Geopolitical uncertainty is shifting tax risk from emerging markets to developed economies, with the US, the UK and Australia – along with China and India – now representing the top five tax risk jurisdictions. That is according to the first installment of the EY 2017 Tax Risk and Controversy Survey Series, Tax steps into the light – a survey of more than 900 tax and finance executives in 69 jurisdictions.
The survey finds that 59% of executives have experienced an increase in risk or uncertainty around tax legislation or regulation as a result of globalization.
While tax risk has been weighted toward emerging markets in recent years, geopolitical drivers including the tax implications of Brexit and the uncertain direction of tax policy in the US, are shifting the epicenter of tax risk away from emerging jurisdictions toward developed economies that are traditionally characterized by a more measured approach to risk.
“Until recently, emerging markets have been far more unpredictable for global businesses from a tax perspective, with the introduction of new tax rules in regions such as Africa and Latin America,” says Rob Hanson, EY Global Tax Controversy Leader.
“Now, with seismic geopolitical change taking shape across the US, the UK and beyond, we are seeing a significant increase in tax risk and uncertainty and a move toward more imminent controversy in developed markets. This may be heightened by anticipation around prospective US tax reform, augmented by the effect of authorities having access to more information and developing more effective tools to collect revenue.”
Compounded by transparency and reporting requirements
According to the survey, the impact of geopolitical change is further compounded by transparency and reporting requirements set forth by the G20/OECD’s Base Erosion and Profit Shifting (BEPS) project.
Fifty-five percent of respondents say they have experienced an increase in tax disclosure and transparency measures, and 41% have seen an increase in the volume and/or intensity of tax audits.
Reassuringly, however, more than half (53%) say they have the necessary reporting systems to comply with BEPS, compared with 71% stating in 2015 that they needed additional resources to meet the new information requirements.
Looking to the future, 55% of respondents state that they think global disclosure, reporting and transparency requirements will increase significantly, while just 3% believe they will remain the same, and 56% say they are concerned that governments will require public disclosure of tax information.
Significantly, 42% foresee the availability and quality of data for reporting as their greatest BEPS implementation challenge. That figure jumps to 57% for large businesses with more than US$3b in annual revenues.
Hanson says: “Tax authorities are making strategic use of data analytics to facilitate compliance and audit determinations, and are increasingly sharing this data with tax authorities in other jurisdictions. This exposes businesses to more risk, however, if their people, processes and systems are outdated or misaligned with government requirements and expectations.”
The survey also confirms that tax risk is increasingly rising on the boardroom agenda and permeating business functions, with 41% stating that their CEO and/or board’s oversight of tax risk and controversy has increased over the past two years. Seventy-three percent say they provide periodic briefings to the CEO or CFO on tax risk and/or controversy.
BEPS implementation challenge
As for non-tax functions impacted most significantly by BEPS implementation, the accounting function topped the list at 71%, followed by finance (62%), treasury (32%) and legal (30%).
Hanson says: “In a landscape characterized by uncertainty and change, it is critical to have a clear and structured line-of-sight of flashpoints for controversy around the whole organization. Now more than ever, the C-suite is beginning to understand that tax policy and risk is much more than just an issue for the tax function. Tax teams must take responsibility for helping the wider business understand and respond to all of the implications.”