If you’ve had a sneaking suspicion that litigation between corporate taxpayers and tax authorities has been heating up lately, you’ll find plenty of support for that view in a recent International Tax Review article (log-in required; free trial available) written by Anjana Haines. In their quest to reduce tax gaps, authorities worldwide are adopting more aggressive positions and demanding larger audit adjustments, Haines reports.
Vertex experts Bernadette Pinamont, VP of tax research, and Nancy Manzano, director in our chief tax office, are quoted throughout the article. In addition to governments’ perennial drive to secure revenue, Bernadette and Nancy view the OECD’s BEPS project as a factor behind the new tactics: “One thought is that tax administrations are using the umbrella of BEPS to empower themselves to unilaterally take more aggressive stances in audits. Tax authorities around the world are doing this as a means to meet the demand that non-government organizations (NGOs) and the public have placed on them that they enforce tax compliance and ensure that all corporations pay their fair share of taxes.”
However, tax authorities’ legal actions have failed in some high-profile cases, and businesses are fighting back by setting aside more cash for audit and litigation risks than ever before. The stakes are high on both sides, with companies risking reputational damage from accusations of tax avoidance and tax authorities running the risk of discouraging multinationals from doing business in their jurisdiction. If authorities continue their current course, “it will create tension among countries, as well as heightening the risk of double or triple taxation for corporations,” Bernadette and Nancy point out in the article.
The way out of this impasse is for tax authorities to scale back their tax demands, Haines indicates. By issuing post-audit tax bills of slightly lower amounts, authorities could benefit from more settlements, saving the high costs of litigation. From the company perspective, Haines suggests that a reasonable penalty would be “an easier pill to swallow than a multi-billion-dollar demand that could potentially cause financial ruin,” and would keep the tax dispute private, protecting the company’s brand and its reputation.
That’s a genuine win-win. Let’s hope tax authorities will see it that way.
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