The Changing Landscape of Tax Controversy
24 July 2013
Posted by: Author: Graeme Palmer
Author: Graeme Palmer (TaxTalk Professional)
An overview of the ways in which tax controversy has impacted upon international taxation frameworks
"Be wary of strong drink. It can make you shoot at tax collectors… and miss”, was the blithe advice offered by American author Robert Heilein on disputes with the tax authorities. The environment in which tax disputes are being conducted is changing, and before taxpayers take aim at the tax authorities they should consider the advantages of trying to identify and resolve possible tax controversies in advance. Governments around the world have come under pressure to collect monies to meet their growing needs and budget deficits. This has resulted in tax authorities adopting a more aggressive approach to tax collection and an increase in the number of audits being conducted. Increased audits combined with a more aggressive approach by the authorities are a recipe for greater tax controversy.
The global landscape in which tax controversy takes place is changing. These changes include:
• the sharing of information by tax authorities with other countries for the purpose of tax collection and enforcement;
• treaties being concluded between countries to limit tax avoidance transactions. For example, the recent renegotiation of the double taxation agreement with Mauritius is a good illustration of co-operation between governments, in this case, to end a perceived abuse causing the erosion of the South African tax base;
• joint audits where a taxpayer can be subject to a single co-ordinated audit by two or more jurisdictions;
• more attention being given to transfer pricing by the tax authorities to protect their revenue base;
• the introduction of alternative methods to resolving disputes due to traditional methods, such as the court system, being placed under strain. Examples of alternative methods can be found in the Tax Administration Act, 2011, where specific procedures are set out in Part F of Chapter 9 for early dispute settlement.
As companies procure business interests around the globe, multi-jurisdictional disputes will become a common feature of tax controversy. In other words, multinational companies will get involved in dispute across more than two jurisdictions. Multi-jurisdictional tax disputes will present problems for both tax authorities and businesses alike, as there are no multi-lateral tax treaties, only bilateral treaties. This will create practical difficulties as there will be no means to resolve the disputes. It has been mooted that an international dispute resolution forum may be required to arbitrate on multi-jurisdictional tax controversy.
When governments seek to increase their revenue the corresponding tax legislation used to achieve this objective is likely to become more complex and difficult for taxpayers to manage. Disputes with tax authorities, which are already expensive and resource intensive, will similarly increase. It is of interest that three years ago a KPMG survey showed that tax controversy in South Africa was stabilising. But this survey was conducted before consecutive annual budget deficits. We have also seen the introduction of the Tax Administration Act, 2011 which will have a significant impact on how tax controversy is managed in South Africa.
The Tax Administration Act, 2011 enables the South African Revenue Services (SARS) to follow the global trend to implement a more aggressive approach to tax collection. Provisions in Chapter 5 of the Act allow SARS to, amongst other things, randomly select companies for audits, arrive at a premises without prior notice, search and seize without a warrant, compel persons to answer questions even when self-incriminating, and request information from third parties, such as the taxpayer’s bank or accountant. With increased tax controversies comes a greater risk of damage to the taxpayer’s reputation.
There have been a number of high profile international companies which have received negative publicity on their tax avoidance schemes. A recent investigation conducted by American authorities revealed that Apple Inc had paid only 2% tax on $74 billion in overseas income by exploiting a loophole in Ireland's tax code. There are also reports that Amazon paid only $3.7 million tax on 2012 sales of $6.5 billion, and Google only £10 million in UK corporate taxes between 2006 and 2011, on revenues of £11.9 billion.
Adverse publicity surrounding tax avoidance schemes of high profile international companies is likely to result in greater co-operation between governments through sharing of information, treaties and joint-audits. More countries are likely to pursue general anti-avoidance legislation to combat the schemes. While South Africa has had general anti-avoidance laws for many years, there are several countries, such as Germany and China, which have only recently adopted them. Multinational companies will have to adjust to these new laws and treaties.
When taxpayers engage in disputes with tax authorities through the courts the documents filed become public record. Disputes with the tax authorities may also have to be disclosed in the company’s annual financial statements. There is also a possibility of a leak to the media or social media. Early dispute settlement with the tax authorities can limit damaging negative publicity.
There are significant advantages to taxpayers identifying problems and potential disputes at an early stage and taking steps to resolve them with the tax authorities. Businesses and tax authorities will increasingly see the benefits of adopting a co-operative and transparent relationship. By engaging with the tax authorities at an early stage it provides upfront certainty and reduces the risk of future disputes. In the South African context, there are opportunities in the Tax Administration Act, 2011 which allow for transparency and co-operation, such as the provisions relating to advance rulings or the voluntary disclosure programme.
Tax controversy is changing as we see more information sharing and co-operation between governments. Tax authorities are under pressure to collect funds to reduce deficits and therefore are adopting a more aggressive approach and conducting a greater number of audits. Inevitably this will cause more tax controversy. Tax controversies consume valuable taxpayer’s resources, are expensive in that professionals must be engaged to resolve the disputes, and also expose business to the risk of negative publicity. Taxpayers who best manage the evolving landscape of tax controversy will benefit. There are advantages in being less adversarial and adopting a more co-operative and transparent approach to tax controversy as it may save costs and resources, reduce risk and create certainty.
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