Four out of five companies expect tax risks to increase in the next two years. In particular, the Base Erosion and Profit Shifting (BEPS) project of the Organization for Economic Cooperation & Development’s is seen as a major risk, according to an Ernst & Young survey of 830 tax and finance executives in 25 countries.
The potential lack of coordination by national governments around the initiative, which consists of a 15 point action plan aimed at improving the international tax regime, is considered a threat by multinationals.
The project targets gaps in the interaction of tax rules from different countries and the application of certain double tax treaties which leads to no or unduly low taxation.
Nearly one-third (31 percent) of all companies surveyed predict the BEPS roll out will be characterized by relatively limited coordinated action and by increased unilateral action by countries.
Three-quarters (74 percent) of companies with a turnover of more than $5 billion believe some countries have already been motivated by the BEPS project to change their enforcement approach before any recommendations have passed into national law.
As a result, the majority of these largest companies fear that double taxation will increase in the next three years.
“International companies share the OECD’s concern that coordinated action by national governments is necessary to ensure any BEPS-related recommendations are productive,” said EY’s Global Tax Vice Chair Dave Holtze. “The OECD can play an invaluable role in preventing what it has called a ‘global tax chaos’ that results in double taxation and increased controversy by pressing for common approaches and consistent standards.”
As well as risks relating to BEPS, the survey report “Bridging the divide” reveals other sources of tax risks, including stricter tax enforcement and reputational risks from media coverage of tax issues.
Companies are experiencing a harsher enforcement environment from tax authorities, particularly around transfer pricing, which is identified as the top tax risk.
The majority of the largest companies (68 percent) report that they feel tax audits have become more aggressive in the last two years, up from 57 percent in 2011.
The news media has become an even bigger driver of tax-related reputational risk for companies, according to the survey. Nearly nine out of ten of the largest companies are concerned about news media coverage of tax issues, up from 60 percent in 2011.
The survey also found that operating in emerging markets significantly increases the risk of tax controversy, according to 84 percent of the largest firms. In 2011, only 67 percent of the firms believed that tax risks were higher in emerging markets.
China, India and Brazil are the top three emerging market countries identified as having the most significant potential for risk related to tax.
As a result of these increased risks, 78 percent of the largest companies 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. Forty-three percent of all companies use no technology or rely on local personnel to manage tax audits and incoming data requests from the tax authorities.