tax on the policy side of things, and that has to do with whether tax reform is going to happen, and what is it going to look like? What it’s going to look like has a lot to do with the politics. Will Democrats get on board, and if not you have to go through reconciliation, and reconciliation is a procedure that will restrict to some degree the content of the tax reform bill.”

In the meantime, taxpayers are going to need some advice from their accountants. “If you’re a taxpayer right now who uses a lot of tax expenditures and you hear all this talk about base broadening to pay for the rate, there’s uncertainty there,” said Koch. “Am I going to be able to do this next year? Is this expenditure that I use in my business going to be available for me next year, and what do I do about that? So right now there’s a lot of uncertainty in the tax environment because of something, tax reform, that we really want to see accomplished, but in the short term it can create a bunch of questions about which way should I head down this road because I’m not really sure what to expect at the end of the day.”