Volume of tax audits rising
11 October 2012
Posted by: SAIT Technical
By Paul de Chalain (PWC/Moneywebtax)
Sars has commenced joint audits with countries such as Botswana, the UK and the US.
The recent economic uncertainty has tax authorities worldwide scrambling for revenue to make up for shortfalls in government deficits. More local and foreign audits and tax disputes are being brought before the competent authorities. These are some of the trends highlighted in a recent paper issued by PwC Global Tax Services: The shifting global tax audit and controversy landscape. The paper highlights some of the principles and the different ways and measures that governments are starting to reshape their tax systems.
Multinational companies are experiencing rapid change with regard to tax audits and policies. Tax authorities around the world are engaging in intense tax audits and pressure has been exerted on the tax enforcement and compliance processes.
As a result, tax authorities have become more aggressive in the corporate arena, leading to more tax audits, creating an uncertain environment.
Each country has varying approaches as to how it carries out an audit. The challenge for governments is to ensure sufficient revenue for the future, while at the same time sustaining economic growth.
The landscape is undergoing significant change. For instance, the tax authorities are using a number of channels to engage in the reciprocal sharing of information of information with each other for the purposes of tax enforcement and collection. The last decade has seen significant movement in this area. A large number of countries have signed income tax treaties that include exchange of information provisions. The South African Government has plans to improve the exchange of information between various government agencies as well with other jurisdictions.
Recent media reports state that the South African Revenue Service (Sars)has 70 double taxation agreements and five information exchange agreements in effect that provide for the exchange of information with other countries.
Many bilateral Tax Information Exchange Agreements between members of the Organisation for Economic Co-operation and Development (OECD) and non - OECD members, such as the Cayman Islands and Bermuda, have also been entered into with the aim of promoting international cooperation on tax matters. Multilateral treaties of this nature are also becoming more common and one such treaty between members of the Southern African Development Community is currently in the process of being concluded.
Many international tax authorities are also using a variety of emerging tax techniques, states the PwC paper. For instance, certain jurisdictions are now carrying out joint audits where an individual or business is subject to a single coordinated audit by two or more jurisdictions.
Recent reports in the media, state that Sars has also commenced joint audits with countries such as Botswana, the UK and the US with regard to high net worth individuals. Given the complex nature of the affairs of many high net worth individuals, audits and investigations into this sector may take much specialised skills and resources.
Although joint audits have signalled a landmark shift among the tax authorities towards coordinated action, not all tax authorities have embraced them as a foundational approach." For example, although the US pushes their efficiencies, it appears that the UK tax authorities do not wish to make such an official statement at this time.
The tax authorities in South Africa are also clamping down on those who evade their taxes and are carrying out risk-assessments to identify those cases of non-compliance. In those cases where non-compliance is discovered, taxpayers may face penalties of up to 200% plus interest on any outstanding amount.
New tax dispute resolution approaches and programmes are emerging worldwide. One of the newest dispute resolution approaches is the inclusion of mandatory binding arbitration clauses in income tax treaties. Although inclusion of these provisions in tax treaties is a new occurrence, their success remains to be seen.
Companies need to adopt a proactive and coordinated strategy with respect to tax audits and disputes. Careful tax planning may yield successful risk reduction, financial benefits and other resource-driven benefits.
In addition, multinational companies should consider looking at coordinating and aligning issues across jurisdictions, anticipating potential arguments with the authorities and crafting defensive strategies. This may also include developing sound in-house policies and procedures, including a carefully crafted plan on how to effectively manage audits and examinations as to when and where they occur.
Evaluating the future tax audit and controversy landscape has become a business imperative. These and other forward perspectives should be built into every aspect of a company's proactive and coordinated business strategy.