Based on KPMG International’s latest tax department benchmarking survey, tax audit and controversy activity is increasing throughout the region. Currently, 60 percent of survey respondents in the Asia Pacific region say they are involved in some form of tax controversy. For example:
- 32 percent of ENR respondents say they are currently involved in corporate income tax controversy
- 26 percent are involved in indirect tax (sales/use or VAT/GST) controversy
- 19 percent are involved in disputes involving transfer pricing.
Further, Asia Pacific respondents agreed that over the past 12 months, tax authorities are focusing more on auditing corporate income taxes, indirect taxes, and transfer prices. They are also reviewing accounting and tax processes and controls, as well as tax strategy and risk management.
Taking aim at cross-border tax Issues
The leaders of the G20 are raising concerns about inappropriate corporate tax planning. In response to demands for action, the OECD’s Forum of Tax Administrators is developing an action plan to tackle base erosion and profit shifting (see page 16). Tax authorities in Australia, China and India have set their sights on tax issues involving permanent establishments, treaty shopping, and intellectual property.
In a speech on 14 March 2013, the new Commissioner of the Australian Taxation Office (ATO), and former KPMG in Australia tax partner, Chris Jordan said he wants “the ATO to take a more active role in the community debate around profit shifting and the threat to the tax base.” This will include working with the OECD’s Forum on Tax Administration to improve ATO’s understanding of key tax risks (international, unilateral and bilateral developments) and how the Forum can bring new ideas to manage them.
Adding momentum to these initiatives is a rising emphasis on the link between taxation and morality, particularly in Australia, Europe and North America. As fiscally challenged governments impose austerity programs and attempt to boost their tax revenues, the general public is growing more hostile toward corporations and high net worth individuals who shirk their tax payment obligations. These changing public perceptions are giving tax authorities a stronger mandate for tackling tax avoidance and evasion.
Tax authorities are working together much more closely than ever before these days. The Forum on Tax Administration is just one example. They are also entering new agreements to share taxpayer information, leveraging existing ones more frequently, and showing more willingness to collaborate on bilateral advance compliance programs such as APAs. Within their own countries, they are getting better at sharing taxpayer data microscope between departments, such as between tax and customs or immigration. They are also making more sophisticated use of technology to collaborate on activities such as income matching and data mining. In the future, more formalized joint international tax audits for global companies could become the norm, if countries take up the OECD’s Forum on Tax Administration’s 2010 recommendations and guidelines for their conduct.
Reducing risk and achieving certainty
Tax authorities want to deploy their audit resources efficiently and effectively, and so they are using a variety of techniques to help them focus on taxpayers with the highest risk of non-compliance. Some tax authorities have been given legislative tools to help them better target tax avoidance.
For example, the ATO’s risk-based approach to managing the corporate tax base includes an assessment of the taxpayer’s corporate governance framework and how it manages tax risks. The assessment feeds into the ATO’s rating of a taxpayer’s perceived compliance risk and hence the level of risk review and audit activity the ATO undertakes. By directing their attention toward taxpayers and transactions with the greatest uncertainty and risk, tax authorities are better able to detect noncompliance and increase the amounts of taxes they assess on audit.
Tax authorities also have programs designed to help taxpayers achieve certainty on the tax treatment of transactions before tax returns are filed. For example:
- APAs, which fix a company’s transfer prices for several years in advance, and often permit rollbacks to earlier years, are becoming a common feature of many transfer pricing regimes.
- Many countries offer forward compliance programs as part of their VAT systems, and preclearance procedures have become a valuable component of many customs regimes.
- Voluntary disclosure programs may allow taxpayers to correct previous omissions and errors without the risk of incurring additional penalties and interest.
- Advance interpretations and binding tax rulings continue to play an important role in providing advance certainty on potentially controversial areas.
In his recent speech, the ATO’s new Commissioner said he would work to decrease the number of tax disputes and increase the speed of their resolution. For example, the ATO is currently pilot-testing the use of specially trained ATO facilitation officers to conduct and process smaller, less complex disputes. The ATO also plans to improve its large business pre-assessment review program by assigning reviews to senior technical staff in its law area, rather than its large business area.
As tax audits and disputes continue to rise, a proactive approach may be your best defense. When dealing with tax authorities, you need to be well prepared, well organized and in complete control of your facts and issues. This means understanding why transactions or tax positions were taken, being able to explain the technical basis of your understanding, and being ready to back-up your assertions through clear, comprehensive documentation.
Companies that are entering new markets should engage local professional advisers with in-depth knowledge of the tax system and familiarity with tax authority personnel — advisers who can help them avoid missteps. They also should bear in mind that tax authorities in most emerging economies are rapidly catching up to their more sophisticated counterparts. Companies should ensure their approach to the tax authorities evolves accordingly.
back to top