Tax administrators helped businesses during the COVID-19 pandemic. As they seek revenue, new areas of potential tax controversy arise.
companies may soon experience new audits of various tax issues related to COVID-19, according to the 1,265 and finance leaders who responded to the 2021 EY Risk and Controversy Survey.
Tax authorities played a critical role in governments’ responses to the economic impacts of the global COVID-19 pandemic. Nearly 140 jurisdictions provided relief that included delaying filing deadlines, deferring the collection of some , and a pause in audit and litigation activity, according to the EY Tax COVID-19 Response Tracker. They also deployed massive levels of support and stimulus measures enacted by policymakers.
However, a year into the pandemic, administrative relief has come to an end in most jurisdictions. Respondents highlight several areas of where they believe tougher enforcement — and scrutiny — awaits them as governments pivot to raise revenue to cover new fiscal shortfalls. Respondents say that increased law enforcement will be accompanied by increased tax relief pressure, with more than half anticipating an increase in direct tax pressure in the next three years. “We are already seeing some governments shift their focus to revenue collection,” says Luis Coronado, EY Global Transfer Pricing and Tax Controversy Leader .on confirmation. “That means companies will now have a whole new set of issues to assess and manage from a tax dispute and risk management perspective.
Administrative challenges
Although businesses have welcomed the 2020 administrative relief, they must deal with several ongoing impacts on the administration.
In our survey, 48% of the respondents stated that they used to experience delays in their dealings with the tax authorities. On the other hand, these delays were more likely in mature markets: in North America, for example, the figure rises to 65%.
However, only 28% of respondents reported a slowdown in inquiries received from authorities, confirming that much tax work continued as usual, although 35% noted a concurrent slowdown in audit activity and tax disputes. At the same time, there are signs that increased use of technology may have had a positive impact, with 26% (rising to 38% in Asia-Pacific and 44% in Central and South America) reporting an improvement in engagement with authorities due to the use of tools such as virtual meeting platforms.
Tax treatment of issues related to the pandemic
A plethora of tax challenges and disputes are expected as a result of the pandemic, with issues related to worker mobility, pandemic-related losses, claiming refunds, and even receiving the stimulus measures themselves identified as main concerns.
Tax issues related to staff staying abroad as a result of travel bans and immigration changes were the main pressure point, highlighted by 45% of respondents. Both the Organization for Economic Cooperation and Development (OECD) and several countries have issued guidance in this regard, and many nations have temporarily relaxed certain rules to try to mitigate the problem, which affects both the taxes of workers and the social security and the risks of a permanent establishment in general.
39% of respondents expect different tax treatment of COVID-related issues (such as losses), rising to 48% in Asia-Pacific and 52% in Central and South America. This is not surprising, considering the 2020 changes in the treatment of losses (some temporary) documented in at least 10 countries in the EY Tracker. Although taxpayers may be willing to attempt to convert losses into deferred assets, the opportunities to do so must be carefully assessed and managed from a risk perspective.
Staying abroad
Another concern expressed by those surveyed is the possibility of being subject to a tax audit as a result of receiving aid or stimulus measures. In the United Kingdom (UK), for example, Her Majesty’s Revenue and Customs (HMRC) has estimated that between £1.75bn and £3.5bn may have been wrongly claimed (including fraudulent claims) under its Retention Scheme of Jobs by Coronavirus. Although HMRC has said it will not pursue legitimate errors, multinational corporations (MNCs) should consider a systematic review of claims under all similar programs; 28% of respondents say they see the potential for new tax audits in this area.
Some 35% of respondents expect cross-border companies to see different interpretations of transfer pricing as a result of the pandemic. This concern has already prompted the OECD to issue new guidance in late 2020, providing clarifying commentary and illustrations of the practical application of the arm’s length principle to the unique fact patterns and challenges that arise during and after the pandemic.
Application of taxes
In the realm of law enforcement, while respondents expect more scrutiny, it is likely to vary greatly by country. Geographic hotspots will continue to pose problems, while many tax administrations will likely move forward with new digital data reporting requirements and broader transparency and disclosure laws. Italy, Mexico, Poland, and the UK have all recently seen further advances in disclosure.
It is known that several countries are already scrutinizing the largest multinational companies more closely than ever before, looking for any tax uncertainties that could lead to new tax audits and subsequent liquidations. Several of these countries have already announced tax settlements of hundreds of millions, even billions of dollars, with extensive media coverage. More countries may see this and follow suit.
New “forensic” tax audits and documentation requirements
Respondents’ concerns are based on real-world activity. In Japan, the resumption of audits in October brought new scrutiny to multinational companies’ cross-border transactions, as well as the creation of new requirements requiring almost forensic levels of supporting documentation.
Japan’s National Tax Authority also reports that transfer pricing adjustments have tripled in the past three years, from $2.2 billion to $6.6 billion. 2 Japan is unlikely to be the only country to do so.
Many Asia-Pacific tax authorities are now asking importers to explain their approaches in much more detail, and Ohira anticipates greater scrutiny of certificates of origin used to claim tax exemptions under free trade agreements.
Indirect taxes increase
Although VAT fell in many countries during the first months of the pandemic (albeit temporarily in some and very selectively in most, benefiting the travel and leisure sectors and the purchase of both personal protective equipment and food basics), the direction of change was not universal. In May 2020, for example, Saudi Arabia announced that it would triple its VAT rate from 5% to 15%, effectively abandoning a long-term plan to introduce VAT at a low level and gradually raise it. 3 Colombia, Oman, Qatar, and Ukraine also appear to have higher VAT rates in 2021.
Europe is also likely to see increased indirect tax pressure in 2021, says Gijsbert Bulk, Global Indirect Tax Leader. “By removing reduced rates or exemptions, governments and authorities will broaden the VAT base. They will also apply greater scrutiny to what they see from taxpayers,” he says.
Actions to take now
Many multinational companies facing the ongoing challenges of post-COVID-19 tax scrutiny, new forensic documentation requirements, and potentially significant changes in international tax rules are wondering if there is a better way to manage tax disputes.
To prepare, many are investing in a broader approach to tax risk and dispute management across the enterprise. These companies tend to report better results in managing tax risk than others in the EY survey. 76%, for example, claim to have complete or substantial visibility into open tax audits globally, slightly more than the 65% of companies that do not use the TCF.
