Companies are seeing stepped-up enforcement of corporate tax compliance even though the Biden administration’s $80 billion infusion for IRS audits remains just a proposal. That’s because there are other tax-compliance initiatives taking shape, in the U.S. and globally, and they are starting to bite.
Companies operating across borders say they’re already seeing a significant rise in tax audits, driven in part by what’s known as the base erosion and profit sharing (BEPS) project of the Organization for Economic Cooperation and Development (OECD).
The project is an international framework launched in 2013 to combat corporate tax avoidance but it’s getting a boost by the recent focus, in the press and by governments, on multinationals’ success lowering their taxes by moving operations around globally based on countries’ tax policies.
The project is complementary to the Biden administration’s focus on international corporate taxation. The administration is seeking to raise $1.2 trillion in taxes from multinationals by charging a surtax on U.S. companies’ foreign operations, among other changes, and it’s pressing for a global minimum 15% corporate tax rate.
“Nearly all multinationals, middle market corporations and partnerships, and institutional and financial buyers [are] at risk for an inquiry by a taxing authority,” Greg Engel, vice chair of tax at KPMG, said.
Meanwhile, the G-7 agreement announced at the beginning of the month includes a proposal to eliminate tax havens and close gaps caused by profit shifting. Should that happen, CFOs are advised to work with their C-suite colleagues to map a new plan for their international operations based in part on the distinction between a tax haven and a low-tax country.
“CFOs will need to remember the difference,” said George Salis, principal economist and tax policy advisor at tax software company Vertex. “Operating in Ireland, Luxembourg, Lichtenstein or the Netherlands is not viewed the same as operating in the Isle of Man, Cayman Islands, and other so-called suspect taxing jurisdictions,” Salis said.
His forecast is the OECD and the global community will need to redefine what a tax haven is given the numerous jurisdictions that operate as an international financial center and not necessarily as a zero- to low-tax jurisdiction.
“Tax havens are known for employing bank and fiscal secrecy, and confidentiality and banking rules are set up to encourage tax evasion,” he said. “International low-tax jurisdictions feature financial centers that provide transparency, share information, serve as trade mechanisms, and promote global economic balance.”
Whatever agreement is reached on tax havens, it’s unlikely to happen soon, given how long past efforts to adjust global tax practices have taken over the past few decades. For that reason, CFOs can expect much more work and negotiations will be needed to strike an accord that is palatable for all countries, Salis said.
It’s not just international initiatives putting the focus on corporate tax, tax specialists say; companies are seeing a proliferation of taxes on digital services, the IRS is stepping up its implementation of the 2017 Tax Cuts and Jobs Act provisions, and, at the state and local level, jurisdictions are less likely to act in lock-step with the IRS as much as they once did, complicating tax compliance.
In this environment, CFOs are being advised to deploy technology solutions and, if they don’t already, look seriously at bringing in outside expertise to future-ready their tax strategies.
Engel recommends the use of predictive technology tools and data mining and analytics, because what CFOs need is a way to get a forward-view of their tax data to either prevent or manage future audits.
The idea is to prepare now and use modeling technologies to map out scenarios but not to take any concrete action that could have tax consequences until there’s more clarity on the prospects of Biden’s tax agenda.
You want to “deploy a ‘wait and see’ approach before making any drastic financial adjustments,” Engel said. “There’s still a long road ahead for the next round of tax reform, and it’s very likely that chief executives will need to go back and refine their assumptions and calculations once we have a final law.”
The uncertainty over whether the IRS budget will be increased was highlighted at a recent Senate Finance Committee hearing when Sen. Mike Crapo (R-Idaho), the ranking minority member, said it’s important to understand whether circumstances actually warrant more funding. He contended the requested increase is based partly on speculative and questionable assumptions and analysis.
“Multi-year, guaranteed appropriations like this are rare, and it is important to understand whether the circumstances actually warrant it,” he said.
He also took issue with the administration’s plan to step up the IRS’s ability to mine data of companies’ gross inflows and outflows, for both traditional and non-traditional financial accounts, as well as for third-party settlement entities.
“I have long been critical of big data collection activities and oppose turning banks and brokers into government tax collectors,” he said. “I also have strong concerns about the proposed IRS big data requirements.”
In this environment, although some companies are seeing stepped-up audits, the real change is still ahead and will reflect how much the Biden administration gets from Congress for its tax initiatives and how successful governments are at achieving global initiatives to curb profit shifting, whether through implementation of a global minimum tax or action against tax havens.