In a changing environment severely affected by business and political transformation, global organizations are being challenged by an escalation of tax lawsuits that will continue to escalate into 2022 and possibly beyond, adding further pressure to the already distressed finances of businesses such as as a result of COVID-19. This is, according to a recent Baker McKenzie report, “Reshaping Risk: Outlook for Tax Disputes 2022-2025.”
The study surveyed 1,200 tax officials in 10 jurisdictions (Australia, China, France, Germany, Italy, Japan, Mexico, the Netherlands, the United Kingdom and the United States) across six sectors. Among them, 62% said that exposure to a major tax adjustment would be detrimental to the financial performance of their organization, which has already suffered as a result of the COVID-19 pandemic.
In all, these organizations had as much as $269 billion in tax disputed capital in 2021. Based on the findings of the company’s 2018 report, The Shape of Water: Tax Disputes in the Era of Intangible Value, this represents a threefold increase of 75.3 Billion dollar.
In this sense, the study confirmed that the volume and value of tax disputes continues to rise. More than half of the respondents (58%) said the volume of tax litigation had increased in the past year, and 76% said the same regarding its value.
Similarly, 68% of tax officials expect that the amount of litigation in this area will continue to increase over the next 12 months, and 75% expect the same for the total amount.
On the other hand, the company indicated that double taxation will be a major challenge for taxpayers, as authorities will try to secure revenue for their jurisdiction.
“Later on, we will see the full picture of how these global rules are interpreted and applied locally by tax authorities and judges, which will certainly reveal inconsistencies,” said Baker McKenzie Group Director of Transfer Pricing for Europe and the Middle East. East and Africa (EMEA), Caroline Silberstein.
Innovation and Policies, Big Drivers of Tax Litigation
The COVID-19 pandemic has seen advances in digitalization in a matter of months, and how transformative change in business and operating models is impacting tax exposure for organizations.
According to 67% of tax leaders, changing the transformational business and operating model will affect their organization’s tax exposure, complicating transfer pricing, indirect tax liabilities and risks associated with tax disputes inherited from mergers and acquisitions.
In fact, more than half (56%) tax leaders reported that they acquired tax risk through goals, and 58% said the old tax controversy through mergers and acquisitions presents a significant area of risk for their corporations.
Nearly half (47%) tax leaders expect tax litigation to focus on digitalization in the next 12 months, and 42% said the same about business change.
In general, digitalization and business transformation aims to create value for organizations, and value creation and value creation are two of the basic concepts of taxation. Baker McKenzie concluded that without a clear consensus across countries on how to define it, it is clear that digitalization and business transformation are creating an uncertain environment for global tax leaders.
At the same time, organizations are experiencing times of profound changes in the international tax policy landscape, with new regulations, not yet implemented at the domestic level, proposed by the Organization for Economic Cooperation and Development, as well as by the European Union, including DEBRA and DAC 7 and ATAD 3, among others.
The apparent lack of clarity and common understanding of rules and concepts by global and local tax authorities will undoubtedly lead to an increase in tax disputes. Moreover, by having regulators distinguish companies based on their ability to pay, the OECD proposals increase the compliance burden on large taxpayers and create a challenge for these organizations on how to measure, manage and plan their growth.
Overall, this research shows that digitization and business change are seen as the main drivers of the future of tax litigation in Australia, China, France, Germany, Italy, the United Kingdom, the Netherlands and across industries, while new changes in international tax policy and shareholder scrutiny top the list in the United States.
“As tax risks are reshaped by the changing business environment, tax budget pressures and tighter enforcement, clients from all jurisdictions and industries are increasingly concerned about the rise of high-value cross-border tax lawsuits and to see if legacy approaches to managing these Head of the Global Tax Dispute Resolution Group “Disputes still exist”.
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