The Rise of a New Role
23 August 2013
Posted by: Author: Nigel Gibson
Author: Nigel Gibson (TaxTalk)
With governments struggling to pay off their debts and companies squeezing every last ounce of profit out of their operations, it is no wonder that disputes over tax are becoming more frequent. Indeed, the risk of disagreement, particularly between national authorities and international companies, has rarely been greater. Is it time for a new hero or heroine to appear? Enter the newly crowned head of tax controversy.
Around the globe, a range of companies have established, or are in the process of establishing, such roles. They see this appointment as a way of guarding against differences with the tax authorities which, unless managed correctly, threaten to undermine their reputations for propriety and good governance. What is more, with politicians challenging executives from firms whose products or services are part of our daily routine but which, in some countries at least, seem to pay little or no tax, tensions are bound to rise.
Part of the problem is that, as the pace of globalization has accelerated, and with it the mobility of capital, so the amount of tax collected from companies by governments within the OECD has declined, particularly over the past 25 years. Countries have countered this by broadening their tax bases, sometimes with limited success.
While economies grew rapidly and corporate profits rose at a reasonable rate, it seemed to matter little. But now, with profits under pressure because of low growth rates or even recession in some developed markets, disagreements have multiplied. Not only have tax authorities become more active in challenging taxpayers; they also talk to each other as never before. Following guidance from the OECD, more and more governments around the world have pressed for joint or simultaneous audits of companies that are liable for tax in their respective territories. Just as one tax authority clamps down on a loophole, it seems, others promptly do the same.
The benefits to governments are obvious: joint audits ensure that companies meet their obligations and comply with the rules. By joining forces, the tax authorities also reduce their own costs. But for the company, is it always a headache? Well, no. One benefit is the certainty that a joint audit will bring. Firms may also gain from a consistent approach in more than one country. Last but not least, companies may benefit from being able to influence the timing and scope of such audits.
Against this background, it is no surprise that an increasing number of companies, particularly large ones with businesses around the world, have appointed a head of tax controversy. Often, they have worked within the tax administrations of developed markets as well as in the private sector. Their tasks may differ, yet the job is rarely easy. On the one hand, there are specific risks to anticipate and manage, particularly in rapidgrowth markets where the conventions governing tax are typically limited. In more developed markets, on the other hand, there are questions of reputation and governance to consider, which in turn become a board-level issue.
‘‘Indeed,’’ says Chris Oates, Head of the Tax Controversy and Risk Management practice at Ernst & Young in the UK, ‘‘the role of head of tax controversy today is as much about reputation and governance as it is about managing a company’s exposure to tax. It is no longer just a question of managing things on a real-time basis but of weighing up how transactions entered into in the past may be viewed against today’s standards of disclosure, and how current decisions may be regarded in the future,” he says.
This means that heads of tax controversy must manage tax risk and its implications, sometimes across many jurisdictions, much more proactively than in the past. "These days, it is about more than having a link between the tax director and a company’s board of directors,” continues Oates. "The board puts the tax director on the spot and asks the question: will what we do now lead to a reputational risk in the future? As a result, boards are much better briefed about tax risk than they used to be.”
Likewise, companies need to be consistent in what they say about their tax affairs. With governments exchanging information, sometimes on a real-time basis, particularly about international companies, messages can quickly become mixed. Penalties differ: what might be just a warning in one jurisdiction could result in criminal sanctions or a tough penalty in another. What is clear is that globalization has created not just opportunities in new markets for firms able to move quickly; it has also underlined the value of such things as intangible assets, royalties, service fees, the financing of subsidiaries within a group and, of course, intellectual property. As the balance of economic growth shifts toward services, these all carry greater weight than they did before.
From here, too, it is a short hop to the complexities of transfer pricing. Transfer pricing is the tool for allocating profits where economic activities cross borders and, as such, is one that is a frequent subject of disagreement between companies and tax authorities. Add to that the fact that the size of tax losses carried forward by companies has risen steadily in recent years, and it is no wonder that disputes are on the rise.
New routes to consider
To guard against abuses, more and more governments have chosen to apply new rules, often to restrict the way in which losses can be used to offset tax. So much so, in fact, that rarely has the pace of change in the way tax is regulated been so brisk or difficult to manage. No wonder heads of tax controversy have their hands full.
A prerequisite for the job is not just the willingness to travel but also an understanding that a multilateral approach to these problems is often the only way to solve them. As Pascal Saint- Amans, Director of the OECD’s Centre for Tax Policy and Administration, noted recently in an interview with Ernst & Young’s Global Tax Policy and Controversy Briefing: "Interest in transfer pricing has been growing for 20 years and is still growing. So how do you best use transfer pricing to avoid double taxation?”
This is not to suggest that all such issues necessarily result in litigation. Indeed, tax controversy leaders have a variety of alternative resolutions to explore. These range from the political, such as ensuring strong and respectful relations with relevant tax administrations, through to the practical, such as ensuring solid documentation and preparation for tax audits. At a different level, there is also progress being made within tax administrations too. In March 2012, tax officials from 90 countries agreed that the rules on transfer pricing need to be simplified, that the guidelines governing intangibles should be more straightforward and that disputes on such issues should be easier and faster to resolve. Until they are, more and more companies are likely to need a head of tax controversy to help them steer a course through the minefield ahead.