Businesses seek controversy-proof tax approach

How aggressive?

At Alfa Laval, as at many organizations, “it’s a board decision how conservative or aggressive your tax strategy should be,” Malmros points out.

Board members are keenly aware of the damage tax controversy can do to a company’s performance and reputation.

For their part, tax officials increasingly expect board-level engagement in tax matters.

For example, at McKesson Corp., a San Francisco-based pharmaceutical distributor and health care information technology company, Paul Smith regularly brings members of his team to present at meetings of the board’s audit committee, in his role as Senior Vice President, Global Taxes.

He also looks for opportunities outside of formal board meetings to keep tax matters in front of directors.

Laying the groundwork

In global business, tax control frameworks can be essential tools for mastering today’s risks.

Given increased oversight by tax authorities, so are controversy management frameworks.

Tax control frameworks include a clear tax strategy, a comprehensive plan for operationalizing the strategy, assigned responsibilities, documented governance and regular testing and updating in line with business dynamics and changing tax rules. These frameworks often form the basis of cooperative compliance relationships with tax authorities.

As the OECD sees it, “when the tax control framework of a multinational enterprise participating in a cooperative compliance program is determined to be effective, and when the enterprise provides complete disclosures that include relevant information and tax risks … the extent of reviews and audits of returns submitted can be reduced significantly.”

Controversy management frameworks represent another level of control.

“Companies operate in many more countries today, which is driving their need to strategically manage global controversy from beginning to end,” says Frank Ng, a member of EY’s Tax Controversy and Risk Management Services group in Washington, DC.

As they work across jurisdictions, dealing simultaneously with more and less automated and sophisticated tax administrations, businesses need to understand local laws and procedures, including dispute resolution tools, appeals rights and litigation procedures.

“Many multinationals at headquarters are looking for a line of sight to tax exposures on a real-time basis,” Ng says, including how many audits are open, at which stage in the process and the potential impact in other jurisdictions.

The role of digitalization

A particular flashpoint for tax risk is the current digital transformation affecting global businesses and tax administration functions.

“Governments are looking to digital technologies as well as transactions within the digital economy as new sources of tax revenue” says Channing Flynn, EY Global Technology Industry and Digital Tax Leader based in San Francisco and San Jose.

Businesses should understand the four key components of digital tax and develop a strategy to deploy them within their tax organization, he says.

These include: Digital tax effectiveness, Digital tax, administration, tax technology, and tax big data.

An overall digital tax strategy should then answer four questions:

What are the tax implications as digital technology changes business strategies, models and supply chains?

What can businesses do to meet the demands from governments’ digital tax administrations, continued regulatory changes and increasing transparency requirements?

How can digital technology help build a better working tax function?

How can it provide value-added insights and better visibility by leveraging data?

Reaching out

Alfa Laval has good relations with its tax administration at home in Sweden, Malmros says, but has an especially bad relationship in one Asian country in which it operates.

For over four years, Swedish authorities have been trying unsuccessfully to agree with this country’s administration on Alfa Laval’s transfer pricing approach.

Recently, tax inspectors came on site and demanded all emails from the local chief accountant and financial controller in the country, Malmros says. “It’s a very hostile environment.”

EY survey results point to shifting relations between business and government.

At the EY Annual International Tax Conference in October, more than half of tax directors said the number of countries in which they are subject to an active audit has increased.

Karen Lynch