- Among the global organizations included in this survey, global disputes amounted to USD 269 billion in 2021, adding further stress to companies' already strained financials caused by the pandemic.
- Majority (75%) of the surveyed 1,200 tax leaders predict the value of the tax disputes will rise even higher in 2022, while 68% believe that the volume of tax disputes will further increase in 2022.
- A shifting international policy landscape, business transformation, including digitalization and shareholder scrutiny, are the top key drivers of tax disputes now and in the immediate future; and tax controversy inherited through M&A represents a significant risk area.
In a changing environment deeply impacted by business and policy transformation, global organizations are challenged by growing tax disputes that will continue to rise in 2022 and possibly beyond, adding further stress to companies' already strained financials as a result of COVID-19. This is according to Baker McKenzie's latest report, "Risk Reshaped: Tax Disputes Outlook 2022-2025."
The report surveyed 1,200 tax leaders in 10 jurisdictions (Australia, China, France, Germany, Italy, Japan, Mexico, the Netherlands, the United Kingdom and the United States) across six sectors. Collectively, these organizations had up to USD 269 billion in capital subject to tax disputes in 2021. Building on the findings of the Firm's 2018 report, "The Shape of Water: Tax Disputes in the Age of intangible Value," this represents a threefold increase from USD 75.3 billion. A clear majority, 62% of the tax leaders, said that being hit with large tax adjustments would be detrimental to their organization's financial performance, which has already suffered as a result of the COVID-19 pandemic.
The volume and value of tax disputes continue on an upward trajectory. More than half (58%) of the respondents said the volume of tax disputes rose in the past year, and 76% said the same for value. In more unsettling news, 68% of the tax leaders predict the volume of tax disputes will rise further in the next 12 months, and 75% expect the same for total disputes sum.
Business and policy transformation are the primary drivers of upcoming tax disputes
Business transformation
The COVID-19 pandemic saw digitalization advance years in a matter of months, and transformational change to the business and operating model is affecting organization's tax exposure.
According to 67% of the tax leaders, transformational change to the business and operating model will affect their organization's tax exposure –– giving rise to transfer pricing complexity, indirect tax liabilities, and risk associated with tax controversy inherited through M&A. In fact, more than half (56%) of the tax leaders reported that they have acquired tax risk via targets, and 58% said that tax controversy inherited through M&A represents a significant risk area for their organizations.
Close to half (47%) of the tax leaders expect tax disputes to focus on digitalization over the coming 12 months, and 42% said the same of commercial change. Looking further ahead, this trend holds firm with around one-third of the tax leaders believing that digitalization and commercial change will continue to be the primary drivers of tax disputes over the next one to two years.
Indeed, organizations are under pressure to keep up and even stay ahead of the curve with the changes occurring in the market as a result of the pandemic. This goes from acquiring new assets, such as new technologies, to embracing new ways of working, including cross-border remote working. Full impact on companies’ tax strategy is not always straightforward or easy to perceive and anticipate.
Overall, digitalization and business transformation are meant to create value for organizations, and value and value generation are key notions to tax enforcement. With no clear consensus across countries on how to define these, it is clear that digitalization and business transformation create an uncertain environment for global tax leaders.
"Digitalization and business transformation continue to be huge drivers of controversy worldwide," said Scott Frewing, a partner in Baker McKenzie's Palo Alto office. "There is no consensus on how to define value and value generation, so jurisdictions determine liability differently, and when there's a big variation in the nominal tax rate, the imbalance is even more pronounced."
To a lesser extent, the tax leaders also expect shareholders and public scrutiny to drive tax disputes over the coming year. The relationship between tax and ESG is now also playing out in the management of disputed tax, with 64% of the tax leaders saying that the board and company management now take an outsize interest in disputed tax as a result of ESG commitments.
Finally, the majority (61%) of the tax leaders note a significant change in their team’s objectives as well as in the way the boards approach litigations / manage disputed tax, with an increasing preference for settlement.
Policy transformation
In parallel, organizations are living through times of deep changes in the international tax policy landscape, with new rules, yet to be implemented locally, proposed by the OECD (Pillar 1 and Pillar 2) as well as by the EU, including DEBRA, DAC 7 and ATAD 3, among others.
A clear lack of clarity and common interpretation of rules and notions from global and local tax authorities will no doubt lead to an increase in tax disputes. Moreover, with regulators making a distinction among companies based on their ability to contribute, the OECD proposals raise the burden of compliance for larger taxpayers and create a challenge for these organizations around how to measure, manage and plan for growth.
"Controversy is inevitable further to OECD reform," said Caroline Silberztein, head of Baker McKenzie's Transfer Pricing group for the Europe, Middle East and Africa (EMEA) regions. "In the years immediately after these coming into force, double taxation will be a key challenge for taxpayers, as authorities seek to secure revenue for their own jurisdiction. Later, we will see the full picture of how these global rules have been interpreted and implemented locally by taxing authorities and judges, which is sure to reveal inconsistency."
Overall this research shows that digitalization and commercial change are seen as the key drivers of the future of tax disputes in Australia, China, France, Germany, Italy, the United Kingdom and the Netherlands and across all industries, while new changes in international tax policy and shareholders scrutiny are top of the list in the US.
Building a tax mindset is more important than ever to best approach upcoming tax disputes
Jorge Narvaez-Hasfura, Chair of Global Tax Disputes Resolution Group said, "As tax risk is reshaped by a changing business environment, fiscal budgetary pressures, and more aggressive enforcement, clients in every jurisdiction and industry are increasingly concerned about rising high-value cross-border tax disputes and whether the legacy approaches to managing those disputes are still working."
Faced with a relentless rise in tax disputes and new risks on the horizon, including criminal tax risk across the business, our report led us to conclude that tax teams must be proactive in their preparation, integrated in their approach, coordinated across the business, and engaged in a productive dialogue with tax authorities.
However, our research shows that tax leaders see their teams as not ready enough and/or resourced enough to fully embrace that need. In this report, Baker McKenzie's full-service global tax team has identified four pillars and corresponding actions that are designed to help organizations build a strong tax disputes mindset: proactivity, integration, coordination and dialogue.
About the report
"Risk Reshaped: Tax Disputes Outlook 2022-2025" combines the findings from the interview of 1,200 tax leaders at global organizations with the expert insight and analysis of Baker McKenzie's tax disputes and international tax teams in order to offer a report that shares both big picture global tax disputes environment and trends alongside instructive point of considerations for organizations forming their response to a new global environment. Opinion research was conducted in late 2021 among tax leaders, including global and regional heads of tax, tax directors and senior finance professionals from organizations in 10 jurisdictions worldwide (Australia, China, France, Germany, Italy, Japan, Mexico, the Netherlands, United Kingdom and the United States) across six sectors (Consumer Goods & Retail; Energy, Mining & Infrastructure; Financial Institutions; Healthcare & Life Sciences; Industrials, Manufacturing & Transportation; and Technology, Media & Telecommunications), with a combined annual turnover of up to USD 12 trillion and a collective tax exposure of up to USD 2.7 trillion.