Our Tax policy perspectives series provides insight into specific topics influencing global tax policy developments, including in-depth analysis of trends in specific jurisdictions. Drawing on case law, practical experience, and knowledge of tax systems worldwide, we'll provide a global perspective on each subject area, look at how it is currently playing out in a few contrasting territories and suggest the pivotal challenges to come.
Global perspectives - Managing tax controversy challenges on the horizon
Multinational enterprises are experiencing rapid change with respect to tax audits and controversies worldwide. Fundamental aspects of audits and controversies are evolving such as how revenue authorities are obtaining information, how they choose who will be audited, their choice of audit techniques, and how controversies are being resolved. And historical frameworks are being modified by more modern approaches.
While no one can predict the future, a closer examination of the broader trends crossing borders may better equip your company to proactively plan, anticipate challenges, and capitalise on opportunities.Explore our insights around the world. Expand a country spotlight below:
Increasing focus on general antiavoidance rules (GAAR)
Australia’s GAAR, enacted over 30 years ago, eliminates tax benefits arising from schemes where the dominant purpose for entering into the scheme is to obtain a tax benefit. The GAAR (so-called Part IVA of the income tax law) requires an assessment of the tax benefit obtained by a taxpayer and an analysis of the reasonable alternative scenarios that could have been undertaken to achieve the taxpayer’s commercial objectives (so-called counterfactuals).
The Australian Tax Office (ATO) will consider the application of the GAAR where there is an indication of contrivance in an arrangement. The ATO looks for 'warning signs' that the arrangement is 'tax driven' including where the arrangement contains a step or series of steps that appear to serve no real purpose other than to gain a tax advantage or where the tax result of the arrangement appears at odds with its commercial or economic result. This may also include instances where the parties to the arrangement are operating on non-commercial terms or in a non arms-length manner.
Focus on increased enforcement
A number of initiatives have been adopted to increase enforcement of existing tax laws, which have significantly increased collection levels. The federal tax authorities continue to have a strategic focus on revising and simplifying audit processes through procedures and legislation. This has led to increasing sophistication with respect to tax audits.
The government has attempted to focus on the needs and profile of taxpayers as well as the agility of administrative tax processes to speed up tax collection. The tax authorities have also focused on their integration and cooperation with other tax authorities at the state and local level and have also pursued increased interaction with taxpayers through tax education and the encouragement of voluntary compliance.
Moving towards a risk-based audit approach
The Canada Revenue Agency (CRA) is striving to enhance the efficiency of audits while reducing costs by moving towards a new risk-based approach with respect to large case taxpayers. Under this approach, a taxpayer’s risk profile is assigned a grade of low, medium, or high risk. The grade is based on CRA’s evaluation of a number of factors including the company’s compliance history, aggressive tax positions and audit history, as well as its tax governance structure. The CRA’s risk evaluation will be a core element to the CRA's audit process as it determines the scope and amount of time to be spent on an audit.
In addition to the implementation of the new Corporate Income Tax Law, Chinese tax authorities have issued various administrative circulars in recent years requiring taxpayers and withholding agents to report prescribed activities, corporate structures, business and other information to the relevant tax bureaus. For example, the authorities are now requesting contemporaneous transfer pricing documentation as well as certain information from Non-China Tax Resident Enterprises (Non-TREs) regarding indirect transfers of certain equity interests and those applying for tax treaty benefits. Information from Chinese-capital controlled foreign companies is also being sought.
Retrospective legislation to impact disputes
The Supreme Court of India recently pronounced its judgment in the Vodafone tax case. The controversy in this case focused on the taxability in India of the offshore transfer of shares of a Cayman Islands Company by the Hutchison Group to the Vodafone Group.
The Indian Revenue Authorities contended that in view of the substantial underlying assets in India of the Hutchinson group, the transfer was not of the share of the Cayman Islands Company but instead was in substance a transfer of the underlying Indian assets. Accordingly, the Revenue contended that the capital gain arising from the transfer was taxable in India and consequently withholding tax provisions would apply. The Supreme Court decided in favour of Vodafone to hold that the transaction was not taxable in India and hence there was no need to withhold. One of the reasons for the decision of the Court was that the Act does not have specific provisions to tax such transactions.
In reaction to this loss, the Indian government has enacted a provision under which gains on the transfer of shares of a foreign company would be liable to tax in India if the shares derive, directly or indirectly, their values substantially from assets located in India. This enactment regarding indirect transfers would apply retroactively from Assessment Year commencing 1 April 1962.
The impact of such a change would be limited by the ability of the tax authorities to re-open assessments only for a specific period, currently six to seven years for most purposes although a longer period could be introduced (for example, a 17- year period has been discussed for certain other matters). However, a recent administrative instruction has limited the application of this retroactive enactment to cases where the assessment is not complete before 1 April 2012 and where a notice for reassessment has been issued before that date. In spite of this, the retroactive enactment remains a source of worry and surprise to stakeholders and may face challenges based on its constitutional validity. The implications of retrospective rules could have significant implications for previous tax disputes.
Openness and early engagement
HM Revenue & Customs (HMRC) is continuing to develop tax compliance processes that are based not only on objective risk assessments but also a policy of open and upfront engagement around issues as they arise. The UK’s largest businesses are now expected to engage in a regular transparent dialogue about tax positions in real time, or as close to it as possible.
Those who do not do so face higher risk assessments and potentially more inquiries. A number of new approaches and regulations enable this policy. For example, the UK authorities may utilise information disclosure powers which allow them to issue statutory notices requiring more immediate disclosure (before relevant tax returns have been filed). In addition, the Senior Accounting Officer regime requires large groups to sign off on the appropriateness and accuracy of their tax reporting systems on an annual basis.