Tax disputes, audit prevention and information management are no longer an after-thought for companies trying to comply with their tax obligations worldwide. They instead form part of the core tax strategy that helps a business ensure it has a robust tax policy that helps prevent unwanted audits, disputes and reputational damage.
In anticipation of ITR’s Tax Disputes Summit on April 30, some of the speakers and attendees talk to Anjana Haines about what trends they are witnessing across Europe.
What tax dispute trends are you seeing in your jurisdiction(s)?
Martin Phelan, head of tax at William Fry in Ireland
I am seeing an increased number of “aspect queries” being raised by Irish Revenue concerning tax refunds – across all tax [areas] but VAT in particular – together with more timely periodic reviews of tax returns as filed. Irish Revenue is increasingly proactive in this area.
Aspect queries are followed up on and escalated to audits in cases where the answers are unsatisfactory or require further review.
In the VAT field, I am noticing that Irish Revenue is keeping on top of developments at an EU level and challenging any Irish arrangements that they deem anti-abusive/contrary to EU law. I am also seeing a rise in mutual agreement procedures (MAPs) and competent authority reviews and challenges.
Revenue is also being more aggressive in the tax litigation area and is not afraid to issue tax assessments that might garner publicity in the media – a case in point being the recent media reporting of the assessment of Perrigo for corporation tax of €1.6 billion ($1.8 billion).
Stephanie Li, tax director at Acer EMEA, based in the UK
Transfer pricing audits are still the focus by EU tax officers and there is no sign of abating.
Damon Lambert, head of tax EMEA at Swiss Re, based in the UK
Increasing focus on minor taxes, other than VAT and corporate tax
Focus on accuracy of accounting
If anything, less focus on transfer pricing as established agreements are left to run
Tânia Carvalhais Pereira head of tax at CAAD, the Portuguese Centre for Administrative Arbitration
In Portugal, tax disputes, particularly stamp duty, corporate tax and VAT disputes, are increasing in both volume and complexity.
We are still experiencing the consequences of the tax burden increase from the crisis period.
Meanwhile, we are also experiencing new tax challenges such as the implementation of the OECD’s base erosion and profit shifting [action plan], or the emergence of cases such as double VAT taxation.
Erik Knijnenburg, global head of tax and transfer pricing at H&M, based in Sweden
Given the new OECD developments/proposals and the business developments of going into OMNI models [omni-channel concepts], there is an increasing unwillingness for authorities to step into all-inclusive advance pricing agreements (APAs) and/or controversy settlement.
Kim Boylan, partner and global head of tax, and Brian Gleicher, partner and head of the transfer pricing practice, White & Case in the US
The most significant trend that we are seeing is an increase in audit activity with respect to international and, in particular, transfer pricing matters. This, in turn, is causing taxpayers to become more proactive, including by seeking APAs and appropriately documenting their transactions so that contemporaneous facts are memorialised.
We also see continuing vigorous audits of purely domestic activities.
Johanna Waal, head of the large taxpayers’ office, Finnish Tax Administration
In the last few years, the biggest trend in the Finnish Tax Administration/Large Taxpayers’ Office (LTO) has been the strong investment in developing pre-emptive measures. The goal is to resolve tax issues in advance and avoid disputes. The LTO is offering a co-operative compliance programme for our large business customers. The LTO also promotes the possibility for a pre-emptive discussion for the large business customers. In a pre-emptive discussion, a customer discusses their tax issue with the LTO in advance to receive guidance that is binding for the LTO. In 2019, the pre-emptive discussion was extended to SMEs.
Moreover, the LTO has introduced a new, international tool for resolving cross-border tax issues in advance – the cross-border dialogue (CBD). In the CBD, a cross-border tax issue can be discussed between a large business and two or more tax administrations, in order to resolve the issue in both relevant jurisdictions at the same time. The CBD is a lighter and faster method than e.g. APA and suitable for all cross-border tax issues.
Nina Legaard Kristensen, head of unit, Danish Ministry of Taxation
In Denmark, we see an increasing number of disputes relating to cross-border transactions, including transfer pricing cases. During later years, the Danish tax authorities have, among a range of other control activities, made a considerable effort to ensure that the largest groups of companies (including MNEs) are correctly paying their taxes in Denmark.
In terms of audit prevention and dispute resolution, what is keeping you busy at the moment?
Erik Knijnenburg, H&M
Not so much on audit prevention, but rather focusing on dispute resolution for the moment.
Disputes are settled more and more using a kind of a unilateral safe harbour approach. Less attention for the content and specifics of the case at hand, but an increased negotiation attitude towards settlements.
Stephanie Li, Acer EMEA
Keeping abreast of new tax requirements, re-assess tax risks and necessary changes in business operations/structure.
Damon Lambert, head of tax EMEA at Swiss Re
Time delays in internal sign-offs in tax authorities.
Also, ensuring clear audit trails – simply being neat so tax authorities are presented with accurate and clear information.
Kim Boylan and Brian Gleicher, White & Case
In the context of international tax disputes, we remain busy in negotiating APAs and resolving issues through the competent authority process set forth in bilateral income tax treaties.
On the domestic front, we continue to represent taxpayers at all stages of the dispute resolution process, with an emphasis on obtaining resolution at the IRS Office of Appeals.
Martin Phelan, William Fry
I am seeing an increasing level of second reviews or health checks being requested by taxpayers.
Depending on the circumstances of the case, this could be a review of a tax plan or tax position taken or about to be entered into by a taxpayer.
In an era where Irish Revenue is taking a more aggressive approach in tax litigation matters, i.e. the recent media reporting of the assessment of Perrigo for corporation tax, I am seeing boards of directors, CFOs and heads of tax seeking tax reviews of historic filing positions to ensure that they are as robust and defensible as the taxpayer believes them to be.
Tânia Carvalhais Pereira, CAAD
The volume of tax arbitration cases presented before the CAAD keep me busy.
The tax arbitration regime is an alternative dispute resolution mechanism available to taxpayers concerning most tax disputes organised under the CAAD.
For the last seven years, the majority of cases submitted to tax arbitration are related to stamp duty (28%), corporate income tax (24.3%) and VAT (10.1%).
Tax arbitration has become the fastest route to solve tax disputes in Portugal and one of the fastest routes in Europe to obtain a European Court of Justice ruling.
Nina Legaard Kristensen, Danish Ministry of Taxation
Taxation legislation often entails great complexity and is subject to continual amendments. Effectively ensuring legal certainty and the taxpayer’s rights are therefore central matters when dealing with dispute resolution in relation to taxation. This is a high priority of the Danish Minister for Taxation, which has resulted in a range of initiatives to underline and support this agenda. Those initiatives include, among others, reintroducing the reimbursement scheme covering the expenditures of companies disputing decisions made by the tax authorities. Under this scheme, individuals and companies are eligible to get a full reimbursement of their costs, should their appeal be found to be well founded by the administrative or ordinary courts. If the appeal is unsuccessful, the taxpayer is still eligible to a reimbursement amounting to 50% of the costs.
How do you think tax disputes will evolve over the coming year?
Johanna Waal, Finnish large taxpayers’ office
With the heavy focus on pre-emptive measures, there are already fewer disputes in the large business sector of the Finnish Tax Administration than a couple of years before. However, situations can occur where the customer disagrees or does not follow the guidance of the LTO. In this case, tax control is needed, which can lead to tax disputes.
Erik Knijnenburg, H&M
Given the assumed way forward, whereby we will see a mix of apportioned calculations on top of residual approaches, this will not get easier. Combine this with a unilateral attitude of tax authorities and you a have a mix for increased scrutiny of facts and findings.
Kim Boylan and Brian Gleicher, White & Case
Transfer pricing is a significant area of the disputes that we handle. We expect that it will remain so for the coming year.
We also believe that purely domestic issues will continue to face the same level of scrutiny in the near term.
Stephanie Li, Acer EMEA
Double taxation [is] on the rise, and means that resolving cross-border disputes [will] remain ineffective in practice.
An increase in country-by-country reports-induced tax audits and tax data-driven VAT and TP audits.
Compliance and tax disputes costs will spiral.
Tax offices that fail to invest in tax technology will feel the pressure from their more advanced peers.
Damon Lambert, head of tax EMEA at Swiss Re
Tax authorities will grow in aggressiveness given the overall climate and need to raise funds. This may mean time-consuming challenges, not necessarily well-founded in law.
Tânia Carvalhais Pereira, CAAD
In my opinion, tax disputes will become increasingly complex due to the nature of operations – international transactions, triangular transactions, etc. – and the increasing pressure on tax authorities to demonstrate they’re collecting the right amount of tax.
Martin Phelan, William Fry
I expect to see more tax litigation over the coming year. Because of a number of well-publicised EU state aid cases – and one in particular involving Ireland on which William Fry had an advisory role – the Irish Revenue has restricted the circumstances in which it will provide tax rulings.
That said one cannot expect the state to provide tax opinions for clients – surely that is why clients engage the services of a tax practitioner.
Nina Legaard Kristensen, Danish Ministry of Taxation
We will hopefully see the effects of an increased focus to limit the number of disputes. For instance, in the area of transfer pricing, the Danish tax authorities have introduced the alternative dispute resolution (ADR) scheme in transfer pricing cases which is inspired by the success achieved in the UK in a similar scheme. The ADR scheme is an alternative measure to handling conflicts between the Danish tax authorities and the taxpayer without resorting to the administrative or ordinary courts. Rather, a third party assists the parties in reaching a solution. In 2017, four cases were successfully solved by use of the ADR scheme.
Attention could also be drawn to the tax governance project, which was introduced by the Danish tax authorities in 2013. The objective of this project is to offer a possibility for the larger groups in Denmark to engage in a formalised and extended co-operation with the tax authorities. Participation in this project requires the groups to commit themselves to share relevant information relating to matters of uncertainty with the authorities. In exchange, the authorities commit themselves to respond quickly and give specific guidance to the taxpayer, where relevant. This helps the taxpayer to comply with the applicable rules and minimises the risks of mistakes.
What do you think is the toughest challenge in gaining tax certainty, and why?
Stephanie Li, Acer EMEA
Hasty introduction of new tax laws makes planning difficult and also damaging when these tax measures lead to double taxation or additional financial burden. This problem is likely to stay much longer than one would expect. Persistent tax uncertainty is the only certainty.
Erik Knijnenburg, H&M
To attract the right attention and understanding for the case at hand with a fair recognition of both elements is present in the debate right now. This being a more global balanced approach of allocating income and taxation towards market countries and at the same time respecting the entrepreneurial functions and their value to the case.
Damon Lambert, head of tax EMEA at Swiss Re
Avoiding double taxation, in a timely basis, where there are cross-border transactions, both from a direct and indirect tax perspective.
Speed of tax dispute resolution remains lengthy.
Tânia Carvalhais Pereira, CAAD
The toughest challenge nowadays is to grant transparency and accountability at an international level.
Kim Boylan and Brian Gleicher, White & Case
Transfer pricing has continued to be a focus for tax authorities and it presents challenges in obtaining certainty because the rules are complex and the disputes are inherently factual.
Moreover, tax authorities may have differing views, and even within a specific tax jurisdiction there may be differences in opinion as to how transfer pricing rules should be applied. For example, while the competent authority within a tax jurisdiction may be focused on how its treaty partner would view a transfer pricing adjustment, the audit team proposing the adjustment may not consider its foreign impact.
Martin Phelan, William Fry
A constant internal pressure is Ireland's general anti-avoidance legislation, which effectively operates such that there is no statutory time limit for the review of transactions that breach it.
The number of tax rulings issued by the Irish Revenue has decreased over the last few years. However, such rulings never provided much certainty anyway as they had no legal effect in Ireland – and, in any case, one would not like to be relying solely on a legitimate expectation argument before a court of law.
Developments in international tax at OECD (BEPS) and EU (ATAD) levels have caused the implementing domestic legislation to be more "grey" in application, which has lead and will lead to increases in the issues to be considered and resolved.
In my capacity as Secretary General of the CFE in Brussels, I see a lot more interaction with policymakers in Europe, but it is important that the policymakers understand that taxpayers require certainty in the field of taxation. A case in point is the recent OECD digital economy consultation. I inputted on Taxand’s response to the OECD. It is clear that the new OECD proposals concerning the allocation of profit from the digital economy seem conceptually simple but they are legally and technically complex and could lead to more uncertain tax positions and a rise in disputes and double taxation.
Johanna Waal, Finnish large taxpayers’ office
International tax legislation environment today is constantly undergoing significant changes. At the same time, digitalisation is affecting the both the businesses and the tax administrations, bringing new demands for data collection, use and analysis. It is a tough challenge for the tax administrations to keep up with these developments, ensuring both adequate tax certainty for the businesses and reliable tax collection for the state.
Nina Legaard Kristensen, Danish Ministry of Taxation
Based on my personal experience, I would point to combating tax/VAT fraud and evasion as the toughest and most urgent challenges.
From individuals to the largest companies, everyone must pay their fair share of taxes contributing to our vital public services. The reason why this continues to be the toughest challenge - even despite an increasing awareness from policymakers and tax authorities across the world - is that organised fraud and evasion occurs not only within a country but also across countries both within the EU and globally. The increased globalisation and digitalisation unfortunately also paves the way for new types of organised fraud. It is therefore vital that the tax authorities in the EU and OECD countries continue to work closely together by, for example, sharing relevant information at the right time and developing practices to tackle tax/VAT fraud, evasion, avoidance and non-compliance.
