Ninety percent of tax and finance executives of companies headquartered in the United States anticipate already heightened tax risks to accelerate in the next two years, compared to executives with 81 percent of companies globally who anticipate increased risk, according to a new survey by Ernst & Young.
The new EY report, Bridging the Divide, finds that companies view the potential lack of coordination by national governments around the Organization for Economic Cooperation and Development’s Base Erosion and Profit Shifting, or BEPS, project as a major new risk.
For the report, EY polled 830 tax and finance executives, including 120 chief financial officers, in 25 countries. Ninety percent of U.S.-based companies report that they already experience more risk or uncertainty around tax legislation or regulation than they did just two years ago. When asked about reporting requirements, 69 percent of U.S.-based executives said they have seen an increase in disclosure and transparency requirements over the same two-year period compared to 48 percent of respondents around the world.
“The list of countries either deploying or planning significant tax reform continues to expand, and tax directors everywhere report that the pace, complexity and volume of new legislation is straining their already limited resources,” said EY global director of tax controversy Rob Hanson in a statement. “On top of BEPS and changing legislation, we’ve found that companies also need to develop plans to address reputation, enforcement, and operational issues if they’re to successfully manage their tax risk.”
Thirty-one percent of the companies surveyed by EY around the world predict the BEPS roll-out will be characterized by relatively limited coordinated action and by increased unilateral action by countries. As a result, a 60 percent majority of the largest companies (those with annual revenues in excess of $5 billion) fear that double taxation will increase in the next three years. However, only 45 percent of U.S. companies agree. Three-quarters (74 percent) of these largest global companies say they believe some countries already see the very existence of the OECD’s BEPS project as a reason to change their enforcement approach before any recommendations have passed into national law.
“Although they expressed confidence in their tax planning stance, U.S.-based executives in particular recognized that they would need additional resources to comply with new reporting requirements under the BEPS project plan,” said Hanson.
In addition to BEPS-related risks, the survey also found other sources of tax risks that U.S. companies are currently experiencing and anticipating over the next several years. Though U.S. survey respondents reported heightened challenges in response to the numerous tax changes, they are resolute to maintain their course:
Companies headquartered in the U.S. report a 90 percent greater risk or uncertainty around tax legislation or regulation during the last two years, a 28 percentage point (or 45 percent) increase over global respondents (62 percent) and 24 percent higher than the “largest companies” global respondents.
Among U.S.-based executives, 53 percent report greater complexity around effective tax rate management during the course of the last two years, a 22 percent increase over all global respondents (31 percent) and 11 percent higher than the “largest companies” global respondents.
“Today’s global business environment presents a complex assortment of tax risks for multinationals, particularly when operating in markets that may be less familiar,” said EY global tax vice chair Dave Holtze in a statement. “Companies need to get actively engaged on this issue, from ensuring that they have open lines of communication within their own enterprises to making their views known and understood on issues such as BEPS.”
Seventy-nine percent of U.S.-based companies reported that tax audits have become more aggressive in the last two years, with 69 percent seeing an increase in disclosure and transparency requirements and 74 percent perceiving an increased focus on cross-border transactions by tax authorities.
Advance Pricing Agreements have been a means for tax authorities and taxpayers to mutually agree on a way to reduce risk and, therefore, the volume of disputes in relation to transfer pricing. Many survey respondents, however, reported that APAs are now becoming far more difficult to secure. Among U.S.-based companies expressing an opinion, 63 percent found one or more tax authorities to be more difficult or challenging with respect to concluding an APA in the last two years.
As a result of these increased risks, 78 percent of the largest companies around the world agree or strongly agree that tax risk and controversy management will become more important in the next two years. Yet three-quarters of these companies feel they have insufficient resources to cover tax function activities, up from 57 percent in 2011. Forty-three percent of all companies use no technology or rely on local personnel to manage tax audits and incoming data requests from the tax authorities.
To see the complete report and infographics, visit www.ey.com/taxriskseries.