How to Create an Effective Tax Controversy Function

Businesses all over the world faced their fair share of challenges in 2020. While the COVID-19 pandemic was undoubtedly the biggest source of concern for companies in various industries, there were other (often related) trends that organizations still needed to keep track of to mitigate risk and manage their financial situations.

One significant theme during the year was the increasingly complex nature of international corporate tax. Various jurisdictions have been following a pattern of growing scrutiny on how organizations manage their tax affairs.

Among the potential consequences of this is a higher risk of tax controversy - something all businesses should be prepared for.

A time of change in corporate taxation

As Deutsche Bank noted in a report published in November 2019, 2020 had the potential to be an 'inflection point in global corporate tax', even before the pandemic and the enormous impact it had on business and government budgets alike.

The study highlighted a number of themes that were expected to prove significant during the year, including:

• US and European politicians making higher corporate taxes a key message in their election campaigns
• International cooperation on OECD proposals for a globally consistent model of corporate taxation, which could see multinational enterprises having to pay tax in every country where they operate
• Corporations reconsidering their strategies in areas such as capital expenditure, mergers and acquisitions to prepare for the possibility of higher taxes in the medium term

These trends and changes are indicative of an increasingly turbulent and unpredictable tax landscape, which businesses must be prepared to navigate.

The growing emphasis on tax controversy

Research has suggested that most companies are well aware of the various changes taking place in corporate tax rules and regulations around the world, but aren't necessarily prepared to manage the fallout of these developments.

The 2021 EY Tax Risk and Controversy Survey, which reflected the views of 1,265 tax and finance leaders across 60 jurisdictions and industry sectors, showed that two-thirds (66%) of respondents had seen tax controversy become a more important issue for their company recently. But only a quarter (24%) said they had complete visibility of all tax audits, disputes and litigation globally.

Another key finding showed that more than half (53%) of tax leaders expect stronger enforcement of tax laws in the next three years. This could be fuelled by governments taking more action to deal with budgetary pressures resulting from the pandemic.

All these signs suggest it will become increasingly important in 2021 and beyond for businesses to shield themselves against risk by taking a fresh approach to their tax controversy functions.

Building your tax controversy function

To prepare your business for the future and reduce risk where changing tax regulations and compliance are concerned, it's crucial to focus on your tax controversy function. This is a broad, complex and potentially daunting subject area, so it would be wise to approach it from a number of different angles.

One key issue to focus on is your people, particularly in terms of the experience and capabilities that you already have in your workforce, and the qualities you want to acquire or develop in the future. A certain level of technical and legal knowledge relating to corporate taxation is vital, of course, but it could also become more important to access skills in areas such as data analytics and strategy planning.

If you have senior experts in your workforce who have acquired valuable skills and expertise over the course of a long career, make sure you have processes in place so this knowledge is passed on to younger employees.

Another essential question to ask is whether the processes you follow are still fit for purpose, or whether they need to be updated to help you manage the risk of tax controversy in a changing regulatory environment.

That could involve focusing on issues such as:

• The procedures you use to determine whether a tax authority enquiry is routine or requires more attention
• Which issues can be handled within your finance and legal teams and which require escalation to senior leadership or the C-suite
• When other functions need to come into play, such as public relations and legal counsel

Furthermore, it's now more important than ever to ensure you're taking full advantage of technology to optimize your tax controversy function. Modern tools and solutions make it easier for you to keep track of key information such as the approach the company has taken to past procedures and the data collected during audits.

Technologies driven by AI and machine learning can also help you monitor and predict emerging tax risks. As a result, you can be proactive in predicting trends and protecting your business from potentially damaging disputes.