Tax transformed series
We’re seeing an increase in the number and size of tax audits, assessments and disputes with revenue authorities worldwide. Organizations need to develop coordinated approaches to audits and disputes, adopt preventative measures and use traditional and alternative dispute resolution techniques to better manage their tax audits and document their filing positions upfront.
In recent years, the Canadian government has increased the budget of the Canada Revenue Agency (CRA) in an effort to step up its audit activities to fight tax avoidance and evasion. As part of its strategy, the CRA continues to focus its resources on large businesses and wealthy individuals and is challenging more transactions. This is putting greater pressure on taxpayers, who must develop tax plans to stay competitive by minimizing their tax expenses.
For many organizations, the time and effort needed to manage tax disputes has grown, as has the uncertainty of their tax filing position. It can take many years before a tax director is comfortable and confident the company’s tax filing position is correct and settled.
Audits can often take place many years after the transactions in question. During this time, there may be changes in tax policy and transaction familiarity within the organization as people leave or change positions, leaving a gap in tax knowledge.
This increased focus in tax revenue and tax controversies is also happening globally. To further complicate the situation, the rapid pace of change and the complexity of international business and tax laws has created a challenging environment for CRA to educate and train their staff.
Significant government resources are currently directed at high net worth individuals and large corporations, placing them under increased scrutiny. Although it’s necessary for any major business to tax plan, the public’s opinion has become more influential in making sure businesses are paying their fair share of tax. The spotlight is often only on corporate income tax paid, which doesn’t give the full picture of a business’s total tax contribution to government or its impact on the economy.
It’s important for taxpayers to understand the global pressures they face. Considerable attention is being paid to international transactions and transfer pricing. Reporting requirements are on the rise, and co-operation and information sharing among global tax authorities is growing. The CRA is also coming up with novel auditing techniques and using data analytics to further detect risk and non-compliance with tax laws.
With tax laws and the global environment becoming more complex, greater commercial awareness and training for employees is necessary. Staff must have the training and the expertise to administer tax law based on the rule of law.
Meanwhile, individuals, trusts and companies need to undertake effective tax planning so they can stay competitive. They should be aware of the increased uncertainty of tax filing positions, which requires taxpayers to be prepared and think through next steps.
Taxpayers should fully document their positions upfront to prevent complications down the road. To the extent possible, organizations should consider maximizing the scope of privilege when identifying their tax risks. For instance, they may consider obtaining a litigation risk review, a process in which the legal advice is privileged. This not only helps identify risks in a protected way, but it means that if a dispute occurs many years later, all of the required information will already be organized and available to substantiate their tax position.
Finally, to avoid potential disputes, it’s important to consult with tax experts from the start of an audit and not wait until problems arise. Managing the audit process lets you anticipate, prevent and resolve issues as much as possible.
Don’t wait to be audited tomorrow: develop a tax plan today.
Seek advice and conduct a risk assessment specific to your individual or business needs. Focus on both objective, technical tax positions as well as the possibility of a subjective approach to tax administration.
Invest in your skills, data analytics, technology and processes so that, in the event of an audit, you have the technical capacity to deliver accurate and timely information.