Watch Out, the Aggressive Taxman Cometh

by Mark Weinberger, Ernst & Young, 18 November 2011

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topics:
Accounting and Regulations Tax

tags:
consumption tax corporate tax rate tax audits tax disputes value added tax

The sovereign debt hangover of the recent global financial crisis and the accelerating pace of globalization are forcing tax burdens worldwide to edge higher and causing tax authorities to be more aggressive. These developments are compounding the unprecedented levels of uncertainty global businesses face today and may be contributing to the anemic economic recovery in many countries, including the United States.

Two-thirds of 541 CFOs and 100 audit committee members surveyed in a recent Ernst & Young global study, "2011-12 Tax Risk and Controversy Survey," said they face greater risk or uncertainty because of rapidly changing tax laws.

And three-quarters of them said they were experiencing more frequent or aggressive tax audits as governments try to squeeze more revenue out of the laws already on their books.

This, they say, makes it difficult to plan and make them more hesitant to invest.

Paradox: Investments vs. revenues

Heavily-indebted governments like Greece, France, and even the United States are caught in a paradox. They recognize the need to be as attractive to business as possible to attract investment and jobs. But they also have a real need for revenue to pare deficits and provide services to their people.

After a decade in which 91% of the Organization for Economic Cooperation and Development (OECD) members cut their corporate tax rate to an average of 25%, countries increasingly are turning to a new mix of taxes. The most common ones tax consumption, property, employment and financial transactions. Special levies on activities such as mining and higher income taxes for wealthy individuals also are in vogue.

Countries that are moving from taxing income to taxing consumption have the backing of the OECD, which declared in 2009 that these levies are less harmful to economies than corporate income taxes.

But these constant changes have been hard for companies to keep track of, let alone anticipate. And levies such as value-added taxes are difficult to comply with. Different tax bases, definitions and business residency thresholds all increase controversy. Half of all the companies Ernst & Young surveyed said they have experienced stricter VAT-related audits in the last two years.

US uncertainty

Interestingly, by far the biggest source of legislative uncertainty for companies in the Ernst & Young survey is what will happen with the tax laws in the United States, my home country.

The United States knows its 35% corporate tax rate is one of the highest in the world and may soon seek to cut it as part of comprehensive tax reform. Moreover, the US is the only major economy that has both a top marginal corporate tax rate above 25% and levies its businesses on their worldwide income.

But a major US tax reform effort is unlikely to get underway in earnest until after the 2012 presidential election. It will be difficult to put the US corporate tax rate in line with the 25% average in the OECD without also adopting some sort of new revenue source, and the United States Senate already expressed vehement opposition to one in a vote last year.

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