Tax survey stresses excessive scrutiny, significance of BEPS
A new survey by E&Y released at its 33rd Annual International Tax Conference, titled “Connecting the dots” uncovered the issues of navigating multiple challenges, led by increased scrutiny and the effects of the Organisation for Economic Co-operation and Development’s (OECD) base erosion and profit shifting (BEPS) project.
“Tax directors need to be informed about all changes in the current tax environment and prepare themselves to manage any new challenges,” according to Kate Barton, EY Americas vice chair of tax services.
“Whether you’re talking about tax law changes, BEPS or the growing incidence of tax controversy, it is important to know all the issues, know your options and design the best path for your company.”
Tax directors are increasingly convinced that the BEPS project will generate significant changes over the next five years, with 79 percent projecting an impact compared with 65 percent just a year ago. However, most are still unprepared to address it. Only 28 percent expect to make any changes due to BEPS in the next two years.
To that point, while 25 percent of respondents expect the biggest impact from increased information reporting, 53 percent revealed they have not even begun analysing what country-by-country reporting
would mean for their company. This apparent procrastination may reflect a preference to delay decisions until final recommendations are made by the OECD and countries pass implementing legislation.
Pascal Saint-Amans, director, Centre for Tax Policy and Administration at the OECD, who was the keynote speaker at the conference, shared his perspective on the status and direction of the BEPS project, focusing on the long- and short-term prospects.
Saint-Amans reiterated his premise that the BEPS action plan will provide a level playing field for countries around the world, saying “short-term, the BEPS actions will require change. Long-term, they should reduce controversy that is expensive to countries and companies.”
Nearly a third of respondents (30%) are already seeing tax authorities raise audit issues that reflect various issues being addressed by the BEPS project, primarily in Europe (74%), Asia Pacific (33%) and North America (32%). Previously, Asia Pacific had shown less reported activity than North America. Overall, 53 percent are currently being audited in more countries than ever before. In addition, 65 percent of respondents judge the enforcement posture and tactics of foreign tax authorities as more aggressive than before.
“These findings are consistent with the results of a recent Tax Risk and Controversy Report in which 79 percent of US-based companies said they have faced more aggressive tax audits in the last two years,” said Jeff Michalak, EY Americas director for International Tax Services.
“The report also found that another 69 percent see an increase in disclosure and transparency requirements imposed upon companies, and 74 percent see an increase in cross-border focus by tax authorities. It’s clear that, given the increased incidence and aggressiveness of income tax audits, companies must devote more resources than ever before to managing their global tax risk profile and to administering government inquiries and audits. In this environment, 67 percent say they are more likely to consider using the Advance Pricing Agreement (APA) process to help manage risk and obtain certainty, a 12 percent increase last year.”
Among respondents that have faced audit issues reflecting BEPS, 60 percent ranked transfer pricing overall as the number one focus area currently being raised as an audit issue. When asked about the top challenge in foreign country audits, 39 percent selected transfer pricing related to tangible goods and services, while 24 percent chose transfer pricing related to charges for intellectual property.
These challenges are already affecting companies’ transfer pricing practices. Among all anticipated changes to their tax profile, transfer pricing documentation was most frequently cited (50%), followed by transfer pricing methodology (38%).
