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BEPS To Compound Global Tax Risks: EY

by Mike Godfrey,, Washington

15 May 2014

The vast majority of companies headquartered in the United States expect already heightened tax risks to accelerate in the next two years.

90 percent of US respondents to EY's 2014 tax risk and controversy survey shared this view, compared with 81 percent for companies globally. The findings have been revealed in a new report from EY (formerly Ernst and Young), Bridging the Divide, which identifies that companies are concerned that national governments could respond to recommendations stemming from the Organization for Economic Cooperation & Development's (OECD) Base Erosion and Profit Shifting (BEPS) project with unilateral policies.

The EY survey of 830 tax and finance executives (including 120 chief financial officers) in 25 countries has tracked tax risk for ten years, and now offers the first quantifiable global sample of how companies around the world view the OECD BEPS project and other types of tax risks companies are currently facing.

"The list of countries either deploying or planning significant tax reform continues to expand, and tax directors everywhere report that the pace, complexity, and volume of new legislation is straining their already limited resources," says Rob Hanson EY Global Director of Tax Controversy. "On top of BEPS and changing legislation, we've found that companies also need to develop plans to address reputation, enforcement, and operational issues if they're to successfully manage their tax risk."

90 percent of US-based companies report that they already experience more risk or uncertainty about tax legislation or regulation than they did just two years ago. When asked about reporting requirements, 69 percent of US-based executives said they have seen an increase in disclosure and transparency requirements over the same two-year period, compared with 48 percent of respondents around the world.

Nearly one-third (31 percent) of all companies surveyed predict that the BEPS roll-out will be characterized by relatively limited coordinated action and by increased unilateral action by countries. As a result, the majority (60 percent) of the largest companies (those with annual revenues in excess of USD5bn) fear that double taxation will increase in the next three years. Yet, only 45 percent of US companies agree. Three-quarters (74 percent) of these largest global companies say they believe some countries already see the very existence of the OECD's BEPS project as a reason to change their enforcement approach before any recommendations have passed into national law.

"Although they expressed confidence in their tax planning stance, US-based executives in particular recognized that they would need additional resources to comply with new reporting requirements under the BEPS project plan," says Hanson.

In addition to BEPS-related risks, the survey also reveals other sources of tax risks that US companies are currently experiencing or anticipating over the next several years. Though US survey respondents reported heightened challenges in response to the numerous tax changes, they are resolute in maintaining their course:

  • Companies headquartered in the US report a 90 percent greater risk or uncertainty around tax legislation or regulation during the last two years, a 28 percentage point increase over global respondents (62 percent), and 24 percent higher than the largest companies responding to the survey globally;
  • Among US-based executives, 53 percent report greater complexity around effective tax rate management during the course of the last two years, a 22 percent increase over all global respondents (31 percent), and 11 percent higher than the 'largest companies' global respondents;
  • 48 percent report greater complexity in supply chains during the course of the last two years, a 19 percent increase over the global respondents (29 percent) and 11 percent higher than the 'largest companies' global respondents;
  • In terms of controversy, 79 percent of US-based companies report that tax audits have become more aggressive in the last two years, with 69 percent seeing an increase in disclosure and transparency requirements, and 74 percent seeing an increased focus on cross-border transactions by tax authorities;
  • Advance Pricing Agreements (APAs) have long been a means for tax authorities and taxpayers to mutually agree on a way to reduce risk and the volume of transfer pricing disputes. Many respondents report that APAs are now becoming far more difficult to secure. Among US-based companies expressing an opinion, 63 percent found one or more tax authorities to be more difficult or challenging with respect to concluding an APA in the last two years.
  • As a result of these increased risks, 78 percent of the largest companies around the world agree or strongly agree that tax risk and controversy management will become more important in the next two years. Yet three-quarters of these companies feel they have insufficient resources to cover tax function activities, up from 57 percent in 2011. 43 percent of all companies use no technology or rely on local personnel to manage tax audits and incoming data requests from the tax authorities.

EY Global Tax Vice Chair, Dave Holtze adds: "Today's global business environment presents a complex assortment of tax risks for multinationals, particularly when operating in markets that may be less familiar. Companies need to get actively engaged on this issue, from ensuring that they have open lines of communication within their own enterprises to making their views known and understood on issues such as BEPS."

TAGS: environment | tax | business | training | law | audit | enforcement | multinationals | legislation | tax planning | transfer pricing | United States | tax reform | regulation | Tax

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