We hear a lot about “ongoing economic uncertainty” these days, but there’s at least one economic certainty for companies with international operations: global audit activity will continue to increase.
Nearly three-quarters (73 percent) of global chief financial officers report that tax audits, across all aspects of tax, increased in frequency last year, according to a recent Taxand survey, with transfer pricing audits leading the way. The aggressiveness of the audits and related assessments has also surged, particularly in emerging economies; just look at the well-publicized Vodafone and Shell transfer pricing cases in India.
Other, increasingly common audit techniques include two or more countries performing joint and simultaneous audits; a greater focus on “high risk” audit issues, especially transfer pricing; and an increasing reliance on “e-audits” and prescribed formatting of the electronic data.
Wait, there’s even more keeping companies on guard. Not only are audits increasing, the expansion of exchange of information and transparency initiatives — endeavors that extend beyond traditional tax treaties – help tax jurisdictions collaborate more easily. OECD and non-OECD countries are entering into bi-lateral Tax Information Exchange Agreements (TIEAs) that facilitates an automatic exchange of companies’ financial and tax information.
Transparency initiatives, such as the OECD’s Aggressive Tax Planning Disclosure Initiative, promote early, mandatory disclosures by companies for certain transactions. The purpose of these disclosures is to substantially reduce the lag between the creation of aggressive tax planning strategies and transparency of their financial impact to the tax authorities, which traditionally relied on audits for this information.
Tax professionals should be aware of these issues so that they can develop effective responses to intensifying audit activity. These developments pose significant challenges for tax departments around the world. The following steps can help tax departments address these challenges:
- Synchronize your company’s global tax policy and global business strategies. Robust documentation, especially around business purpose for executed strategies, is a strong defense.
- Develop internal procedures and discipline around processes to ensure sufficient, contemporaneous documentation. Make sure accounting systems and data warehouses contain the level of easily-accessible data that will be requested during an audit, especially the emerging e-audits.
- Utilize resources effectively. The increased caseload will require more resources. Consider utilizing available audit resolution programs to help manage limited resources. These programs include IRS CAP programs, Pre-filing Agreements, Advance Pricing Agreements, managed audits and voluntary disclosures.
These proactive steps can help companies achieve a greater sense of certainty and efficiency as audits and transparency initiatives continue to increase around the world with no end in sight.
Please remember that the Tax Matters provides information for educational purposes, not specific tax or legal advice. Always consult a qualified tax or legal advisor before taking any action based on this information.