KPMG International’s Global Tax and Benchmarking survey conducted across 35 countries and 270 respondents suggests that behaviour is changing among tax authorities worldwide. Feedback indicates that audit activity has increased across the board with international tax and transfer pricing in particular leading the way.
Notably, 100% of South African respondents have received more requests for information, more audits, a greater use of formal powers to obtain information, more aggression in raising assessments and more frequent application of penalties. About half the respondents expect audit activity to intensify. The majority of respondents (81%) have experienced increased difficulty in reaching resolution with tax authorities. This difficulty in reaching resolution is attributed to revenue authorities being less willing to reach a settlement or a compromise with taxpayers and rather expecting taxpayers to concede substantially all of the tax in dispute. This feedback is consistent across the globe. Also the majority of respondents say that tax authorities are sharing more taxpayer information and this will no doubt intensify as country by country reporting requirements and automatic exchange of information come into effect.
An increasing focus on the tax compliance and morality debate has meant that greater scrutiny of both public and private financial affairs has become the norm. It may not seem obvious to examine litigation and dispute resolution when discussing a responsible tax approach. However, guided by legislative changes, the resolution process KPMG proposes looks to equip all stakeholders (corporates, executives, revenue authorities etc.) with cooperative approaches for the best outcome in terms of disputes.
So how have South African companies responded so far to the swelling levels of tax disputes and the significant reputational and financial losses they can cause?
- The majority employ a tax manager or equivalent who also deals with disputes and reports directly to the finance function. Similarly, only 20% of the global respondents have a specific group that handles tax audits and disputes and under 10% have a global head of controversy or equivalent who is responsible for the day-to-day management of tax disputes, provide strategic direction and communicate with the board and senior management.
- 67% of South African Companies manage the disputes internally within the tax function on a dispute-by-dispute basis, with 33% outsourcing the management of the dispute to external advisors. This is while 61% of respondents do not employ personnel with specific, relevant tax dispute management experience.
- Only 24% of respondents have a budget for managing tax disputes and for these companies the dispute portion of the tax function budget is approximately 10%.The majority of South African respondents (80%) believe this budget is adequate.
- Only 5% of South African respondents utilise technology to help monitor the number and nature of tax disputes across their organisation and globally and they don’t expect this to change in the next 2 years. This is while tax authorities in many jurisdictions (including South Africa) are employing increasingly sophisticated data analytic tools to flag audit issues and risk-assess taxpayers.
The current survey tells us that South African tax executives and /or finance executives clearly recognise the importance of tax dispute management to their business, yet some companies are not quick enough to invest in strengthening their dispute resolution functions at a pace needed to keep up with the tax authorities.
Companies require dispute resolution expertise to formulate and/or update their strategy regarding existing and potential disputes with the tax authorities. This would avoid the element of surprise and sometimes panic that arises when the potential impact of a tax controversy matter is understood. It becomes part and parcel of a responsible tax approach for a company to be clear in its position, attitude to risk, communication and accounting exposure if and when a tax dispute does arise. It is important to know when to concede, when and how to engage with the tax authorities, when to consider settlement or arbitration and how to prepare for litigation simultaneously where necessary. Underestimating the importance of a clear dispute resolution strategy often proves to have profound commercial and reputational implications for companies. Put simply, litigation is costly in terms of fees and management time and it is in the interest of all parties to avoid it where possible. But, on the one hand, conceding - where tax should not be due - hits the bottom line; while on the other, fighting the wrong cases leads to reputational damage.
By advising clients to invest in strong dispute resolution capabilities, the issue of tax transparency is engrained into their business operations, while managing commercial and reputational risks.
With more tax authorities wanting a greater share of the global tax pie there is more potential for tax disputes. Based on the current survey, many companies have scope to better protect their bottom lines and preserve value by investing in their tax dispute management functions. Across the survey responses, it is clear that a minority of forward-thinking companies are already at work developing robust tax risk management frameworks that are fit for the future.
South African tax and/or finance executives need to formulate, articulate and inculcate their company’s approach and policy to tax into the DNA of the company. The KPMG Global Tax Disputes benchmarking survey clearly demonstrates that the “tone at the top” sets the scene for tax strategy. If companies wish to avoid the arduous dispute resolution process as much as possible they need to adopt a responsible tax approach.
Roula is a senior tax partner with over 20 years’ experience in tax advisory services and specializes in corporate tax. She has advised on a wide range of corporate tax matters with particular emphasis on the opportunities and issues flowing from corporate tax planning and consulting, mergers and acquisitions, corporate restructuring, management and leveraged buy-outs, disposal of businesses, structuring of...