Enforcement and Reputational Risks of Corporate Tax Planning
Have your companys general counsel and chief financial officer talked about tax matters recently? According to a recent survey of CFOs, multinational corporations are seeing an uptick in tax-audits by government authorities, and companies are also reporting an increase in reputational concerns when it comes to tax planning strategies.
A 2012 global survey conducted by corporate tax consultancy Taxand found that 78 percent of respondents said they had witnessed an increase in the number of tax audits conducted by authorities over last year. That rise was slightly more visible in Europe, where 83 percent of CFOs reported an increase in audits, compared to 76 percent of CFOs in Asia, and 75 percent of CFOs in the Americas.
Europe saw a rise in tax audits, a direct reflection of the troubled global economic environment and governments needs to fill deficits, the report states. The sheer intensity and scrutiny faced during tax audits could explain the perceived increase in frequency amongst multinationals.
Given the potential challenge of contending with audits in multiple jurisdictions, the authors recommend that companies establish protocols for responding to requests and documenting the status of tax audits. Specific response mechanisms for each jurisdiction will ensure consistent information is provided to all authorities involved.
For better or for worse, 84 percent of respondents also believe that tax authorities are co-operating more with each other across the globe. According to the report, theres a reason for that: an increase in bilateral agreements.
The sheer speed with which the worlds tax administrations joined forces is astonishing, with taxpayers data and information being shared at remarkable rates, the study states. These agreements have grown from relatively few to over 700 in only the last few years.
Such agreements can benefit a companys international tax planning, but Taxand spies a downside, too, if dealings arent consistent across countries: To date, tax authorities appetite to collect more information cross-border is not matched by an appetite to quickly and efficiently deal with so-called competent authorities matters on a multilateral basis, states Keith ODonnell, who leads Taxands global real estate tax team.
But its not just government scrutiny thats making multinationals wary. Theyre also concerned about how the public views their tax planning activity. Globally, 72 percent of respondents felt that public exposure to tax planning could be detrimental to a companys reputation, increasing from 53 percent in 2011.
That increase largely stemmed from Europe, where 87 percent of CFOs voiced reputational concerns, compared to 69 percent of respondents last year.
Public activism, including the Occupy movement, has focused attention on corporate tax contributions, according to the report: The past year has seen the rise of citizen activism as the economic crisis deepened and governments attempted to make up the shortfall in the public purse by hiking VAT rates, tightening legislation, and enforcing retrospective taxes on businesses.
The authors also say that, as governments try to maintain popularity ratings, they are exerting pressure on multinationals who are considered to be avoiding paying the appropriate amount in tax.
Reputational concerns were down among CFOs in Asiafrom 81 percent in 2011 to 64 percent in 2012and in the Americasfrom 75 percent in 2011 to 62 percent in 2012.