Tax litigation process ripe for reform
Tax litigation continues to rise across the globe as tax authorities are challenging multinationals on the rationale and structures involved in their tax planning activity. This topic was discussed today at the Taxand Global Conference in Milan.
Litigation over tax matters has become increasingly common and with mounting regulation such as the OECD’s BEPS initiative and treaty anti-avoidance, this trend is only set to continue. The ever more complex relationship between multinational companies and tax authorities around the world means that more and more, dispute resolution is being channelled to the Courts.
A push for tax revenues is undoubtedly driving higher levels of scrutiny and an ever greater focus on supposed abuse of law from tax authorities, with a particular concentration on ensuring that businesses are providing valid commercial rationale for their tax planning activities.
Central to the increased litigation activity is a rising trend that tax authorities will challenge a taxpayer’s transaction on the basis of anti-abuse provisions or general concepts of treaty abuse. Worryingly for multinationals, the tax litigation may actually start years after the challenged transaction took place. This makes it ever more important for companies to ensure they hold robust documentation recording the valid commercial reasons for the transaction.
Businesses would be wise to also ensure they are obtaining certainty of as many tax positions as possible through rulings, clearance applications, Advance Pricing Agreements (APAs), and open engagement with tax authorities where possible and appropriate.
India is a clear example of a jurisdiction in which litigation is on the rise. It is estimated that approximately USD 67 billion of tax in dispute is currently locked up in litigation before the courts in India. Some of the key reasons for this increase have been overzealous tax administrations, complex laws and inadequate dispute resolution and settlement forums, all of which is providing a heightened sense of uncertainty for multinationals. There are also major concerns over the time, cost and administrative burden required by what is a long and drawn out process.
Whilst tax litigation is also on the rise in the UK, there is at least a recognition of other options, with the less burdensome Alternative Dispute Resolution (ADR) acknowledged by HMRC as more effective in some cases.
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Barnaby Fry, MHP
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Quality tax advice, globally
Taxpayers should expect increased scrutiny of international transactions and structures. There are no simple answers and no “one size fits all” approaches to dealing with tax litigation, which can be costly in terms of resources needed and potential reputational impacts in the current environment. Perhaps the best advice is “be prepared”!
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