There is no doubt that tax authority activity has been rising steadily in recent times as financially strained governments press for higher revenue collections and media and public attitudes harden against perceived corporate tax avoidance, writes Roula Hadjipaschalis, director: corporate tax at KPMG in South Africa.
The audit activity has increased across the board with international tax and transfer pricing in particular leading the way. This trend is clearly reflected in the latest KPMG Global Tax Disputes benchmarking survey, in which 270 respondents participated across 35 countries.
Across the globe there has been an increase in requests for information and audits with half the respondents observing that tax audits are taking longer to conclude. Revenue authorities are taking a harder line in negotiations, with 25% observing that there is an increase in the tax authorities application of penalties globally. 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.
So how are South African companies responding 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 that 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 two 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.
• Notably, 100% of South African respondents have received more requests for information, more audits, a greater use of formal powers to obtain information, more aggressiveness 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 increased aggressiveness by the revenue authorities, less willingness to “split the difference” with taxpayers and rather expecting taxpayers to concede substantially all of the tax in dispute.
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. In terms of the survey, leading tax dispute management functions of tomorrow would include:
• A global, senior executive head of tax controversy to provide strategic direction and centralise tax dispute monitoring and controls;
• Dedicated budgets;
• Dedicated teams of professionals with tax dispute management experience;
• Centralised internal processes to promote consistency, quality and efficiency;
• Clear, company-wide tax dispute management;
• Escalation processes for bringing issues to the tax dispute management team’s attention as early as possible;
• Processes for communication with company directors about the potential impact of tax disputes on their company’s reputation, operations and bottom line;
• A worldwide tax audit management software platform for a complete view of all current disputes and potential disputes in the pipeline.